No country is immune from adverse spillovers from crises originating
elsewhere, writes Dr. Prasarn Trairatvorakul, Bank of Thailand governor
The concern about the ongoing
European debt crisis is weighing heavily on the minds of policymakers around
the world. For those of us in Asia with relatively open economies, we are fully
aware of the potential downside risks of the European debt crisis to the
region’s economic performance both in terms of lower exports and financial
instability. Against this challenging backdrop, it is important that all
countries - regardless of whether or not they contributed to the crisis - must
be a part of the solution.
For Asia and Thailand alike,
collaborated efforts have been carried out on many fronts. At the global level,
Asian policymakers have fully engaged with various international organizations
in a wide range of activities including sharing policy experiences, setting
global regulatory policies, and contributing financial resources. In June of
this year, for example, Thailand and other Asian counterparts have joined a
group of 37 member countries in pledging additional contributions to ensure
that the IMF has adequate resources to carry out its mandate to safeguard
global financial stability.
At the regional level, concerted
efforts have been committed towards promoting intra-regional trade and further
improving the regional financial safety net. In particular, ASEAN+3 has
recently agreed to strengthen the Chiang Mai Initiative Multilateralisation
(CMIM) by doubling its total fund size to $240 billion, increasing the IMF
de-linked portion, and introducing a crisis prevention function.
In addition, Thailand has entered
into bilateral cross-border collateral arrangements with Japan, Malaysia, and
Singapore to facilitate reciprocal operational arrangements. This collaboration
is aimed at enhancing liquidity facilities to financial institutions in
Thailand and those countries, thus supporting central banks and monetary
authorities in preserving regional financial stability.
These efforts are a testament to
the spirit of commitment and cooperation that we, as members of the global
community, must adhere to if we hope to steer the global economy away from the
economic turmoil we are currently facing.
STRONG FUNDAMENTALS
Over the past couple of years,
Thailand has been adversely affected not only by external shocks from the
global financial crisis and earthquake in Japan, but also by various internal
shocks including the devastating flood in the fourth quarter of 2011. Each time
the economy has shown its resiliency and managed to bounce back strongly. This
robustness to shocks underscores our strong economic fundamentals. Among
Thailand’s key strengths are healthy corporate balance sheets as well as
companies’ ability to adapt to changing economic conditions, enabling them to
manage exogenous shocks well and rebuild quickly.
The sound financial position of
the private sector has also enabled policy stimulus to be more effective in
boosting domestic demand in times of economic slowdown. The strong capital base
of the banking sector allows financial institutions to provide necessary
funding to the real sector despite an uncertain macroeconomic outlook.
Thailand’s robust foreign reserves position instills investor confidence amid
volatile capital flows. Lastly, minimal direct exposure to troubled assets in
Europe, together with a highly diversified export sector - both in term of
markets and products - lessens the adverse impacts from the G3 slowdown.
The resiliency of the Thai
economy also reflects the fruits of ongoing reforms that started as a result of
the 1997 crisis. The upgrade of risk management capabilities both in the
financial and corporate sectors together with efficient risk-based supervision
have prevented any major buildup of imbalances in key sectors. Macroeconomic
policy discipline under the inflation-targeting and fiscal sustainability
frameworks have served Thailand well in promoting long-term stability
objectives as well as reserving policy tools for future use.
Moreover, the new Bank of
Thailand Act (2008) improved the transparency and effectiveness of monetary
policy conduct by safeguarding the operational independence of the central bank
while providing clear mechanisms for policy coordination with the Ministry of
Finance.
Moving forward against the
backdrop of an uncertain global environment, it is vital that we must continue
to focus on reaching the right balance between providing the necessary stimulus
for domestic demand to cushion the impact from a slowdown in exports while
promoting longer-term stability. It also means that we need to enhance our
capabilities in detecting systemic risks and employing an appropriate policy
mix that includes macro prudential measures to address any major risk buildups
that may arise.
