Olarn worried about liquidity amid global squeeze

Olarn Chaipravat, deputy prime minister in charge of economic affairs, said he is concerned about the tight liquidity as a result of the global credit squeeze.

He assured the government would make sure that small and medium-scale enterprises have access to liquidity to continue their businesses.

The Cabinet yesterday discussed the draft of government policies, which will be submitted to Parliament later.

Olarn also said Thailand would deepen economic cooperation with Asian countries, Deputy Prime Minister Olarn Chaipravat said.

The new government will seek closer financial cooperation with Asian neighbouring countries, he said yesterday in response to the turmoil of global financial markets. Cooperation has already been implemented such as the Asian bond initiative, he said.

After the 1997 financial crisis, Thailand initiated bilateral agreements with Asean members plus three East Asian countries - Japan, South Korea and China - for an emergency credit line, known as the Chiang Mai initiative on swap arrangement.

Currently these countries and Thailand are in the process of transforming the bilateral agreement into a multilateral one. The members would create a pool of reserves and allow them to borrow during times of abrupt massive capital outflows.

At the same time, the Bank of Thailand (BOT) has recommended the Somchai government to prepare for the impact from the US financial meltdown on the Kingdom's real economy as it believes the US recession would be deep and prolonged.

It also urged the government to restore confidence to bring the country back on track while the central bank was ready to inject liquidity in the system to prevent shortage.

Atchana Waiquamdee, the BOT deputy governor, said the US crisis had a minimal impact on financial institutions, which have limited exposure to the financial products issued by US financial institutions.

However, the turbulence has had a huge impact on the Thai bourse, which has resulted in a decline in wealth. This would eventually affect the real economy, she said.

The country's economic fundamentals were sound but risk of a global economic slowdown was very high, said the deputy governor.

According to CitiGroup's Asia Macro View, published on September 30, 2008, the Congress rejection of the US$700-billion rescue package would have repercussions on Asia.

Asset prices were likely to tumble further, until the US risks stabilise.

Risks of Asian financial institutions could rise dramatically in the coming months.

Asia's balance of policy concerns should shift more rapidly towards growth.

Monetary policy easing could accelerate. We already expect Asia's monetary policies as a whole to reach a turning point sometime during the fourth quarter.

"We think other regional central banks, such as Thailand's BOT, could follow," CitiGroup said.

Asian governments will probably also look for fiscal expansion to stimulate growth.

Asian currencies could weaken further in the coming months.