26 February 2016
Following is the transcript of an exclusive CNBC interview with Veerathai Santiprabhob, Governor of the Bank of Thailand. The interview was broadcast on The CNBC Conversation on 26 February 2016 at 6pm SG/HK Time.
All references must be sourced to a "CNBC Exclusive Interview'
Interviewed by Sri Jegarajah, Anchor, CNBC
Sri Jegarajah: Governor, let's start with the global economy, is recession a risk when you look at flatter U.S. yield curve? Or is the risk over-stated? Is that your base line?
Veerathai Santiprabhob: If you look at today's growth momentum in many parts of the world, we tend to see a picking up of activities, as in the case of the U.S. economy, the labor markets indicators seem to suggest that the momentum is improving. But if we talk about base line analysis, we also need to be mindful of what we call the tail risk events; events out there that could trigger a sharp slowdown in global economy, the likes of financial volatility that might have implications to the tightening of financial conditions in some parts of the world; issues of corporate debts, emerging markets corporate debts, that could lead to financial turbulence in certain developing countries.
Sri: Do you believe the U.S. Fed committed a policy error in December with the first rate hike?
Veerathai: No, I think the rate has been very low for too long, the Fed set the stage very well in deciding to increase the policy rate in December, taking into account the developments in the real economy.
Sri: Given the continued economic turmoil and the volatile global markets, do you believe the Fed will proceed with a rate hike in March?
Veerathai: The markets seem to discount that already. The market does not expect the Fed to hike in March. If you look at recent minutes, statements from the last Fed meeting, the possibility for the rate increase in March is very low.
Sri: What then are you assuming for the pace of future rate hike by the Fed over the course of 2016?
Veerathai: The Fed has communicated, even before the volatility starting in January that the pace of rate hike will be very gradual, taking to account the developments in the U.S. economy. So we did not expect the rate hike to be fast pace from the beginning.
Sri: Do you believe the USD resurgent has largely run its course now?
Veerathai: We see further expansion of monetary policies by other central banks, and developments in financial markets in many parts of the world will contribute to the fluctuation of forex rates.
Sri: There is sense that global central banks are running out of policy options, they are running out of road. Do you get that sense as well?
Veerathai: As we know monetary policies can be used as supportive policy measures. Looking at rates, they have been very low for quite some time now. There are also negative consequences, adverse consequences, of maintaining rates at very low level for so long.
Sri: There has been this broad move to negative rate policy in Europe, in Japan. Is there a danger that this is going to backfire and tighten financial and credit market conditions?
Veerathai: Definitely, when monetary policy has to return to its normal path, it means the adjustment has to be much stronger. If monetary policy is used with heavy burden by going into negative rate territory, it is important that the government has to step up its effort in fiscal policies and supportive structural adjustment policies. If the authorities rely too much for too long on monetary policy, there could be adverse consequences and adjustment back to normal path could be painful.
Sri: Janet Yellen has not counted out negative interest rates policy. Do you think it will get to that point where she has to adopt negative rates in the U.S. context?
Veerathai: I hope not. I hope the recovery will continue in the U.S., economic momentum will continue.
Sri: Japan has called for emergency economic summit. That suggests they are looking for some sort of coordinated action plan to draw a line on the slower economic growth globally. Realistically, how much can be done?
Veerathai: Coordination of monetary policies is something that will help improve the stability and also contain volatility in the financial markets. That is something we should welcome, initiatives like these. In terms of policy coordination, it could also be some sort of liberalization, policies on further cooperation on the real sector that governments can think of.
Sri: How exposed is Thailand to China? Are you concerned about a hard-landing there?
Veerathai: China is a major trading partner for Thailand. We have seen effects on certaintypes of exports to China. But we have to look into the details. For instance, in exports of electronic products, there are certain parts of the smartphones that we produce, we have seen a big increase in exports of those products to China, because the consumption is doing ok within China. We have seen a surge in Chinese tourist arrival into Thailand, and that continues to expand.
With this economic transition in China, we should expect to see a slowdown in China,in terms of the impact on countries like Thailand, there are also certain sectors that have benefited, while the larger economy has obviously been impacted by the slowdown of China. The impact of the slowdown in China on a country like Thailand, we also have to look at second-order effect that comes from neighboring countries.
