Bank of Thailand Head Sees Stronger Fiscal Role for Recovery
(Bloomberg) -- Thailand’s outgoing central bank governor said public debt restrictions should be eased to allow the government to spend more as monetary policy options dwindle with interest rates already at an all-time low.
Given the severity of the pandemic-driven downturn, Governor Veerathai Santiprabhob said his “personal view is that the 60% public debt-to-GDP limit can be relaxed.” The limit was set up during “normal times” and the level isn’t high compared to other emerging markets, he said Tuesday in an interview with Bloomberg Television’s Haslinda Amin.
“At this point in time, the government is the only sector that can help stimulate the economy and minimize the long-term impact on the economy and the society from the pandemic,” Veerathai said. If government spending can create jobs in rural areas, which have absorbed unemployed family members returning from major cities and tourist areas, “that’s more important than the debt-ceiling limit.”
In any case, the debt limit isn’t yet close to breaching the 60% limit: The Finance Ministry’s Public Debt Management Office said last week it’s at 46% of GDP now and may take another five years to reach the limit, unless there’s a massive government borrowing program in the meantime.
Thailand’s economy is forecast to suffer one of the biggest contractions in Asia of more than 8% this year, and central bankers are running low on ammunition to deal with the fallout. The Bank of Thailand has brought its benchmark interest rate to a record low 0.5% in three interest-rate cuts this year, and has been on hold since June as it tries to preserve policy space.
Veerathai, 50, will leave the central bank at the end of this month when his five-year term ends. He’ll hand over to Sethaput Suthiwart-Narueput, a member of the monetary policy committee.
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Current monetary policy is accommodative enough and further interest-rate cuts would be less effective in reviving the economy from its pandemic-driven downturn, Veerathai said. While all options, including interest-rate cuts, remain on the table, targeted policies that can get funds to sectors that need them can be more effective, he said.
“The problem now is not so much on illiquidity. I think we have to focus more on insolvency problems that will occur across different sectors and segments of the economy,” he said. “The policy rate is already quite low.”
The bank has been studying unconventional monetary policy options such as yield-curve control, but Veerathai said he doesn’t think it’s needed right now.
“We have to assess the situation on a regular basis,” he said. “If there is steepening of the yield curve to the point that it might affect the economic recovery, then yield-curve control might come in.”
A former International Monetary Fund economist with a doctorate from Harvard University, Veerathai was the Bank of Thailand’s youngest leader in four decades when he took office in 2015. During his term he dealt with a military government, U.S.-China trade tensions, currency volatility and the pandemic.
He’ll leave the bank at a time of heightened uncertainty about fiscal policy following the sudden resignation of Finance Minister Predee Daochai less than a month into his term. After some local media reports said Veerathai would be approached to replace Predee, the governor said Tuesday that he’s “not ready to take up any position” yet when his term at the central bank ends.
“Veerathai’s legacy would be very interesting. He’s basically the first Asean central bank governor who has had to confront the zero-bound interest rate” with an economy experiencing weak growth and virtually no inflation, said Taimur Baig, chief economist at DBS Group Holdings Ltd. in Singapore.
Veerathai remained “fairly conservative” with inflation targeting, financial stability and asset price issues, he said.
“That all makes sense from the Central Bank 101 playbook, but the world is changing so dramatically that you could ask whether the Bank of Thailand could have been more proactive in cutting rates,” Baig said.
Other highlights from Veerathai’s interview:
- Thailand’s currency, a recurring source of concern for the central bank because of its impact on exporters, is now more fairly valued, though it’s likely to be more volatile than in the past. The baht is down 4.6% against the dollar so far this year
- Government disbursements early in the pandemic helped people survive and boosted domestic consumption, but “as we move toward the next phase, we need to think more of restructuring,” Veerathai said. He cited a need to build the next generation of digital infrastructure, reform the country’s tax structure and find ways to generate a better return on government assets
- There’s no need for the Bank of Thailand to directly finance the government’s budget deficit -- as Bank Indonesia is doing amid the pandemic, for example. “We have to be mindful of the central bank’s independence. This is very important. The central bank needs to have operational independence to ensure that it can fulfill its mandates on a long-term basis,” Veerathai said
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