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PolicyApril 6 2009

Korn Chatikavanij

Thailand is suffering tumbling export receipts and a decline in business confidence and investment. Its recently installed minister of finance discusses how he plans to get the country through the crisis. Writer Simon Montlake
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Korn Chatikavanij, Thailand's minister of finance

Korn Chatikavanij became Thailand's minister of finance in December 2008, after the installation of the country's fourth government in just over a year.

A former investment banker who was educated in the UK, Mr Chatikavanij is deputy leader of the ruling Democrat Party and was first elected as MP in Bangkok in 2005 after stepping down as country head for JPMorgan.

He says his government's survival in office is likely to depend on the success or failure of a six-month, $3.3bn stimulus package that takes effect in April. Political tensions continue to rock Thailand, with simmering protests led by allies of the former prime minister, Thaksin Shinawatra, who is in exile after a corruption conviction.

Mr Chatikavanij spoke to The Banker in Bangkok in March at Thailand's national parliament, where a small but noisy rally outside echoed through the building's corridors.

Q: In 1997, Thailand was at the epicentre of what has been called the first modern crisis of globalisation. How is the global economic crisis affecting Thailand this time around?

A: We were completely buffered from a perspective of direct impact of the banking crisis in the West. Our banks are financed entirely by domestic deposits and they are only lending about 88% of total deposit value, so there is excess liquidity. They had almost next to no investment in foreign financial assets. They've been very conservative.

Our corporations are very lowly geared. Looking at the major companies listed on the Stock Exchange of Thailand, I've never seen such low debt-to-equity ratios coming into a crisis. Household debt has been creeping up over the past several years but it is roughly at 50% to 60% of income, so it is a level that is manageable, especially in an environment when interest rates are falling.

Debt hasn't been a problem. Exposure to foreign capital markets was only through the stock exchange so the only evidence of fund outflow has been through the market. But the Thai market has been suffering in the past few years leading up to the crisis because of our own political problems so there hasn't been any kind of bubble in any asset class. That's a stark contrast to the period leading up to the 1997 crisis. It's a complete inversion. Now it is all about demand management. We have seen rates of inflation diving all around the world.

Q: You took office in December. What are your immediate priorities?

A: Thailand's total export value is almost 70% of gross domestic product (GDP). Its contribution net of imports is less, but when you're talking about a 25% drop in export value in January, as opposed to normal rates of growth over the past few years of about 15%, then you are talking about a 40% swing in demand. That's a very big drop-off.

The biggest challenge is the question of how to fill that demand gap. With exports down, private consumption has held up reasonably well, but will inevitably decline. Private investment in Thailand has been weak for some time and will continue to be weak. The only arm left is the government. It's a very similar story to other countries around the world. Monetary policy is somewhat effective but it is not the sole answer.

Interest rates have been drastically reduced in Thailand and it hasn't made an impact on loan growth though it has led to a reduction of financing cost for existing borrowers. The real impactful government role is through fiscal policy and that is why the government has had to step up with a fiscal stimulus. That has been my priority.

Q: How does the size of the stimulus package compare with the projected fall in exports?

A: The full-year deficit for the current year is Bt350bn ($9.7bn). It's not a drop in the ocean. The supplementary budget alone is worth 1.1% of GDP. We are making a difference but we are not suggesting we can fill the gap entirely. It might not be prudent to try to do that in one shot. We have kept a lot of our powder dry. We need to wait to see what kind of impact [the stimulus] has on the economy then we can properly address that with the remaining ammunition that we have.

Q: In terms of monetary policy, benchmark rates are now down to 1.5%. Is there much room to cut further?

A: It is up to the Bank of Thailand, but I am not sure of the technicalities of taking it down to zero. There's room for further reduction – at least more than there is in the UK! But that is not saying much. There is always a time lag in terms of response. But so far the indications are that monetary policy alone is not going to do it, which is why most governments have been urged to become more active in terms of fiscal policy, specifically in Thailand.

