Long global recession would hit financial stability: BOT

Bank of Thailand Governor Tarisa Watanagase yesterday said the central bank could ease monetary policy to help lift the economy. However, she ruled out a cut in the policy rate to zero as some have expected, saying such a move would do more harm than good.

Bank of Thailand Deputy Governor Bandid Nijathaworn, meanwhile, expressed concern that if the world's economic crisis were protracted, the country could face an upside risk to external stability and financial-institution stability.

He urged both the public and private sectors to react urgently to the situation in a bid to weather the worst global crisis since the Great Depression of the 1930s.

The government's stimulus packages will not be able to boost the economy on a continuous basis unless the global economy gets back on track, Bandid said.

The central bank must ensure the banking system functions normally, while the real sector should at the same time be adjusting itself to cope with the crisis. This would enable the economy to grow continuously once the global recovery begins, he said.

"The key point is to take good care of and support the private sector to adjust itself throughout this year, as this is the most fragile year in this round of the economic crisis," said the deputy governor.

Chakramon Phasukavanich, a member of the Monetary Policy Committee, said the economy could register a 3-per-cent contraction this year given the unpredictable magnitude of the global crisis.

The committee still has room to ease monetary policy further to support - not boost - the Thai economy, although a very low interest rate would damage household savings, he said.

"The US Federal Reserve has injected a [huge] amount of money, but no one knows what will happen next. If the dollar collapsed and lost its trustworthiness, it would make a widespread impact around the world," said Chakramon.

Bandid said the global economic meltdown had extended capital outflows and exports would continue to decline. This could lead to a current-account deficit.

External stability is currently at a satisfactory level in terms of the country's current account, foreign debt and international reserves.

The banking system, however, has been damaged by events, as evidenced by non-performing loans (NPLs) increasing by Bt16 billion in only two months. The overall NPL ratio of Thai banks escalated from 5.6 per cent last December to 5.9 per cent last month.

Bandid said the rising level of bad loans had been caused by the economic downturn, which also put pressure on credit approval and banks' earnings. He would not predict whether the ratio would jump into double digits, saying that depended on economic conditions.

"It is a challenging year for financial institutions, because of a very sharp economic downturn or even contraction ... The higher credit risk is caused by [debtors'] lower ability to repay debt. This puts pressure on NPLs, which will adversely affect the banks' bottom line and capital," he said.

The central bank has tried to maintain enough liquidity to support business expansion and pave the way for the real sector to access credit.

The overall loan-to-deposit ratio, including bills of exchange, amounted to 85.2 per cent last month, indicating adequate liquidity in the system.

Bandid suggested banks proceed with debt restructuring with customers whose liabilities have not yet become NPLs. An NPL customer is defined as one that has lost the ability to repay debts for more than three months.

The central bank has also relaxed a regulation whereby banks can now acknowledge NPL customers in terms of account instead of a company as a whole. A company may have one or more NPL accounts, but if it has another that is not in this category, it will still have some access to credit.