CHANGING ECONOMIC MODEL
Notwithstanding the apparent
robustness of the Thai economy in weathering various shocks, we still face the
critical long-term challenge of creating a new economic paradigm for
sustainable growth to replace the legacy economic platform of export-based
growth to G3 markets. According to the 11th National Economic and Social
Development Plan (2012-2016), two key growth strategies have been particularly
highlighted, as a means to drive new growth platforms: economic restructuring
and regional connectivity.
Regarding economic restructuring,
Thailand’s past success relied on two main factors, namely FDI and low cost
competition. As we now face greater foreign competition and rising wages, it is
imperative that we restructure our economy to leverage our unique strengths by
upgrading from a labour cost based economy to one that is based on creativity
and innovation. The challenge is to avoid falling into a middle income trap and
to propel the economy up the global value chain.
To achieve this goal, the
government has formulated strategic plans to raise expenditures on R&D to
2% within 10 years as well as forge a closer collaboration between research
universities and industries both in terms of promoting joint research efforts
and human resource development. We also aim to utilize innovation to leverage
our competitiveness and create added value in key industries including
agri-business, high tech manufacturing, and tourism.
The severe impact from last
year’s flood underscores the necessity of infrastructure upgrades, particularly
in water management. The government has therefore established an integrated
command unit (Single Command Authority) as well as approved plans for the
constructions of various water management projects and flood prevention
infrastructure covering Bangkok and key economic and industrial estates.
Additionally, over the next five
years the government plans to step up investment in several infrastructure
mega-projects, including roads, railways, air and water transportation, energy
facilities, and communications systems. To alleviate the burdens on the budget
and public debt, a number of alternative financing vehicles such as
infrastructure funds and public-private partnership (PPP) schemes will also be
employed. Such planned investment of high quality infrastructure and logistic
systems will not only provide a domestic demand cushion in the face of the
global slowdown, but also encourage private investment and strengthen our long-term
economic competitiveness.
The 2015 ASEAN Economic Community
(AEC), creating a single market and production base with a free flow of goods,
services, investment, capital, and skilled labors, will change business in
multiple dimensions, including market expansion and higher business
complexities in terms of supply chain management and cultural diversity.
Strategically advantaged in terms of geography and an open culture, Thailand is
therefore in an enviable position to serve as a regional hub for transportation
and logistics for key selected sectors that will result in shared benefits to
the region.
INTER-CONNECTIONS
To achieve this vision, the Thai
government is planning the expansion of an efficient transport and logistics
infrastructure, connecting to all neighboring countries. Priorities include
development of the East-West Economic Corridor as well as the Dawei industrial
zone and deep seaport in Myanmar which will be connected to Thailand’s Eastern
Seaboard.
In addition to the linkage of
physical infrastructure, there are also coordinated efforts to further
integrate regional financial services to better serve the growing
intra-regional economic activities. Restrictions on capital flows have been
steadily reduced, while payments in regional and local currencies have been
encouraged as alternatives to major currencies to reduce transaction costs and
currency risks. For example, a number of ASEAN central banks, including the
Bank of Thailand, have in recent years signed bilateral swap agreements with the
People’s Bank of China to facilitate the use of yuan and their local currencies
for trade settlement.
On banking services, discussion
is ongoing on the criteria for Qualified ASEAN Banks (QAB) which would, by
2014, permit the entry of ASEAN banks into other member countries. Meanwhile,
regional stock exchanges are working towards promoting ASEAN equities as an
asset class and establishing an ASEAN linkage that permit the trading of
regional securities on a common platform. This will likely result in higher
inbound fund flows and trading volumes for regional capital markets.
In the global environment of
increased interdependence, no country can be immune from the possible adverse
spillovers from crises originating elsewhere. Asia and Thailand are no exception.
To prepare for this vulnerability, the strategy is therefore for each country
to adhere to policy disciplines, to forge ahead with economic reforms to
sustain their competitiveness, and to collectively contribute to global and
regional sustainable growth dynamics.
Prasarn Trairatvorakul
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