There are two ways of doing this: tax cuts or fiscal spending. It was clear to us that tax cuts were not going to achieve this, simply because our tax base is narrow – the well-to-do pay most of the taxes. Reducing taxes on them would lead to higher savings, and not the desired effect of stimulating demand. Almost 50% of the stimulus package is to promote discretionary spending by low-income groups, and therefore we anticipate that those funds will come back into the economy quite quickly. We are now in the process of considering the 2010 budget that kicks off in October. That will be designed as a stimulus package.

Q: Like many Asian export countries, Thailand is facing the problem that the industrialised world isn't buying its products. Do you get any sense in the region of any backlash to this economic model or to the idea of the free market?

A: No, to the contrary. From recent meetings [with regional finance ministers] I think the single, united message we had was that developed economies must remain committed to free and fair trade and not be tempted into increased levels of protectionism.

We all face a dilemma. Over the past two decades, all Asian economies have built up their production capacity in order to meet the demands of the Western consumers. Now that Western consumers have disappeared overnight, it is a real challenge for Asia as to what to do with that excess capacity. We can try to fill the gap by increasing the level of consumption by our own people, which is what every Asian country is attempting to do right now. At the same time, we must hope that trade links remain open and also hope that Western governments are successful in resolving the financial crises in their countries. Once that happens, the level of demand will begin to pick up over time, and I think that is something that every country in the world is hoping to see soon.

In the meantime, there is also a thought that Asia needs to take care of itself, and that leads to some tangible policy options – for example, the agreement to the expansion of the currency pool, the Chiang Mai Initiative. This was a reaction to the 1997 crisis, not the current crisis. But given what's going on, we wanted to make sure there was a mechanism in the region that could be a source of liquidity for Asian countries in times of need, without us needing to repeat the same mistakes that we were forced into making a decade ago. There is also a train of thought and discussions at the Association of South-east Asian Nations (ASEAN) level on how we could better utilise the foreign reserves we have amassed for our own benefit. So rather than necessarily channelling our reserves through Western capital markets, by buying Western debt, is there a way of pooling that for investment in common infrastructure within Asia? A rail link from Beijing to Singapore, for example, and so on.

Discussion of this has been going on for some time. In our capacity as chairman of ASEAN, we will be tabling this in the finance ministers meetings that take place in April and May, and also the leaders meeting that takes place in October. There is an acceleration of a lot of discussions that have taken place over the past few years, and it is certainly, in part, a reaction to the current crisis.

Q: Thailand has large foreign reserves and a low debt ratio. Could there be room to borrow internationally this year?

A: We are about to proceed with parliamentary approval to tap loans totalling $2bn from the World Bank, Asian Development Bank and Japan International Co-operation Agency. Those would be used to support government policies on infrastructure investments. They are not tied so we retain full flexibility on using those funds.

With regards to going to the capital markets, it is something we have been looking at but no decision has been made yet. Given the amount of domestic liquidity we have and the amount of project financing that's available for specific projects, I would say we don't really need it. Though there are benefits from doing it, as an effective way of telling the global financial community that Thailand is back, it is better to be tapping funds when you don't need to than when you do.

Q: There have been several false starts on banking sector reform by the Ministry of Finance. Is it the right time to tackle this?

A: I would like to see broader competition. We have been unhappy with high bank spreads that we have seen in Thailand for some time. I look at this as a reflection of lack of competition in the Thai financial sector. Even immediately post-crisis [1997/98] there was a more vibrant domestic bond market. The capital market was actually a saviour to the banks, post-crisis, and now the number of funds raised through the bond market and capital market has been very low, for a number of reasons.

Direct investment is also down, and foreign banks have been weakened, so there is less competition today for Thai banks than there was almost 20 years ago. It translates into higher financing costs for Thai corporates, which makes them less competitive than their international peers.

We have set up a capital market reform group and are talking about a 'big bang', which will be our major attempt at regulatory reform of the capital market as a whole, to make it more efficient. The Bank of Thailand is looking at potential banking reform that might lead to greater foreign participation in the domestic banking market.

I believe that competition leads to strength. Frankly, Thai banks are now very strong. Potential resistance to greater competition is less than it would be if they were challenged otherwise. They don't necessarily look at foreign banks as a sea of strength. So if you are going to change the rules to provide increased long-term competition, this is the time to do it.

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