The economy continues to face external challenges from global financial imbalances and fluctuating crude-oil prices besides the political uncertainty at home, the top central bank official said.

Governor Tarisa Watanagase warned external risk could jeopardise second-half growth, which the bank has forecast as a result of lower interest rates and a more dynamic government economic response.

However, Tarisa promised monetary policy would support the economy, which was adjusting to the country's current "transition period". The bank would continue to stress stability and support long-term economic expansion.

She said the country remains vulnerable to oil-price shocks precipitated by tremendous demand from China and India. Crude-price hikes can add to inflationary pressures and lead to a current-account deficit due to the country's dependence on imported oil, she said.

"The continued expansion of China and India suggests oil prices may rise yet again in tandem with the global economic cycle," she added.

Tarisa was optimistic the Kingdom's reliance on oil would shrink over time and reduce medium-term impacts as local production capacity and technological prowess increased.

Global imbalances remain a threat to the economy and financial stability because there is considerable room for US-dollar correction. The magnitude of capital flows from the rest of the world to the US is not sustainable and will eventually reverse, she said.

The dollar will depreciate against currencies, including the baht, with a negative impact on exports, she explained.

"The recent capital surge heralds the onset, and not the end, of the unwinding of global financial imbalances. There remains considerable room for US-dollar depreciation."

Tarisa insisted the bank had seen success from its 30-per-cent reserve requirement aimed at preserving economic stability. The measure is temporary.

Despite the reserve requirement, the central bank continues to encourage foreign direct investment, she said. Tarisa pointed to the success of the auto-assembly industry that was funded by foreign direct investment.

She said the baht was "sustainable and moves in line with regional currencies". However, there are net capital inflows because local institutional investors are reluctant to enter unfamiliar foreign markets. Investment abroad by local investors will help reduce pressure from the appreciating baht, she explained.

Tarisa said although the challenges were largely beyond the control of the bank it could contain the adverse effects of external shocks on the domestic economy by preserving domestic monetary policy and financial stability. "Rapid changes, whether from within or without, typically bring forth tension and necessitate tough decisions in trading off short-term pain for long-term gain," she said.

Anoma Srisukkasem

The Nation