Asiamoney [AM]: Is it useful for a central bank governor to have had experience in the private sector?
Prasarn Trairatvorakul, governor, Bank of Thailand (PT): If you stay in your monopoly all through your career you lose the sense that you need to be mindful of the thinking of your stakeholders. You have to appreciate more the concept of marketing. You certainly have your stakeholders, and have to do lots of equivalent marketing works.
Businesses need credibility and we also need credibility. In fact it’s more complex when you are in the central bank and try to identify the needs of your stakeholders’ various objectives, which can conflict with one another.
Even the very concept of branding when I joined the central bank two years ago was almost taboo. One of my deputies told me that that [the central bank’s] reputation is [down to its] credibility and policy not the brand. My simple answer would be that credibility and monetary policy is necessary but if you have that plus a good brand you can even gain more respect from your stakeholders. That’s why we’ve worked a lot on the past two years [to improve our] communication.
Asiamoney [AM]: Is a core of that concept the independence of the central bank?
PT: I try to avoid this word ‘independence’, we try to use more neutral words like principles, integrity, sustainability of the economy and the wellbeing of the economy. People are not ready to accept the concept of an isolated institution from the democratic systems.
We are part of the democratic system but we try to execute the procedure as meaningfully as possible. [Executing] monetary policy is guided by the present legislation. At the end of every year the chairman of the monetary policy committee (MPC) must consult with the finance minister on the inflation target for the following year and if we can reach a conclusion then he submits the target range to the cabinet for approval. We are given these targets to execute.
In this execution we try to avoid [discussing] independence as much as possible in exchange for transparency. Every six weeks we have the [MPC] meeting, and after the meeting each time we hold a press conference and disclose the votes of the seven members, the reasoning of both sides, and three weeks after the meeting we disclose the minutes. This is more meaningful to engage the public’s understanding.
AM: The government has increased the minimum wage and supported the price of rice, which can have inflationary impacts. Was it difficult to agree with such policies?
PT: You pick two very good examples. For the minimum wage…we expressed our support for the direction of the policy because our own calculations of the real wage over the past 15 years has been lower than the pre-crisis in 1997 when you subtract the nominal wage increase compared to inflation. But particularly more labour-intensive industries, both big and small, could face big challenges because of an increase [in wage costs] in the short-term. Our ideal recommendation would be a [longer] span of time for them to [introduce the minimum wage].
On the other hand on the rice price support scheme, we were certainly very cautious on the benefits. I myself participated in meetings with the prime minister or economic minister and expressed my reservations about such a policy. As expected they were not willing to make any changes, but we did express our views.
AM: What is your responsibility in such a situation when a government policy might not be helpful to monetary or fiscal control of a country?
PT: I’m quite direct with them, particularly in the meeting room. You have to be respectful [and] talk with them first rather than going out straight to the public.
In the broader context these policies are quite a worrisome phenomenon and we’ve noticed it’s not happened to one single party but all parties. Every single party in the election season promised all sorts of things and that’s quite worrisome and can have damaging effect for monetary policy in the future.
What we suggest in public is that next time they make promises they should also attach with these promises the identification of sources of funding and…what will be the implication for the system as a whole. This is something we have started to tell the public and hopefully…next time the parties will feel more responsibility to identify their funding sources and do the arithmetic.
AM: What would be the warning signals of a potential crisis?
PT: Public debt would be one. Now it’s at 43% of GDP [gross domestic product] but we may be far from that threshold of fiscal sustainability. Presently we…say that the threshold is 60% of GDP and beyond that it [there is] difficulty in servicing the debt. But if the schemes of spending that the government were already announced were executed you could easily go to 48% in a couple of years.
Plus the population here is going into the aging society under the United Nations’ definition of having a population of an age of over 40 to 50 years old. And of the three major pillars of healthcare, namely civil servants, the social security and the general healthcare and only one is satisfactory: the civil servants. The implication is that in the future you will incur lots of fiscal expenditure in the healthcare system. Then there are various contingent liabilities in various places.
In 2007 the US’ public debt level was only 40% of GDP but by 2010 that figure shot up to 80%-plus of GDP, mostly because of the [global financial] crisis. Nobody can guarantee we wouldn’t face a similar crisis down the road.
AM: Is the quantitative easing of the US, Europe and now Japan impacting your economy?
PT: The baht has appreciated somewhat. Yes we’ve had some impact like many of the other economies in Asia, we are experiencing significant inflows but we are also seeing the need of Thai investors and businesses to invest overseas and inside.
