Central bank head bullish on the kingdom's strength

The eurozone crisis will pose a significant risk for the Thai economy, but the country’s economic strengths – mainly the resilient banking system and huge stash of foreign reserves – would cushion any spillover effect, Bank of Thailand Governor Prasarn Trairatvorakul says optimistically.
“Thailand’s immunity (to external shocks) remains relatively high,” he said in an interview with Nation Multimedia Group.
Hopefully “non-wasteful” investment by the government would ensure a sustainable growth path for the Thai economy, although the current slowdown in exports would take a near-term toll on economic growth.
“The crisis in Europe is a big concern, as the wound is open, untreated for a long time. Now, it’s essential to contain the fire.”
The governor showed concern over how Europeans could do that, in light of some estimates that they may need over US$2 trillion.
All possible tools must be reprioritised, starting with those to restore investor confidence. Then, they still need to review the features that support the single currency, including the varying levels of competitiveness and of autonomy over fiscal policies of each member in the eurozone, he said.
Last week, German Chancellor Angela Merkel urged all European nations to collectively help their banking industries. The European Central Bank also offered more emergency loans to banks to help steady them through the government debt crisis. Investors apparently grew optimistic that European leaders were getting a grip on debt problems.
But no economist believes the problems would end soon. HSBC Holdings last week revised down its 2012 growth projections for Asian economies including Thailand’s.
The openness of Thailand’s economy, estimated by Barclays Capital at 177 per cent of gross domestic product, leaves it vulnerable to many global economic risks.
As signs of recession are imminent in the US and Europe, Thailand would be battered as the two destinations account for over 25 per cent of exports. Huge liquidity demand in Europe for bank recapitalisation could also deplete inflows to Thailand.
Despite the gloomy outlook, Prasarn is convinced Thailand’s fundamentals should allow the country to weather the storm.
The country’s capital – the banking system and foreign reserves – is even stronger now than in 2008 when Lehman Brothers collapsed and sparked a global credit crunch, he said.
According to Bank of Thailand’s website, Thai banks’ capital is valued at Bt1.19 trillion or 15.30 per cent of risk assets.
It took Thai banks three years to boost capital to the level seen before Lehman Brothers’ collapse in 2008.
International reserves have risen steadily from $111 billion in 2008 to $181.3 billion as of September 23.
In the two weeks to September 23, reserves dropped by over $6 billion, apparently to shore up the baht, which weakened sharply against the greenback to 31.26 on Thursday.
“The short-term economic outlook is good, but the long-term outlook seems murky with several tough issues,” Prasarn said.
One is the growing burden from healthcare and unemployment benefits. Given the wide discrepancy in healthcare services to civil servants and individuals covered by social security or the universal health scheme, more funds are needed to ensure equality.
Since the jobless now earn less than 20 per cent of their last salary, against the conventional rate of 70 per cent, a lot needs to be done to improve the social safety net, he said.
The burdens plus funds to finance populist policies would eat into available resources for investment in infrastructure, which has dropped from 23 per cent prior to the 1997 financial crisis to 16 per cent.
“We need more investment in infrastructure as that will define Thailand’s future. The percentage of Malaysia and Vietnam is a lot higher than Thailand’s. All funds should be invested for something to stay, not to boost consumption, as the money would just be drained down the pipe,” he said.
Prasarn agrees with the government’s plan to raise the minimum wage on condition that the increase is phased in, to avoid stoking inflation. Last week, the central bank also settled with the Finance Ministry on the change of the inflation target.
Yet, he expressed concern over the first-car buyer policy. On the rice-pledging scheme, he was concerned that commercial banks might be called on to help.
The governor vows to exploit the central bank’s “capital” when needed to maintain economic stability. The central bank will voice its concerns over risky decisions, even though that may make the organisation vulnerable.
“For effective management, we need to know how much capital we can use and in what situation.
“We need to admit that we take risks when we use the capital. Excessive capital loss could shake the status of the governor and the organisation,” he said.