The term of the governor of the Bank of Thailand will expire on Sept 30 and as incumbent governor Veerathai Santiprabhob has announced he will not seek a second term citing family reasons, the selection process for his replacement has begun.
If it weren't for my age which exceeds the upper limit of 60 years old, I would seriously consider applying for the position. The reason why I am interested in the job is not because of the fame and fortune.
It's because Thailand is at its most difficult point in its economic history. Covid-19 has changed the world around us and the Thai economy needs to change in response to that. Unfortunately, we do not have a government with a strong economic team to lead the country out of the crisis. A strong central bank is necessary. And, of course, I am well qualified for the job.
Apart from having a PhD in macro economics from a world leading university, I had three years experience as an economist at the International Monetary Fund and headed several large local financial institutions, including being president of a state enterprise. As for my economic viewpoints, readers of this newspaper can be the judge of that through my numerous articles. However, qualifications are qualifications and I have no dispute on that.
As one of 70 million Thais, my economic being will either benefit or suffer from policies coming out of the Bank of Thailand under its new governor. I wish the selection process goes well and a capable governor is appointed. For the new governor to be able to prevent the Thai economy entering a vicious cycle like many Latin America economies, he or she should be able to answer the following four questions.
The first question. What should the role of Bank of Thailand be post-Covid-19 depression? Two problems to be considered here. First, the world economy, Thailand included, will enter a depression -- not a recession-- after the outbreak of Covid-19.
The pandemic will change the behaviour of consumers encouraging them to spend less and save more. During the outbreak, both businesses and consumers learn the hard way that savings are the key to survival and they should have at least six months worth of savings to protect themselves from a future crisis.
Many businesses have to shut their doors and people who do not have adequate savings have to wait in a long queue for food donations. I calculate that consumers need to cut their consumption by 10% a year for five years to achieve such a comfortable level of savings. The 1929 great depression began because people cut their consumption and the 2020 great depression will begin for the same reason.
The second problem is that central banks, the Bank of Thailand included, have no more tools to stimulate economies. On March 20, the bank cut its policy rate to 0.75% hoping to shore up consumption, which was down by 15.1% in April.
Two months later, the bank cut its rate further to 0.50%. Does anyone think we will see more consumption and investment in May and thereafter?
It is clear that monetary policy is dead. Economists call this situation a liquidity trap which is what happens when monetary policy becomes ineffective as a result of very low interest rates combined with spending patterns in which consumers prefer to save rather than invest in higher-yielding bonds or other investments.
How would the new governor conduct monetary policy in the case of a liquidity trap? Will the role of Bank of Thailand be reduced to a money printing machine to finance government deficits? This is my first piece of homework for the new governor.
The second question. How would the Bank of Thailand deal with rising NPLs? I am not talking about the 3-5% of bad debts we are seeing now.
We are not seeing real NPLs because the Bank of Thailand allows debtors to postpone payments. No loan payments, no NPLs. Nice trick. But NPLs could exceed 25% in the second half of this year. NPLs at large commercial banks peaked at 25% after the Tom Yum Kung crisis of 1997 and, with more severe economic conditions, NPLs in 2020 could easily reach that level.
More importantly, household debt is now over 80% of GDP and accounts for 60% of commercial banks' total loan portfolio. If half of that has gone bad, the banking system will immediately have 30% of NPLs in its portfolio. If this should happen, what would be the new governor's plan to stabilise the financial sector? This is my second piece of homework.
My third question and third piece of homework. How would the new governor prepare for the risk of capital flight? Most governments in the world come out with large stimulus packages worth more than 10% of GDP. Germany has just announced an additional 75 billion euros package on top of the 750 billion euros package announced in March.
In a short while, there will be many trillion dollars of various government bonds -- US, British, Japan, Germany, French, Australia etc -- floating in world financial markets competing for investors. There is a good chance that foreign capital will leave Thailand to invest in those bonds. Under such circumstance, there could be a severe liquidity shortage and the Thai economy could collapse. Any plan for such a risk?
The last question and the most important one. What does the new governor think about current movements of Thai exchange rates and the exchange rate regime? Thailand had the worst economic month in April with a 3.3% decline in export volumes and zero foreign tourism income. The external position is so bad the current account balance is in the red. But the baht has actually appreciated against economic theory. From April 2 to June 1, the baht/dollar exchange rate appreciated 4.6%. This is unacceptable as 60% of our GDP depends on export of goods and services. Slow world demand is bad enough for the economy; uncompetitive exchange rates will put the last nail in the coffin.
The current governor has been strongly criticised for his passive role in exchange rate management which has been severely hurting Thai exporters. Would the new governor change the policy stance? How? My own answers to the four questions will be revealed after the selection process ends.
Chartchai Parasuk, PhD, is a freelance economist.