Growth last year of 2.9% disappointed many, as most analysts had been expecting 4% to 5% growth at the beginning of 2013.
A combination of external and domestic challenges was responsible. The adjustment of private consumption, after the government’s first-car tax rebate expired in December 2012, took longer than expected in part due to prior accumulation of household debt. More fragile consumer confidence also weighed on household spending.
On the external front, exports of goods were flat, from both sluggish global demand, and supply-related issues in agriculture and IT manufacturing. Meanwhile, tourism performed well and contributed significantly to last year’s growth. Throughout 2013, financial conditions were an accommodating factor, underpinned by low rates of interest and almost double-digit credit growth. Despite spells of capital flows volatility, caused in part by monetary policy shifts abroad, both the financial and real sectors remained resilient throughout.
Towards the end of 2013, the economy was beset by another domestic shock, namely rising political tension. Higher uncertainty about political stability and the overall outlook weighed on private confidence and put pressure on the already weak domestic demand. The subsequent dissolution of parliament subjected public infrastructure investment to further delay. As the political deadlock persisted, tourism began to feel an impact as well. Economic activity continued to be soft in January, despite signs of recovery in some export sectors.
It is under this backdrop that the Monetary Policy Committee (MPC) revised the economic outlook in our meeting on March 12th. The details will be officially released [today], but let me briefly highlight a few key points. First, the MPC had anticipated early on a soft momentum for growth during the first half of the year. As a result, our latest projection of 2014 growth is not very different from what the committee envisaged in January, which was just under 3%.
Second, there are downside risks to this projection, which hinge among other things on how the political situation evolves. Our baseline assumes some form of resolution that would enable a resumption of private spending by the second half of the year. Uncertainties are high with respect to assumptions of a political nature, but many analysts are currently projecting a similar path of growth to ours.
Third, the committee’s estimate of public investment is already quite conservative. Only a quarter of the 2-trillion-baht infrastructure investment is expected to take place starting next year, and spread out over seven years. The recent decision by the Constitution Court therefore poses no further risk to the MPC projection.
Despite significant short-term headwinds, there is also cause for optimism. The world economy is strengthening and is set to grow at a more robust pace this year. The US economic outlook is improving steadily. The Euro area has turned the corner and is projected to grow around 1%, despite uneven distribution of growth. Japan’s fiscal stimulus should partly offset the drag from consumption tax, and the economy should achieve growth of around 1.5%. In China, government efforts to reform the financial sector should bolster the sustainability of growth in the longer term, if at some expense to short-term growth. Overall, the IMF projected global growth in their January report to be 3.7% in 2014, up from 3% in 2013. Brighter global prospects should lend some support to exporting economies such as Thailand.
The Thai economy also derives strength from within. The underlying fundamentals that have been attracting long-term foreign capital to Thailand in past decades remain intact. The young labour force is skilled and offers value relative to other parts in the region. Good infrastructure and business-friendly regulations continue to make Thailand an attractive manufacturing hub for international investors. The financial system is sound and robust, with banks’ balance sheets strong enough to withstand severe economic shocks. A healthy financial sector helps anchor costs of capital, and keep financing costs low for businesses despite economic headwinds. Macroeconomic policy commands credibility from both the public and investors. Inflation expectations are firmly anchored, allowing monetary policy to be accommodative and lend support to the economy. Flexible exchange rate provides the first line of defence against capital flow volatility, and prevents any sustained build-up of external imbalances. International reserves are high by any measures, providing ample room for the central bank to absorb excessive exchange rate volatility.
The credit rating agencies have reaffirmed their positive assessments on the Thai credit outlook. This month, Moody’s announced that “Thailand’s credit fundamentals are strong enough to withstand political crisis”. We share their conviction, and believe that long-term investors in Thailand should focus on the core strength of the Thai economy when planning their commitments. The current environment may in fact offer value for long-term investment, given that the Thai baht has depreciated some 10% from this time last year.
At the same time, we should not be under the illusion that good fundamentals can be taken for granted. Delayed investment in infrastructure, for example, may have implications for long-term competitiveness that far outweigh the near-term impact on domestic demand. The good news is that some of these projects have already secured financing, and will go ahead regardless of the political situation. But it remains the responsibility of the new government to ensure adequate infrastructure in the medium term, in order to sustain growth potential and reap full benefits from impending regional integration. The form and financing of that public investment would be subject to parliamentary process. However, there is much consensus on the economic merits and need for an infrastructure overhaul.
Another related concern is whether the current political turmoil exposes a more structural flaw in the governance and democratic process in Thailand. To be sure, democracy is an adaptive process rather than a fixed state of bliss to be attained. The process is shaped by voices of the people, represented in the ballot boxes or otherwise, under an institutional set-up that provides checks and balances. When functioning well, the process is self-correcting, and evolves with the social and economic trends.
Democracy in Thailand has been in a continuous state of flux ever since its conception over 80 years ago. The current conflict is but one episode of the political system struggling to progress and advance. Much of today’s debate is constructive — the reform agenda holds much promise for moving the country forward. There is certainly a short-term price to be paid. But the Thai economy has weathered more than a few political situations over the past decade. The eventual reward of successful reforms this time could potentially make up for these losses multiple times over.
The MPC’s mandate is to safeguard macroeconomic and financial stability. Throughout the last couple of years, the committee has maintained an accommodative monetary policy stance, in recognition of the downside risks to the economy. At the same time, the committee has been cognizant of any pressure on the financial and price stability fronts. Early last year, credit grew rapidly, especially to the household sector. Capital flows have also been volatile. Weighing the risks to financial stability against the downside risks to growth, the committee carefully adjusted the degree of monetary accommodation to ensure sufficient support to domestic demand. The policy rate was cut in May and November last year, as well as in the latest meeting on March 12th. In those three meetings, most members were convinced the balance of risks had justified further policy easing. Among other things, credit growth has been moderating since the latter part of last year, in line with the committee’s expectation given softening economic momentum. Lower risks to domestic financial stability and subdued price pressure have opened room for monetary easing in light of higher risks to growth.
But at the same time, an already low policy rate means that the case for further easing is not without its caveats. The close voting outcomes of the last two MPC meetings may give you some idea about the lively debate among the MPC. In some members’ views, current financial conditions are not an impediment holding back domestic demand. Instead, weak sentiment associated with the political uncertainties are the root cause. Easing monetary policy further in this environment may therefore do little to spur growth, given that the central economic headwind is not financial. Costs to financial stability of a prolonged monetary policy easing are also hard to evaluate. On the other hand, a counter argument sees a lower policy rate as helpful in ensuring financial accommodation, given that banks are tightening their credit standards and credit risk premiums may edge up going forward. Lower interest rates may also help lessen interest burdens for smaller businesses and households, whose survival is important for overall macroeconomic stability.
The deliberation of monetary policy in Thailand benefits greatly from our MPC members’ diverse experiences, analyses and judgements. Overarching the diversity of views, however, is a unified position held by all members that monetary policy must be an anchor of macroeconomic stability for the economy. As future historians look back several decades from now, each policy rate adjustment will seem like a small detail. The lasting legacy will be a stable economy and financial system that we bequeath to our successors. The MPC collectively intends to pursue that very goal.
Prasarn Trairatvorakul is the governor of the Bank of Thailand. Amended from a speech given yesterday to the Japanese Chamber of Commerce.