There was a Star Wars theme to today’s (August 24) annual Thailand economic and capital markets conference, Thailand Focus 2022. “The New Hope” ran in strident blue capital letters at the back of the Bangkok stage, white lights rising behind it from the city skyline towards a darkened sky.
Hope has been a key part of the arsenal of finance ministers and central bank governors lately, and the Thai event presented a useful case study of the challenges that people in these positions are facing across the emerging world. All are grappling with distinct domestic tests, as every economy is different, while also trying to second-guess not only the behaviour of developed-world heavyweights like the Federal Reserve, but also the knock-on effects of anything that the Fed and its peers do.
The most interesting commentary came from Sethaput Suthiwartnarueput, governor of the Bank of Thailand. He is not your typical central bank governor: he abandons the lectern and strides the stage with a microphone, eschewing the careful, written speeches of many in his position and ad-libbing an honest discussion about the issues of the day.
A former World Bank senior economist, who started out at McKinsey & Co and has something of an American-accented confidence in delivery, his career embraces the entirety of Thai public and private finance: the stock exchange, Siam Commercial Bank, the Government Pension Fund, PTT, the Thailand Future Foundation and, finally, the central bank.
“The theme of today is the new hope, but before we get to the new promised land we need to make sure the economy recovers,” he said this morning, and to get there, the policy objective is a smooth take-off.
Gradual and measured
Like many in his position, Suthiwartnarueput is keen to stress that the obstacles facing an emerging economy are different from those in industrialized economies, where the issue is not so much the take-off as the landing.
He speaks a lot of the pace of normalization being “gradual and measured”, two words that appeared in the latest policy statement. “And those are two different things. We weren’t looking for synonyms for the sake of synonyms.”
Gradual, he said, means “we did not see the need to undertake aggressive, heroically large rate hikes at each of our policy meetings. It doesn’t fit with our economic circumstances and conditions.”
And measured, he said, means calibrating policy decisions in light of economic conditions that prevail at the time.
Thailand has started down this track. On August 10, the Bank of Thailand board voted six to one in favour of a 25 basis point policy hike, and six weeks before that it agreed to start to withdraw some of the blanket measures that it, like many central banks around the world, had launched at the onset of Covid to protect against what they expected the pandemic to look like.
“Given the crisis turned out to be longer than people expected, and the recovery longer, those broad blanket measures don’t make sense,” said Suthiwartnarueput.
Instead, Thailand will leave in place targeted measures, such as soft loans or targeted small and medium-sized enterprise credit schemes, or support to the hotel sector. There is also a scheme to give incentives to banks to engage in debt restructuring, which will remain in place until at least the end of 2023.
These things are largely in line with the headaches every central bank must face: tackling inflation by raising rates without derailing economic growth. But it is important to realize the specifics that every individual country must deal with.
In Thailand the most obvious of those is tourism, which in the good days accounted for 12% of GDP.
“Without recovery in tourism, there will not be recovery of the economy,” Suthiwartnarueput said today.
Pre-Covid, Thailand used to get 40 million tourists a year; in 2021, it dropped to 400,000; this year it has rebounded and will probably hit about eight million
Pre-Covid, Thailand used to get 40 million tourists a year; in 2021, it dropped to 400,000; this year it has rebounded and will probably hit about eight million.
That is an extraordinary dynamic in a country’s key input. Who else has had to deal with such a vital national industry dropping to 1% of its previous activity in the space of a year? It is central to employment, to small business, to foreign currency reserves.
So when Suthiwartnarueput talks about risk, he doesn’t worry about being behind the curve on rates (unlike most countries, Thailand didn’t wait until GDP reached pre-Covid levels before hiking), or about a wage rise spiral kicking inflation to extremes, but something stopping the tourists from coming back.
“That’s the thing that bothers me the most… if there were some geopolitical tail-risk, some virulent new strain, the balance of risk would certainly shift,” he said.
This helps to understand why one cannot generalize about emerging-market policy responses to Covid recovery and the geopolitical challenges of the moment. Malaysia can’t set policy without thinking about its palm oil industry. Vietnam’s direction will be shaped by the presence of foreign electronics manufacturers. India must make every decision in the context of its crude oil import bill. In Thailand, tourism is the wild card.
Low vulnerability
For what it’s worth, Thailand’s looking pretty good. There is a lot of talk about capital outflows from Thailand, as from most Asian markets, but that is not quite true: only three months this year have seen net outflows, and the country has low external vulnerability when it comes to buffers, external debt and reserves.
Finance minister Arkhom Termpittayapaisith, speaking at the same event, expected full-year GDP growth of 3% to 3.5% and a steady increase from there. Government revenue collection is on target, he said, and as of June the public debt level was 61% of GDP, well below the 70% ceiling.
The banking sector looks robust, and although publications such as Euromoney often moan about the proportion of financing that is done through bank lending rather than the local capital markets, that is actually quite handy at a time like this when bond yields are a worry.
Huge amounts of bank funding, sometimes as much as 90%, are backed by deposits rather than wholesale funding, and so banks ought still to be able to lend and spur the economy without threatening the quality of their own books.
But there is so much beyond the control of any country like Thailand. As Suthiwartnarueput points out, you can talk about the decline in the Thai baht as much as you like, but what you are really talking about is the strengthening of the US dollar.
Inflation in Thailand, tracking at 7% compared with a usual target range of 1% to 3%, is hard to budge because it is driven almost entirely by supply-side factors in food and energy.
So what do you do? You can set long-term transformational ideas in motion, such as Thailand’s ambition to be a leader in foodtech. You can try to tack with the prevailing global and local winds.
And you can also hope. As Stock Exchange of Thailand president Pakorn Peetathawatchai said at the end of his opening remarks this morning: “May the Thailand force be with you always.”
