Key Challenges for Thailand’s Monetary Policy in 2013

(25/01/2013)

The striking of the right balance between economic growth and financial stability has been cited as a key challenge in handling Thailand’s monetary policy in 2013. Governor of the Bank of Thailand Prasarn Trairatvorakul stressed the need to maintain the balance in order to ensure sustainable economic well-being, as well as a safe and sound financial system. He pointed out that a prolonged monetary policy of low interest rates might pose risks to financial stability, as it would encourage the private sector to create excessive debts. The policy might also lead to overinvestment in risky assets, since investors would search for higher yields. As a consequence, a financial imbalance, or a bubble, might develop. In this regard, he said, the Bank of Thailand would continue to closely monitor credit extensions and the ability of households to repay debts, especially among low-income earners. Another challenge involves the management of volatile capital flows and impacts of exchange rate fluctuations on the real economy. Mr. Prasarn said that the Bank of Thailand had prepared measures to deal with the situation. For instance, it recently announced the Capital Account Liberalization Master Plan, aimed at encouraging Thai companies to diversify their investments abroad, especially in neighboring countries. Private companies have also been urged to operate their businesses more efficiently and use payments made in local currencies. The initiative would help foster more balanced capital flows and promote financial market developments, ahead of regional integration under the ASEAN Economic Community in 2015. According to Mr. Prasarn, in 2013, the Bank of Thailand will establish a licensing framework under which foreign commercial banks will be able to operate in Thailand, with a view to enhancing the competitiveness of the banking industry. Guidelines will also be set to allow domestic commercial banks to expand and integrate into the Qualified ASEAN Banks network under the ASEAN Economic Community. This integration offers an opportunity for Thai banks to step up their efforts to fortify their strategic strengths and prepare for a fiercer competitive environment. Stronger institutions could seize the opportunity to expand internationally and diversify their risks. As for the economic outlook in 2013, the Governor of the Bank of Thailand said that robust domestic demand would continue to be the main growth driver for the Thai economy. Private consumption would continue to benefit from the first-car tax rebate program and the reduction in personal income tax, which would take effect in 2013. He said that exports were starting to show signs of recovery. Inflationary pressure should remain contained, and impacts of the minimum wage hike in January 2013 on inflation are expected to be limited, as most businesses have managed to keep a lid on costs via increased production efficiency.