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Thailand prepares for shocks, beefs up resilience
Thailand, Indonesia’s next door neighbor, appears to be confident in facing the rising global pressures, as the country’s monetary and fiscal authorities have implemented a series of measures to help reduce heavy volatility in its currency and maintain a stable interest rate
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span>Thailand, Indonesia’s next door neighbor, appears to be confident in facing the rising global pressures, as the country’s monetary and fiscal authorities have implemented a series of measures to help reduce heavy volatility in its currency and maintain a stable interest rate.
Bank of Thailand (BoT) governor Veerathai Santiprabhob said his country in the past 18 to 20 months had reached a situation where its economy was growing as strongly as its neighbors, allowing its exchange rate to appreciate.
“We have been receiving a lot of inflows and we have taken it as an opportunity to accumulate international reserves [foreign exchange reserves],” he said in a recent short discussion panel held as part of the 2018 Annual Meetings of the International Monetary Fund and World Bank Group in Bali.
Data from the BoT show that the country’s foreign exchange reserves stood at US$204.4 billion in September 2018, slightly down from $204.5 billion a month earlier.
Santiprabhob said Thailand had realized the importance of cultivating a higher level of forex reserves, knowing that the trend of rising interest rates in developed economies, including the United States, would eventually occur, triggering capital flow reversal from emerging market and developing countries.
The stable forex reserves have also helped the central bank to maintain its policy rate at 1.5 percent, which had been maintained for the past three years. Santiprabhob claimed that Thailand “is not under imminent pressure to increase its policy rate”.
Santiprabhob said the country enjoyed a good cushion against global shocks, while at the same time, regular stress tests and improvements in the financial regulatory framework were still carried out to face the current pressures.
He projected that global pressures might not recede in the short term as central banks in advanced economies, such as the European Central Bank (ECB) and Bank of Japan (BoJ), would only start normalizing their monetary policies next year, later than the ongoing policy of the US Federal Reserve.
“And when these three giants [Fed, ECB and BoJ] move, the other central banks will also have to move. And global financial conditions will be tighter in the next few years,” he said.
When asked whether the BoT was concerned with the potential contagion from the heavy depreciation of Indonesia’s rupiah, Santiphrabob said the central bank was “not that concerned, but can’t be complacent”.
The Indonesian rupiah plunged to a record low of 15,000 per US dollar in early October, the lowest rate since the 1998 financial crisis, caused by a combination of the escalating US-China trade war and rising oil prices that may increase the country’s trade deficit.
The drop came as a blow to Bank Indonesia (BI), which has increased its benchmark interest rate five times since May to defend the rupiah’s value. The latest hike was implemented on Sept. 27, when BI increased its policy rate — the seven-day reverse repo rate — to 5.75 percent.
The heavy depreciation of the rupiah has eaten into Indonesia’s foreign exchange reserves, which declined to $114.8 billion as of September, compared to January when the level was still $131.9 billion.
BI governor Perry Warjiyo previously argued that pressure on the rupiah would ease in 2019, taking into account the government’s efforts to reduce the current account deficit and expectations that monetary normalization policies in advanced countries would somehow reduce the strength of the US dollar next year.
Santiprabhob acknowledged that the escalation of trade tensions between the US and China, as well as economic shocks in Argentina and Turkey, which triggered volatility in emerging market currencies, had added concerns for the BoT over their impacts on financial stability.
As part of its efforts to strengthen resilience, he said the BoT had decided to step up its macroprudential measures, such as planning a new regulation on mortgage loans. The planned mortgage loan regulation will follow a series of limitations on credit cards and personal loans in Thailand last year, as a result of a rising trend in household debt in the country over the past few years.