Last year outbound Thai direct investment reached US$11 billion, while foreign direct investment inbound was US$8 billion. It was the first year when outbound exceeded inbound. We hope that trend will continue this year and perhaps into the medium term.
We also require lots of investment whether it be the recent reconstruction following the big flood a year ago, or big businesses realising they have to go for a more capital intensive business model, or because the government plans to invest a lot more into capital infrastructure and that will cause crowding in private investment. This requires long-term funds for investment.
AM: Is there a point where the baht’s appreciation could damage Thailand’s economy?
PT: Some people look at THB30 [to the US dollar] as a psychological level but we don’t have a fixed level in our heads.
In 2010 we experienced huge inflows and the appreciation of the baht was very strong but [we saw] how well prepared the private sector was [in terms of diversification of exports]. Even when the baht appreciated 10% that year [our] export growth was 29%.
AM: The country’s infrastructure spending plans suggests the need to develop the bond market. Is the Bank of Thailand playing an active role in promoting this?
PT: Yes. Over time [the bond market] has expanded quite significantly, annual growth [has been] 20%.
We consult with the Ministry of Finance and particularly the public debt management office. Our policy is try to persuade them to issue regular products so that the market can establish good efficient benchmarks for the risk-free debt instruments and the appetite for debt instruments can build up on them. [This has had] a certain level of success but not to the full extent as the Ministry of Finance takes into account the cost and can have more than one objective. But we worked with them and if they can plan ahead regular supply the market can know in advance and for us they issue any more short term debt then we can compliment that structure.
AM: Given the country’s infrastructure funding needs, shouldn’t the government take your recommendation to establish a strong yield curve seriously?
PT: They realise that. We try to work with them [but] sometimes they have this cost objective and want to minimise the cost.
To do regular issuance they need to do regular Treasuries, which would leave them with a surplus and they would have to manage it. And sometimes they are too lazy to do that. They can do issues when demand comes.
Looking at the infrastructure scheme for the next seven years…if it’s issued as a law then certainly you will have this commitment of some THB2 trillion-plus that is required over the course of seven years, then it’s definitely going to be demand for bond supply in a more regular fashion.
AM: Does there need to be further consolidation in the banking sector?
PT: The smaller [banks and] the medium-sized could consolidate to pose more meaningful competition to the big ones. But it’s not the culture here to have voluntary mergers for obvious reasons like lots of duplication in their skill sets, their facilities, their networks and so on.
A more practical reason [hindering consolidation among our top banks] is when you count from five downwards to 14 you already have major strategic partners in almost all of them who are major global banks or players. [At] number five, BA [Bank Ayudhya] has GE [General Electric] as a strategic partner, although [it is in discussions to exit]. The little I know about the candidates negotiating with them is that some of them are in the top 10 in the world. So it’s not too optimistic [to think] that you may have one of the big banks in the world as a strategic partner.
Even at number 14 is the biggest bank in the world, ICBC of China. I don’t think these big boys will merge with others.
AM: This is the Bank of Thailand’s 70th anniversary. What are the big strategic priorities for you and for the bank in its coming years?
PT: We have identified three broad strategic directions of the country that we can support: the first is how to get out of a middle-income trap and become competitive internationally; the second is about stability and sustainability; and the third is having a good environment, making an efficient use of resources.
We can support the first two quite well and have translated [doing so] into four policy platforms. The first of these is encouraging outside opportunities, particularly connectivity outside the country. The second is transforming Thailand into a higher value-added economy. The third is the inclusiveness of growth and development and the fourth is sustainability and stability.
Each has opportunities and challenges. On the first certainly you can identify regional integration…you can do a lot of dimensions of integrations, free flow capital, free flow financial services, capital market development and payment systems.
The second area involves climbing up the value chain and ensuring the banking system helps to facilitate all these activities. In the third area we explore more about the accessibility of the underprivileged groups whether enterprises or individuals, and inducing banks to lower operating costs and modify their credit model [to access] smaller people. But this must be done in conjunction with financial literacy or you [may] create another problem with over-debted households.
Platform four is a back up to the previous three because each of the first three brings a higher exposure of risk.
AM: If there was just one thing you’d like to have done by the end of your term what would it be?
PT: That this [the central bank] shall be a strong organisation with depth and breadth of staff. That’s what I’d be most proud of.
This interview has been edited by Asiamoney.