The Bank of Thailand should consider adopting a weak-baht policy to fuel economic growth and boost exports, complementing its current use of monetary policy, as the latter is an inadequate tool to increase domestic consumption, a banking executive says.
Speaking at Kasikornbank’s monthly seminar on the economic outlook in the second half of 2014, Kobsidthi Silpachai, head of markets and economic research at KBank’s capital markets business division, noted that cutting the central bank’s policy interest rate had both positive and negative impacts on the market.
One negative impact is that a low policy rate translated to low deposit rates, which encourages depositors to put their money into foreign investment funds (FIFs) to seek higher returns, and this will be a worry to the country’s banks when they need liquidity to back lending in the long term.
“We should not be using hot money from FIFs to back lending,” he said.
He said the loan-to-deposit ratio now was 95-96 per cent, regarded as a suitable ratio, compared with more than 120 per cent as Thailand saw during the 1997 economic crisis. Meanwhile, high household debt is not likely to support new lending after its over-acceleration driven by the populist government policies of the past few years.
The central bank’s Monetary Policy Committee will meet next Wednesday, and in KBank’s view, the policy rate will be maintained at 2 per cent for at least a year before considering an increase in the third quarter of 2015.
Kobsidthi said that even if a functioning government can push investment through via fiscal policy and an economic road map, the priority mission of the junta government was to carry on economic growth this year through immediate projects such as paying rice farmers what they are owed.
The junta is anticipated to focus on reforming the country and resolving the political conflicts before returning power to a civilian government.
Therefore, private investments are still on hold because investors are unsure whether the new government will change current economic policies or not.
He said allowing the baht to depreciate was a proper tool to drive the economy and shore up the competitiveness to the export sector, but the central bank should use such a policy carefully to avoid large outflows of capital.
KBank expects the baht to weaken to 33.50 against the US dollar by the end of this year.
After depreciating for some time, the baht rebounded after the European Central Bank decided on a negative deposit facility interest rate to boost lending in the European Union.
This move by the ECB, however, could encourage the US Federal Reserve to delay raising its key interest rate even if it exits its quantitative easing programme by the end of this year.
“The pressure on Thailand to raise the policy rate is relaxing as the economies of developed markets are not recovering yet, reflected by the negative deposit interest rate of the ECB,” Kobsidthi said.
The World Bank also recently lowered its forecast for economic growth in the developing world this year, from 5.3 per cent to 4.8 per cent.