BOT warns of new measures

Bank of Thailand (BOT) Governor Tarisa Watanagase yesterday insisted if the new government ran an expansionary fiscal deficit, the central bank would have to tighten monetary policy, to ensure economic stability.

The Finance Ministry and the BOT must have good cooperation on fiscal and monetary policies, in order to prevent harm to the economy and promote long-term economic stability, she said, adding that easing both fiscal and monetary policy could have a negative effect.

"It's good if we trim the policy interest rate and the economy continues to grow. But if private consumption and investment recovery are unclear, and the government cannot make progress on investment projects, the interest-rate cut could affect savers. The policies must be coordinated properly but not be too extreme," said Tarisa.

The governor's comments followed pressure on the BOT to cut its policy rate in line with the US rate, in order to prevent capital inflows. The US Federal Reserve Board starts a two-day meeting today at which it is expected to lower its rate further, following a cut of 0.75 percentage points last Tuesday.

Asian bourses yesterday braced for President George W Bush's State of the Union speech later in the day, in which he was set to address concerns the US is headed for recession and touch on a planned US$145-billion (Bt4.79 trillion) stimulus package. Fears of widespread calamity led to a slump in stock markets worldwide. While the Chinese market plunged more than 7 per cent yesterday, the Thai market lost 2.02 per cent.

Economists and analysts changed their view on Thailand's economic and monetary policy following the Federal Reserve's steep rate cut last week. They now say that instead of raising the policy rate to cool inflationary pressure, the central bank could slash the rate to boost the economy.

Usara Wilaipich, senior economist at Standard Chartered Bank, said in a report that growth was the immediate priority for the Thai economy, not inflationary pressure.

"To prevent excessive appreciation of the baht and counter the downside risk to growth, we expect the BOT to cut its benchmark one-day repo rate 25 basis points in each of the five MPC [Monetary Policy Committee] meetings from April to October and bring the benchmark interest rate from the current level of 3.25 per cent to 2 per cent," Usara said.

Tarisa, however, said the Kingdom faced a higher risk of economic

slowdown but a lower risk of in-

flationary pressure compared with earlier expectations while the US economy was slipping into recession. She insists the central bank take into account not only inflation, but also economic growth.

A recession in the United States, the world's largest economy and the Kingdom's key trading partner, would have an adverse effect on exports and worsen consumer and business confidence. As a result, domestic demand remains fragile, and the risk to the global financial market and economy has implications for the Kingdom's economy in the future, she said.

"We don't know how long this evaluation will continue. It depends on further economic figures. We can readjust our view if the conditions change," the governor told the bank's annual press conference to announce its vision and policy for the new year.

Rating agency Standard & Poor's (S&P) yesterday said most Asia-Pacific sovereigns would face some challenges from the first-round effects of a US recession, while the likely second-round effects could prolong or exacerbate the pressure. In this situation, Thailand is among many countries that could face rating downgrades, due to existing weaknesses.

"The unfolding global economic and financial conditions leave limited scope, if any, for rating upgrades in the region in the year ahead," said S&P credit analyst Agost Benard.

"However, for slightly more than a quarter of the region's countries, including Pakistan, Taiwan, Thailand and Sri Lanka, the ratings or outlook are susceptible to downward revisions, given existing weaknesses. Yet, in many cases the greatest risk stems perhaps not from the recession itself, but from possible policy missteps by governments when faced with the fallout of a US, or possibly global, slowdown. These could exacerbate problems, especially in countries with relatively weak fiscal and external positions and where market distortions are prevalent," he cautioned.

A Finance Ministry source said that amid concerns about an economic slowdown, ministry officials felt the government could run a budget deficit over the next four fiscal years, until 2012. Members of the new coalition government previously proposed setting aside an additional Bt80 billion of the central budget to boost the economy.

Moreover, Tarisa said the central bank would keep the baht moving in line with other regional currencies, taking into account various sectors.

A strong baht will reduce the Kingdom's competitiveness while domestic demand remains fragile. However, an appreciating baht will reduce inflationary pressure, paving the way for the BOT to run monetary policy to boost the economy, which could slow down more than expected, she said.

The baht has appreciated 1.9 per cent against the US dollar since the end of last month, compared with 6 per cent for the yen and 2.2 per cent for the ringgit.

"We could not let the baht get tremendously stronger, because that brings about risk," the BOT governor said.

Anoma Srisukkasem

The Nation