Bank of Thailand Governor Says We Must Brace for a Time of Volatility

Thailand recently began talks with Indonesia to promote settlement for trade and investment between the two countries in their local currencies instead of in the U.S. dollar. “This is an example of benefits of promoting one form of regional financial connectivity at a time when the global financial environment is very volatile,” Veerathai said.

Much of the cross-border transactions within Asia are quoted in U.S. dollars. In 2015, 84% of trade between Thailand and Indonesia was via the dollar. But the “dollar has become very volatile and is fluctuating,” said the governor. Local-currency settlement will lower that volatility as well as lower spreads for currency conversions.

Prior to talks with Indonesia, Thailand launched a local-currency settlement framework with Malaysia in 2016 enabling Thai businesses to source Malaysian ringgit from selected Thai banks, and Malaysian businesses to source Thai baht at banks in Malaysia.

Thailand also has a similar agreement with China. A clearing bank for yuan was set up in Thailand in early 2015. In 2016, 4% of trade between Thailand and China was quoted in local currencies compared to 0.03% a year earlier.

“Hopefully we can do more [local-currency settlements with other countries],” the governor said, adding that Myanmar has also shown interest in such an arrangement.

Eliminating any “pockets of risk” is what Veerathai sees as most important in surviving “the current world of volatility.”

He suggested that businesses should have sufficient foreign exchange rate management plans, while the Thai central bank will work with commercial banks on providing instruments to help improve hedging capabilities. High dependence on foreign financing, which would make governments and businesses vulnerable to exchange rates, should be kept low, he added.

Baht resilient

Thailand is quite prepared for what might lie ahead, Veerathai said, having learnt a bitter lesson in the 1997 Asian financial crisis. The crisis led to the collapse of the baht and forced the country to enter into a floating exchange rate regime.

Thai bonds, for example, currently have a low exposure to foreign investors. Non-resident holding of government bonds, Bank of Thailand bonds and state enterprise bonds is just 8-9% compared to 30-40% in some emerging economies, Veerathai said.

Although Asian currencies took a dip in the wake of the U.S. presidential election in November, the Thai baht has shown relatively strong resilience. It has already recovered to pre-election levels, despite additional rate hikes by the U.S. Federal Reserve, and is back on an upside trend currently hovering at around 35 baht against the dollar.

The resilience partially stems from the country’s current account surplus, which accounted for about 10% of gross domestic product in 2016, the highest level since the global financial crisis.

The fact that Thailand ranked as the 11th largest contributor to the U.S. trade deficit in 2016 is also pressuring its currency to rise. U.S. President Donald Trump has hit at countries that contribute to the U.S. trade deficit, such as China and Japan.

“I would not comment on whether we are satisfied with the current trend or level [of the baht],” Veerathai said. The Bank of Thailand has kept its monetary policy rate unchanged since March 2015. “But at present, as anyone, central bankers and businesses included, we should not be happy with the volatility that might not reflect the economic reasoning,” he said.

GDP projection “might be conservative”

Thailand’s economy has been picking up steadily, with the Bank of Thailand estimating GDP to have grown at around 3.2% last year, after posting near flat growth in 2014. Exports have improved across a wide base of industries, while the country’s crucial tourism sector has recovered at a faster pace than expected since last year’s crackdown on illegal tour operators saw a drop in Chinese tourists.

Brighter prospects for the country’s rural economies have added to the positive news, added Veerathai. Last year, farmers were hit by a severe drought, but prices for agricultural products are now picking up again.

In its latest forecast, the central bank projects that GDP growth in 2017 will also be 3.2%. But Veerathai hinted that this could be revised upwards in the bank’s next quarterly assessment due in March. “With [various] positive developments … it could be that our earlier projection in December might be a bit too conservative.”

Still, Veerathai said that there are “a number of structural problems” to deal with to achieve the 5% growth the government is targeting in the long term.

Developing a technology-based economy is one challenge, he said. Thailand has been aggressively introducing incentive schemes to encourage research and development investment. Fintech development would also help build an efficient economy, he said, referring to recent government efforts to encourage electronic payments.

He also sees that more public investment in infrastructure, including airport expansion, and the contruction of highways and high-speed railways, is needed to help improve the country’s competitiveness as a regional trade and logistics hub.

However, here again, fiscal buffers will be important, Veerathai stressed. He is in favor of the fiscal responsibility bill, approved by cabinet last March, which will set a legal ceiling for public debt at 60% of GDP. Public debt accounted for about 40% of GDP as of November. “Legal reforms will have implications for the future of Thailand and its financial landscape,” he said, adding that they will make it difficult for the country’s rulers to implement populist policies and will ensure the fiscal discipline of governments to come.

By Yukako Ono and Hiroshi Kotani – Nikkei Asian Review