Thailand’s ambitious reforms

Making the most of her potential

Central banks in Asia have become more mindful of financial stability in the aftermath of the 1997 crisis. The Thai experience is illustrative. After lowering interest rates to 1.5% in the second quarter of 2015, the central bank has kept rates unchanged despite relatively soft growth, even though headline inflation was below target. This reflects the central bank’s recognition of the wider context and set of factors which are muting the monetary transmission mechanism.

Structurally, Thailand is affected by many of the same fundamental forces that are suppressing inflation and growth in advanced economies. They include an ageing population, rising income inequality, and the transition to a services-orientated economy. This evolution is dampening investment, since modern services are less labour- and capital-intensive than manufacturing.

The resistance to lowering rates even further also reflects financial stability concerns in the light of high household debt and evidence of search-for-yield behaviour among investors. The latter is leading to risky shadow banking activities. The central bank’s desire to maintain room for manoeuvre reflects a long-term framework that recognises the limits of monetary policy.

The central bank has forecast 2017 growth will be broadly similar to 2016, while inflation should rise as the base effect from lower oil prices dissipates. With available fiscal headroom, government spending and investment, particularly on infrastructure, ought to stimulate growth. Externally, if the surprises that transpired last year in the global political and economic landscape are any indication, 2017 will prove to be a challenge. Here, Thailand’s high foreign exchange reserves, around 3.2 times short-term foreign debt, and its strong current account position, should provide adequate buffers.

Thailand’s main challenges remain microeconomic in nature. A key growth engine in past decades has been the productivity gains from structural transformation, whereby labour moves from low-productivity agriculture to high-productivity manufacturing and services. This has stalled, and even reversed, of late. To reinvigorate growth, Thailand needs to upgrade education and skills, streamline regulations that shackle business, catalyse public and private investment in key infrastructure, and establish means of spurring innovation. There is great potential for Thailand to use its geographical advantage in the middle of the Greater Mekong subregion close to rapidly developing economies like Cambodia, Laos, Myanmar, and Vietnam.

The government recognises these priorities and is embarking on an ambitious reform agenda. It has already implemented several legal and governance reforms affecting business. Small and medium-sized enterprises stand to benefit, both in terms of lower operating costs and greater financial access.

Thailand is considering a comprehensive reform of the governance of state-owned enterprises. Given their size and critical role as provider of basic infrastructure, state-owned enterprises exert a significant influence on overall economic efficiency. However, the existing regulatory framework is complicated by a large degree of overlap among the relevant government agencies and a lack of overriding authority. The proposed establishment of the National State-owned Enterprise Corporation, with a clear separation of government responsibilities as policy-maker, regulator and owner, could bring tremendous improvements in resource allocation.

The Bank of Thailand’s overriding focus is on strengthening the Thai financial system to serve the economy through fundamental technological improvements. As the backbone of all economic activities, the payment system and infrastructure are critical to efficiency and stability. Policy-makers can enhance financial connections with neighbouring countries through various means, including promoting currency use for regional trade. Moreover, in recognition of the potential for innovative financial platforms to increase efficiency and expand financial inclusion, Thailand has launched a limited-regulation ‘sandbox’ approach to facilitate fintech development – similar to the policy already undertaken in Singapore.

The policy strategy is clear. Thailand must make use of its strong macroeconomic fundamentals to push through critical microeconomic and structural reforms and unleash productivity improvements. The challenge is one of execution.

Veerathai Santiprabhob is Governor of the Bank of Thailand. This is an abridged version of his OMFIF City Lecture in London on 10 January.



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