Thai Central Bank Chief Says He's Saving Rate Cuts for Rainy Day

Bank Of Thailand Governor Veerathai Santiprabhob Interview

Veerathai Santiprabhob, governor of the BOT

Photographer: Brent Lewin/Bloomberg
  • Veerathai says lower borrowing costs may have limited impact
  • China economic reforms, further slump in oil among key risks

Thailand’s central bank is keeping its powder dry on interest rates and is ready to act in the event of external shocks including a sustained decline in oil prices and even slower growth in China, Governor Veerathai Santiprabhob said.

The Bank of Thailand has “limited scope” to reduce rates because borrowing costs are already near a record low but has “reserved some space” to act if needed, he said. Veerathai and the other six members of the bank’s Monetary Policy Committee voted unanimously Feb. 3 to hold the rate at 1.5 percent for a sixth straight meeting.

“Even though we say that for now we see limited need for further easing of monetary policy, it doesn’t mean we shut the door for the possibility for easing in monetary policy if the environment doesn’t turn out as we expected,” Veerathai, 46, said Monday at his office in Bangkok. “If such a shock occurs coming from outside, the MPC would like to have some space to be able to become more accommodative.”

While Thailand has benefited from the slump in oil prices because it’s a net importer of energy, the nation’s exports have tumbled for three straight years as Chinese demand cooled. Asia’s biggest economy was dethroned by the U.S. as the biggest overseas market for Thai goods last year, but remains the largest source of visitors to Thailand.

China’s foreign reserves have fallen to their lowest since 2012 as policy makers combat a weakening yuan amid slower economic growth, plunging stocks and increasing outflows. Veerathai said further market volatility could potentially threaten the pace of economic reform in China as that country’s economy shifts toward services and consumption.

Thailand is in a relatively better position than other Asian emerging markets to cope with volatility because it has solid fundamentals, including a large current-account surplus, said Kozo Hasegawa, a currency trader at Sumitomo Mitsui Banking Corp. in Bangkok. The baht rose to a three-month high Tuesday, touching 35.390 per dollar, after Veerathai said Thailand’s high foreign reserves and low debt levels provide “a good buffer” against capital outflows.

Thai Stimulus

“We also need to be concerned about tail-risk events,” Veerathai said, citing the potential for a prolonged period of low oil prices and continuing instability in China’s financial markets. Thai policy makers are also waiting to assess the impact of government stimulus spending and the progress made on high-speed rail networks and other infrastructure, he said.

“Many projects have been long delayed in Thailand partly because of the political difficulties that we have had,” Veerathai said, referring to military coups in 2006 and 2014. “The other part relates to political interference, but this will depend on the ability of the current government to make tough decisions and start the bidding process. Once these projects go through the bidding process, there will be high degree of assurance that they will continue to stay and get completed as planned.”

Democracy Delayed

Elections have been delayed until next year by coup leader-turned-Prime Minister Prayuth Chan-Ocha, adding to the uncertainty for overseas investors who pulled a net $4.7 billion from Thailand’s stock market in the past 12 months. Applications for foreign direct investment slumped 78 percent in the first 11 months of 2015, according to the nation’s investment-promotion board.

The government has focused on accelerating budget spending, pushing investment projects and launching stimulus measures for farmers and small businesses to help boost an economy that the World Bank projects will grow at a 2 percent pace this year.

“There is no urgency for Thailand to cut rates at this point and they can use fiscal stimulus to support the economy,” Tsutomu Soma, general manager of the fixed-income department at SBI Securities Co. in Tokyo, said in an interview, adding that Thailand may keep rates steady throughout 2016. “China is a very important trading partner for Thailand and therefore, their slowdown poses a great risk and it makes sense for the central bank to reserve the option in case of a significant shock from such risks.”

Good Laws

The military government has had some success in tackling Thailand’s outdated legal framework, including laws governing state-owned enterprises, said Veerathai, a former economist at the International Monetary Fund.

“During the past year we have seen a number of laws,” he said. “Good laws. Laws that have been waiting for enactment for quite a long time got enacted. And that should help improve the legal framework for Thailand going forward, especially laws that set disciplines, laws that will stay regardless of which political party comes to power.”

Veerathai became the Bank of Thailand’s youngest leader in four decades when he took over from Prasarn Trairatvorakul in October. The economist, who received a doctorate in economics from Harvard University when he was 24, said he’s doubled his daily dose of Buddhist meditation since taking the job.

“It has help me tremendously,” he said. “By being in this position, having to deal with so many issues coming from people who like and people who don’t like what we do, it helps improve my understanding of Buddhist dharma.”

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