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AwardsJanuary 2 2006

Central Banker of the Year/ Asia

MR Pridiyathorn Devakula Governor, Bank of Thailand
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With memories of the 1997 Asian financial crisis never far from mind, what can a central banker do with a prime minister with a penchant for reckless policies? It is less than a decade since speculators forced Thai authorities to abandon the currency peg, sending the economy into a corrective nosedive. Economic mismanagement back then was a ticking time bomb that eventually – and with hindsight, inevitably – exploded.

Fast forward to 2005. Prime minister Thaksin Shinawatra is staking his political future on a series of “megaprojects”, valued at Bt1700bn ($41.5bn) and designed to boost growth over the next five years. Economists fear imports of capital goods and construction materials to build these projects could widen Thailand’s current account to a worrying 6% of gross domestic product.

Populist policies have become a hallmark of the prime minister. A subsidy on diesel had to be abandoned after its cost topped Bt92bn. Cheap loans to farmers and wage hikes have been other handouts. Although it appears to have been good for the economy, critics contend that it is no more than a Keynesian-style fiscal boost – and a destabilising one at that.

MR Pridiyathorn Devakula, governor of the Bank of Thailand, will not be having that. He has signalled his determination to maintain economic stability, even if that puts him at odds with the prime minister. At The Banker, we like growth but not at any cost.

Mr Devakula’s prudence is timely. The Thai economy is not a picture of well-being: the economy is slowing, inflation is rising and the current account deficit is widening. At the back of his mind, Mr Devakula knows the US Federal Reserve has been raising rates there faster than he has been keeping up in Thailand, opening an interest rate differential between the two countries.

With inflation expected to peak at 6% in 2006 and the government’s benchmark interest rate at 4%, Mr Devakula has signalled he fully intends getting real rates into positive territory. That’s the only way, he says, to boost savings to cover the existing and possibly deteriorating current account deficit.

Interest rates are up 275 basis points since August 2004 and economists expect at least another 50-point tightening.

Typical of central bank governors, Mr Devakula speaks only in vague terms about the political dynamic. Speaking of the economic outlook he says: “All [economic] factors are positive. However, it is difficult to predict the political situation. How well the economy will perform depends in part on political volatility.”

Taking a tough line on the prime minister’s political opportunism earns Mr Devakula the award for Central Bank Governor of the Year in Asia.

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Read more about:  Awards , Asia-Pacific , Thailand