But stresses good public policies
Bank of Thailand Governor Prasarn Trairatvorakul expects a V-shaped economic recovery, after the coup has raised “short-term optimism” of a revival from sluggish activities since October last year.
In economists’ jargon, a V-shaped recovery is a sharp revival following a sharp slump.
“In light of these recent events, our latest growth projection for this year has been revised upwards to 1.5 per cent. While this figure may be much lower than long-term potential growth of around 4-5 per cent, it is chiefly dragged down by the first-quarter contraction – bygones if you like,” he said in an address to the Foreign Correspondents Club of Thailand on Thursday night.
“From this quarter onwards, we anticipate a clear pick-up in growth and a V-shaped recovery. Many independent forecasters are currently holding a similar view, and most have revised up their growth projections after the political turning point in May.”
In his speech on “Managing the Economy at a Crossroads”, he noted that there remained some risks to the economy.
The export sector in particular has underperformed this year, despite its insulation from domestic political turmoil. Weaker economic growth in regional trading partners, including China and Asean, has been one cyclical hindrance. Global trade also appears to be lagging global growth, limiting scope for emerging economies like Thailand to leverage on advanced economies’ recovery.
“More deep-rooted structural issues at home may also be responsible, as segments of the manufacturing sector are not integrated into the modern global supply chain. For these reasons, exports may play a less active role in its contribution to growth this year,” Prasarn said.
The central bank is also cautious about financial stability. The prolonged economic slowdown has subjected indebted households and smaller businesses to financial strains. Loan quality for weaker borrowers has deteriorated somewhat as a result.
“The good news is that these risks have been confined to specific sectors, and the banking system remains strong and has weathered the slowdown very well, owing to [the banks’] prudent risk-management policies. Externally, we also cannot rule out further episodes of volatile capital flows owing to shifts in monetary policy abroad.
“Our economy has proved resilient to such shocks in the recent past, thanks to strong macroeconomic fundamentals and robust policy framework,” Prasarn said.
At this juncture, the BOT has said structural policy to boost growth and macroeconomic-policy credibility will play important roles, while political uncertainties have waned.
The governor said public policies were needed that would help the private sector overcome structural bottlenecks and fuel the economy’s growth by addressing areas where the market has failed. Policy-makers must also restore and maintain macroeconomic-policy credence, and lay a stronger foundation for the economy to grow on a sustained basis.
He noted that the agenda for economic reform under discussion was wide-ranging, and he urged the military junta to revisit the basic role of government in a modern economy.
“At its most basic level, the government exists to provide services that otherwise cannot be carried out by private market – things like infrastructure, law enforcement, or national defence.”
Public policy may also pursue social-welfare objectives in accordance with its citizens’ will, for example to promote income equality or access to healthcare and education. Finally, but no less important, public policy must provide a stable environment for the nation to prosper, and avoid being the cause of malaise itself, he said.
Prasarn also expressed concern on the greying population, saying that in 20 years, Thailand would be among the first Asean countries to enter an ageing-population phase, with the share of senior citizens rising from 15 to 27 per cent of the total population.
Other necessary public policies include those concerning education, tax incentives, minimum wages, and migration.
“Implementing a comprehensive set of economic policies to lift potential growth, while pursuing other public policy objectives, is not an easy task,” he said, adding that it requires close coordination among various policy authorities.
It also takes immense skills to introduce the right sequencing of policies at the right time, he said. These prerequisites must also be backstopped by strong policy credibility.
Last but not least, he said policy credence was shaped by overall institutional set-ups. Institutions are the providers of rules and norms that govern the incentives of economic agents and constrain their behaviour. They all interact with the policy-makers’ ability to pursue their objectives credibly.