Sri: Last year in December, you projected the Thai economy to grow by 3.5 percent in 2016. Are you maintaining that view or are there risks to the downside?
Veerathai: When we disclosed that 3.5 percent forecast, there were a lot of downside risks that we have to look at and watch carefully. We review our forecast four times a year. The new forecast will come outin March. Since then we have seen a lot of downside risks happening beyond our expectations in December. There is possibility that projected growth might be revised downward slightly.
Sri: Just slightly?
Veerathai: Well, we have to assess different conditions. If you look at growth momentum of Thailand economy, even in the last forecast in December, we have factored zero-growth for exports. Most growth engine come from domestic drivers, domestic demand, and we have to assess the pace of government spending and also consumption.
Sri: Some economists are forecasting that growth could be as low as two percent in 2016. Is that too pessimistic?
Veerathai: Compare that with our forecast, obviously two percent is too pessimistic. If you look at the growth momentum in H2 of last year, fiscal spending has pick up its pace. We have also seen improving activities in construction sector. We have seen some of the large projects like the new motor ways, the expansion of the double-track train system that have passed the auction period. There will be a lot more of these projects expected to materialize in H2 this year. That is a key factor in our growth projection.
Sri: What happens when those fiscal incentives and government spending measures expire? Is the economy going to be self-sustaining at that point? Or will it require the Bank of Thailand to step in and cut rates?
Veerathai: We should expect all those projects have spill-over effects on private investment and trigger recovery in private sector activities. What has been lacking in Thailand over the past three to four years has been private investment; it was unfortunate that we had a big flood some four, five years back, and also political challenges all along. And those events have slowed down private investment. But with the implementation of the fiscal spending, the large scale infrastructure projects, coupled with schemes to promote private investment, hopefully they will go hand in hand and complement each other and help maintain economic momentum going forward.
Sri: The Bank of Thailand has kept main policy rate for the sixth consecutive time this month. How long is that policy rate going to remain on hold?
Veerathai: When we made the decisions on the policy rate, we need to look at different rationales, different angles. Obviously when the policy rate is very low, 1.5 percent is a historical low by the Bank of Thailand's standard; we have to be mindful of the implication as a result of maintaining the low rate for a long, long time. We have to be mindful of the possibility of fragile points that might trigger of financial instability. Looking at these considerations, the committee decided to keep the rate on hold. But we also made it explicit that we are ready to act further to reduce rate if need be, if certain global conditions do not turn out as we expect.
Sri: Do you still expect inflation to turn positive by H1 2016?
Veerathai: The fact that we have negative inflation now is because of the oil prices, which came down very quickly from a high base. Going forward, if oil prices do not come down sharply, the base effect will no longer be that and inflation should return to positive.
Sri: What oil assumption is the Bank of Thailand working on for 2016? Does it imply a recovery in oil or prices remain depressed?
Veerathai: We think the current situation may be over-shooting. We expect it to recover slightly from the current condition.
Sri: Oil has been at 12-year lows. That should be a huge tax break for consumers and industries alike. Are we seeing any evidence of material follow through?
Veerathai: Thailand has benefited from the decline in oil prices. The decline in oil prices has also provided additional purchasing power for the Thai public. Indeed, many industries that have high usage of energy have benefited greatly. Last year we registered a record high in our current account surplus, amounted to about nine percent of GDP, about US$35 billion, part of it because of the savings in energy bill we have to pay because of the decline in oil prices, I think we save about US$18 billion of oil expenses last year.
Sri: Thai consumer confidence, given high level of household debt, how would you characterize it? Where are we in the deleveraging process?
Veerathai: If you look at the surge in household debt during the past three to five years, it has been driven by the so-called populist policies, in particular the first cartax break. We see high increase in auto hire purchase loan. But in current economic conditions, of slow recovery, slow GDP growth, the base is not to grow as quickly. Certain household might require getting more loans to go through current period. So the deleveraging, even though we expect to keep (a rein on), it does not come down as quickly as we would like to see.
Sri: There is still considerable amount of pressure that the emerging markets are under. Are you concerned about capital outflows from Thailand?
