Q How much risk does the current account deficit pose to the economy, particularly in light of the negative interest rate differential with the US?
A This year, Thailand is expected to run a current account deficit of about $3.5bn or slightly less than 2% of GDP, largely on account of the high global oil prices. We have foreseen this since the middle of last year, when oil prices started to rise because our economy is heavily dependent on oil. We have therefore moved to tighten monetary policy successively for the past nine times to pre-empt inflation as well as capital outflow. The interest rate differential with the Eurodollar has not widened and with the confidence in the baht, capital flows have always been positive.
Q Is there a lot of political pressure to encourage growth even if it is at the risk of stability?
A There has been no political pressure whatsoever during the past nine rounds of interest rate hikes by the Monetary Policy Committee. Growth is good for the country but what is more important is sustainable growth. Thailand fully recognises the pain of interrupted growth when the country went into the crisis in 1997. There is therefore a national consensus that stability, both on the external (current account) and internal (inflation) front, is key to achieving long-term sustainable growth.
Q What risk is there of a large-scale withdrawal of capital and a severe depreciation of the baht?
A Thailand has implemented measures to prevent speculative capital flows, ie, flows that are not accompanied by real underlying transactions. We have also moved ahead in our monetary policy tightening cycle by adopting a forward-looking approach to inflation targeting. These should help to pre-empt the risk of a sharp reversal of capital because the relative returns in the country remain attractive and the capital that has come into the economy is mostly associated with real economic transactions.
Q What would you consider to be your biggest achievements of 2005?
A I have been privileged to be associated with a few policy initiatives.
First, we were most supportive of the government’s policy to lift the subsidy on oil, which has helped to slow down the current account deficit.
Second, we were among the first to flag the issue of savings mobilisation to prepare for the upcoming savings-investment gap that would naturally come as the economy picks up.
Third, we have successfully managed the excess liquidity situation in the market in tandem with the pace of increase of our policy rate. More important is the clearer communication strategy from the central bank to ensure that the financial community responds more promptly to our policy signals. This had made our policy effective and timely.
Fourth, as a result of various policy measures on banking supervision adopted during the past three years, including prudential measures on real estate loans and credit card businesses, the banking system has become resilient – as witnessed by its ability to handle the ‘perfect storm’ of high global oil prices, the tsunami and unrest in southern Thailand.
Notwithstanding these shocks, non-performing loans in the banking system continued to decline and banks’ return on assets continued to grow and remain at quite a high level. The banking system expanded both on the deposit and lending side. Real estate loans, which shot up two years ago, have now moderated, thus easing the risk of a build-up of financial imbalances in the system.
