THAILAND can draw on the lessons learnt from the 1997 Asian financial crisis to cope with any upheavals that may emerge in the global economy, Bank of Thailand (BOT) governor Veerathai Santiprabhob said.
Veerathai made the comment as he described the Thai economy as having sufficient stability to cope with external pressures.
“Although the Thai economy has strong stability, we should not take this for granted. Lessons from 1997 have taught us that neglect can lead to damage,” he said.
“We have to reduce the fragile points in the financial system. Examples of this are supervision of savings cooperatives and preparations to cope with global financial-market volatility, which may arise suddenly.”
The baht was floated on July 2, 1997, and with another anniversary approaching, some are speculating on the possibility of another crisis in the wings, given that several emerging-market countries - particularly Turkey and Argentina - are confronting economic crises.
Thailand is seen as having learnt from the 1997 crisis, and has “boosted its immune system” over the past 20 years.
Thailand has since fared better than most other emerging markets in the spheres of economic and financial stability.
The country’s current account has a surplus of US$50 billion, or 11.2 per cent of gross domestic product (GDP). This year, the nation is expected to enjoy a current-account surplus of about $40 billion. This situation stands in contrast with the pre-crisis period when Thailand confronted consecutive annual current-account deficits for several years.
The country’s foreign reserves are sufficient to act as a buffer against possible fluctuations in the capital and financial markets. The figure is hovering around US$210 billion (excluding net long foreign exchange forward position of about US$33 billion), and total external debts are US$150 billion, or 3.5 times short-term external debts. Total external debts are at 35 per cent of GDP, down from 70 per cent in 1997.
Foreign holdings of Thai bonds account for only 10 per cent of the total bond value. Therefore, risks to capital outflow and economic stability are lower than those of countries that rely more on foreign investors. Some countries have foreign holding of bonds at levels higher than 30 per cent and are exposed when the global financial market tightens.
After 1997, Thailand adopted a flexible inflation target framework with the floating exchange The baht’s value is determined by market mechanisms.
While management of the exchange rate, subject to irregularities that rise, may affect the real economy, the central bank decides its monetary policy based on factors ranging from economic growth and inflation to financial-system stability appropriate to the local economic situation.
Over the past 20 years, more agencies and mechanisms have been established, such as the National Credit Bureau, the Real Estate Information Centre, asset management companies and the Deposit Protection Agency. In the meantime, regulatory agencies have been working closely with their international peers. An example is the Chiang Mai Initiative Multilateralisation (CMIM), which consists of the Asean countries, China, Japan and South Korea.
Such structures provide solid foundations to the country’s economic and financial system, starting from good information systems, warnings to prevent crises and a system ready to solve situations if a crisis occurs.
In the meantime, the business sector has grown stronger, reflecting their greater competitiveness, corporate governance and the methods of capital mobilisation available to them - loans, debt issuance and equity instruments. Risk management has been more focused with cautious investment, as indicated by listed companies’ debt to equity ratio of 1.2 times. At the time of the crisis, this ratio was five times.
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Now, listed companies have not relied mainly on short-term external debts which could lead to the currency mismatch faced in 1997.
Thai financial institutions have been much stronger, while combined non-performing loan (NPL) lowered from 45 per cent in 1999 to 2.9 per cent in the first quarter of this year. The capital adequacy ratio stays at 18 per cent, one among the most in the region.
Besides, the Thai central bank has applied Basel III requirements including liquidity coverage ratio (LCR) to Thai financial institutions for more stability.
Governance including good committee structure, risk-management culture and recovery plan is the issue the BOT and financial institutions’ executives pay much attention on for the Thai financial system’s good management.
Presently, the key risk is tightening global liquidity in light of less monetary easing of industrialised countries’ central banks and trade retaliations among major economic powers. And as a result, the global economic recovery could slow down and the global capital and financial markets could move with more volatility. The business sector should plan for immunisation particularly in foreign exchange risk management.
The economic reforms in several dimensions should also be focused for less fragility and solutions to long-accumulated structural problems particularly in labour, educational quality, productivity and national competitiveness.
Adjustment should be made in time to changes in other global economic system when technologies have been changing very rapidly. In the future, these structural problems will be more worrying issues than concern over financial stability.