Veerathai: Yes and no. Yes in the sense that capital flows in and out of EM markets create financial volatility more than the level we would like to see. But in the case of Thailand, we are quite resilient to capital outflows. Let me give you some numbers.
Firstly, if you look at short-term external debt that we have, it is only about one-third of our international reserves, so we have sufficient buffer.
Secondly, if you look at participation of foreign investors in the domestic bond markets, if you look at the total bond outstanding, government bonds, enterprise bonds, and the Bank of Thailand bonds, foreign investors account for only eight or nine percent of total bond outstanding, I think this is quite low as compared to other EM markets. If you also look at the amount of current account surplus that we have, last year, we had a surplus of about nine percent of GDP, that is a huge buffer that we have against capital outflows. On domestic liquidity, the Thai banking system has ample domestic liquidity; so we do not expect capital outflows to trigger any tightening of domestic financial conditions.
Sri: Broadly, the Thai financial system is sound. But what is the extent of non-performing loans (NPLs)? How well capitalized are the Thai banks?
Veerathai: We believe the Thai banks are well-capitalized. Look at capital adequacy ratio; they range about 17 percent, one of the highest in the region. If you look at provisions against loan, against NPLs, they maintain provisions well over the regulatory requirements. Obviously NPLs will continue to increase; now the level stands at 2.6 percent of total loans that NPL will continue to go up. As we know, NPL is lagging indicator, when economic recovery continues to be slow, and in the case of Thailand, the recovery has been uneven. But we do not expect NPL to increase rapidly.
Sri: In trade-weighted terms, how would you describe or characterize the Thai baht?
Veerathai: If you look at the trade-weight terms, the basket of currencies of our competitors and our trading partners, we have been in the middle path. You have to take in account the fact that Thailand is an oil-importing country, and one of the sources of volatility we have seen is the fluctuation in oil prices. All long the baht has been moving in the middle of the group.
Sri: Do you think the SEA currencies, including the Thai baht are under pressure because of the depreciation we seen in RMB in China? Do you think we are in the midst of competitive devaluation?
Veerathai: The currency of SE Asian countries have depreciated more than RMB if you look at what happened during the past few years. RMB has been moving much smaller than the currencies of this region. The talk about the competitive devaluation of currencies might be over-estimated. Most central banks would agree competitive devaluation would not benefit anyone in the end. It might provide more breathing room for exporters. But central banks also need to be concerned about adverse impact on the likes of foreign currency-denominated debt liabilities.
Sri: Back to China, I want to get your assessment of Thai exports to China over the course of 2016. Do you think that will moderate because of the slowdown that we are seeing over there?
Veerathai: The further slowdown of China economy will continue to put pressure on commodity prices. For certain products, like rubber, in quantity terms, we have exported more, but in value terms, the amount has been declining, mainly because of the fall in prices. With further slowdown in China, we will see more adverse effects on certain produce, definitely further slowdown in China will also put pressure on manufacturing export so there will be a lot more competition among manufacturing exporters.
Sri: EM markets like Russia and China - if their economies are under pressure, does that imply a slower rate of growth in tourist arrivals into Thailand?
Veerathai: We have seen a decline in Russian tourists when the Russian economy was going through difficulty a few years when RUBLE depreciated substantially. But now it has stabilized. For China, it is interesting. If you look at the number of Chinese tourist going out of the country, still a small portion of the Chinese population, that total piece of pie continues to expand.
It is also encouraging to see that Thailand has also been getting higher market share of that expanding piece of pie. So even though the Chinese economy has slowed down during the past year, we have seen increasing number of Chinese tourist arrival in Thailand, we have also seen increase in tourist spending in Thailand; I expect the trend to continue.
Sri: Elections are expected in Thailand next year - the political environment - could that affect how Thailand is perceived by foreign investors?
Veerathai: We have the so-called not-normal political environment at present that will increase political risks for foreign investors, even for Thai investors, for large-scale investment projects. So it is very important for the current Thai government to make sure the transition back to a normal democratic process is a smooth one. The major policy that this government has introduced will have to have a high degree of certainty that they will continue, that they will be carried over once we return to full democracy.