Monetary policy will ease to reduce costs

ECONOMY

Monetary policy will continue to ease to reduce business costs and bolster economic confidence in 2009, according to Tarisa Watanagase, the governor of the Bank of Thailand.

She said in a speech yesterday that the bank was ready to continue easing monetary policy amid falling inflation and rising risks to economic growth.

Tarisa: More rate cuts likely

Over the past six weeks, the central bank has slashed its one-day repurchase rate by 175 basis points to 2%.

But small businesses continue to face difficulty in borrowing, as banks have become more cautious of lending amid the economic downturn.

Dr Tarisa said constraints would ease if bank perceptions of risk improved. A government guarantee programme for bank lending would significantly help to ease credit constraints for businesses.

Liquidity meanwhile remained plentiful in the markets, with outstanding loans at just 87% of the bank deposit base. Local banks also hold outstanding bonds of around one trillion baht.

"We don't expect large borrowers to have problems in accessing credit, but small businesses are likely to [have problems]. Reducing the risk of lending to small businesses will be the key. We also see that consumer loans continue to grow," Dr Tarisa said.

She rebutted suggestions that the central bank's interest rate cuts had only resulted in wider profit spreads for banks.

Net interest margins for Thai banks, based on the difference between paid and received interest, are 3.2%, compared with 4% to 6% for Asean countries.

Margins shrank to just 1% once operating costs such as salaries, tax, IT expenses, loan provisions and contributions to the Deposit Insurance Agency were included, Dr Tarisa said.

"The return on assets for local banks is just 1.1%, the lowest in Asean. It shows that Thai banks have a long way to go in terms of efficiency before they are on par with other regional banks," she said.

Dr Tarisa said fiscal policy would have an important role in stimulating the economy, while monetary policy would require more time to be effective.

"There is room for fiscal policy to manoeuvre, given that the public debt stands at just 37% of gross domestic product," she said.

The government expects to run a budget deficit of 350 billion baht this year to stimulate growth. The central bank currently forecasts 2009 growth at between zero and 2%.

On exchange rate policy, Dr Tarisa said the baht had been stable relative to regional currencies. A policy to push the baht weaker would only hurt confidence.

"A weak currency shows that a particular country has a confidence problem," she said.

"The baht has been supportive for international trade. It has weakened against our trade partners and trade competitors. Comparing the baht against the dollar does not represent the whole picture."