Boosting domestic demand through efficient and transparent public investment will help the Thai economy maintain strong growth even as weak global conditions affect exports, according to Prasarn Trairatvorakul, the governor of the Bank of Thailand.
Prasarn: Public debt is not a concern
The central bank projects that global economic growth will be mute for a prolonged period, due to the euro zone's public debt crisis and subdued growth in the United States.
Dr Prasarn said the Yingluck Shinawatra government had launched a number of spending programmes to boost consumption in its first year in office.
He suggested that public spending should shift more towards investment, which in turn would help strengthen the capacity of the economy in the future and stimulate domestic demand.
"It is quite a challenge to shift from domestic consumption to investment-led domestic demand. It will depend on the country's capacity in terms of implementation," Dr Prasarn told the Bangkok Post.
Thailand's fiscal position can support the government's plans to invest 2.27 trillion baht in basic infrastructure over the next seven years, as well as another 350 billion in flood-prevention and water-management systems. Dr Prasarn said the investments should be funded through the annual budget, rather than through a special funding bill.
"Our fiscal position is quite strong to support new investment. But we must ensure that the procedure is transparent and straightforward. I think the 2.27-trillion-baht infrastructure programmes should be included within the same framework as the annual government budget," he said. "It should not be separated."
Public debt now stands at 43% of gross domestic product. The budget deficit for fiscal 2013 is projected at 300 billion baht, down from 400 billion last year. "Public debt is not a concern. Even if the new infrastructure investments are included, [public debt] will still be below 60% of GDP. But any contingent liabilities that might arise from the government's spending programmes should be made clear," Dr Prasarn said.
"We should increase efficiency in revenue collection and in public expenditure and debt management."
Investment has been relatively low since the 1997 crisis, while public investment in infrastructure has lagged in recent years due to political turmoil.
Dr Prasarn said public investment in infrastructure will in turn help attract private investment. "Construction of new mass transit routes will help business expansion along the routes, while improved water management systems will help boost the confidence of the industrial sector," he said.
And while investment should play a greater role in driving economic growth, policymakers cannot ignore the importance of exports to the overall economy.
"Exports still need to be promoted. We need to expand our markets, such as within the Asean Economic Community. Neighbouring countries, which are speeding up their pace of development, will need more investment and imports," Dr Prasarn said.
He played down concerns that a twin deficit in both the government budget and trade account could undermine the country's economic stability, noting that during the 2001 dot-com crisis and 2008 sub-prime mortgage crisis, imports both dropped much more than exports. In the 2008 downturn, exports contracted by 5% against an 11% decline in imports.
Continued liquidity injections by world central banks, particularly by the US Federal Reserve, could result in higher long-term inflation, he said. For now, the central bank is continuing to monitor financial flows into the Thai economy.
But he said the slowdown in growth by Asian economies following the euro zone crisis could see the region becoming relatively less attractive as an investment destination than compared with 2008, when the baht appreciated rapidly against the dollar due to capital inflows.
Ultimately, Thailand would benefit from a better balance between inflows and outflows. Dr Prasarn said flexible foreign exchange policies could help mitigate the need to impose capital controls if the economy was beset with higher inflows. "Although capital controls have become increasingly accepted as a tool for central banks in developing economies to manage capital flows, there are limitations. For instance, [capital controls] cause capital to move to other countries in a given region, once one country imposes measures," he said.
Tomorrow: Governor Prasarn Trairatvorakul offers his views on central bank independence and its relationship with the government.