BOT chief sees crisis impacts as manageable

What do you project for the global economy and its impact on the Thai economy?

The global economic situation has three impacts on the Thai economy - on financial institutions, capital flow and exports.

First, the effect on financial institutions is minimal, but the public and private sectors are not so prudent, being less riskaverse.

Second, capital has flowed out of the stock market, as in other countries in the region. They [foreign investors] have taken the money back to help parent companies, or invest in US government bonds and Tbills, which is safer than investing in other countries.

Foreign direct investment remains but at a slower pace, declining by about US$100 million [Bt3.5 billion]. It is still flowing in, which is a good sign.

Like other currencies, the baht had been weaker against the US dollar, but it has recently turned around because investors are more concerned about the US economy. Over the past year, the baht has been in line with other regional currencies. The BOT has been wary about it overshooting or undershooting, as it is important to maintain competitiveness.

Third, exports will certainly slow down. ITrelated products exported by other countries in the region have been dropping for months, while Thailand's ITrelated products have recently started to fall.

The impact on exports will be evident in the new year, as well as the impact on tourism of the recent political problems. These are issues for which we must find a solution, as exports and tourism are vital to sustaining the economy.

When asked if we could do anything to solve the problems, we introduced appropriate monetary and fiscal policies - and the Labour Department has also helped workers [who have been laid off]. Everybody must work on these matters together.

Monetary policy cannot bolster spending, but helps to lower interest expenses. Fiscal policy has limits, as it takes time before it can be approved. We think it can boost the economy, but consumers might still not spend.

What if the problems become so severe that we cannot solve them?

Don't be panicky: it will not be like that. We experienced a 10percent economic contraction in 1998, but it will certainly not be like that this time around for many reasons.

The problems did not originate here; we have only been affected [by outside events]. We are currently strong enough [to withstand the shock] and are not staggering as we did during the 1997 crisis. We have adjusted ourselves both in terms of the macroeconomy and financial institutions.

In the macro picture, the Kingdom's economic stability is sound with our international reserves four times greater than shortterm debts. The shortterm debts account for only 30 per cent of total external debt, which is a reversal of the 1997 crisis situation.

Policy management is more flexible, as we no longer have a fixed exchange rate. A flexible exchange rate can allay the impact [of severe economic problems]. Monetary and fiscal policies give us room to manoeuvre.

More importantly, we do not have a bubbleeconomy problem in either the property sector or the stock market. The impact of the crisis will not be large if the economy does not bubble up. If a bubble were to develop and burst, then the economic situation would abruptly worsen - but it is not like that now.

Our financial institutions are sound because they adjusted themselves a number of years ago. They have improved their situation and have better capitaladequacy ratios, which will allow them to cope with any further impact [on the financial system].

Non-performing loans continue to decline, although at a slower pace. We must monitor this closely, or else the level of bad loans could rise as a result of the economic slowdown, but this will not become a problem.

We currently conduct a stress test [for example, when the SET Index drops to 350 points]. The banks have invested in the market and are required to mark to market. Will it adversely affect their capital situation? No, it won't. We test the risk that they will experience losses. There is an impact [from the financial crisis] here, but its size is manageable.

Can the agricultural sector cope with unemployment, as farm prices have been decreasing?

In 1997, the economy contracted by 10 per cent, pushing the overall unemployment rate to 6 per cent. Unemployment will certainly not reach 6 per cent this time, but it does stand at about 1 million people. There is a similarity with the 1997 situation in that the business sector is affected and unemployment is rising, but the degree of the problem is different.

Last time, the unemployed went back to the rural areas, but they did not [have the opportunity to] do much farming. This time the sector's ability to cope with the crisis is higher. Although many farm prices, such as rice, rubber and corn, have declined, they are still higher than in the past.

However, the government needs to introduce fiscal measures to help the sector on a continuous basis, such as in water resource management. This will strengthen the sector's ability to cope with unemployment.

Will the economy contract next year?

It will not do so for the whole year, but may do so in some quarters due to the highbase effect. Neighbours like Singapore and Hong Kong have experienced economic contractions for two consecutive quarters. We have not done so yet, but economic growth will be lower than this year [2008].

Is it possible that the policy interest rate will go down to zero?

If it is necessary, yes, as has been experienced in many countries such as the United States and Japan. But if it's not necessary, this should not be done. A nearzero rate has many disadvantages. If we do anything, it is like the bullet is already away. We then have no tools [left] and must find others, which has many disadvantages and is impractical.