Posted on 20 September 2007

 

While the Thai economy looks set to improve in 2008 thanks to a recovery in domestic demand and investment, market volatility and uncertainties remain key risks, says Bank of Thailand governor Tarisa Watanagase.

 

The central bank expects economic growth to range from 4-5% this year, driven primarily by exports.

 

''Growth this year is quite satisfactory, all things considered. But compared with our regional peers, Thailand has underperformed due to weaker domestic demand,'' Dr Tarisa said yesterday at a conference on economic trends hosted by Citibank.

 

She said interest-rate reductions this year would help spur domestic demand and compensate for an expected decline in export growth to push overall economic growth to 4.5-6% in 2008. Core inflation next year was expected to remain moderate, at 1-2%.

 

The Bank of Thailand has cut its one-day repurchase rate by 1.75 percentage points since the beginning of the year in a bid to spur growth.

 

Analysts said the half-point rate cut by the US Federal Reserve on Tuesday would give further room for the Bank of Thailand to cut rates at its next meeting on Oct 10.

 

The US rate cut surprised many investors who had expected a quarter-point cut, and helped spur a region-wide markets rally yesterday. The Stock Exchange of Thailand index closed yesterday at 811.79, up 9.25 points, in trade worth 19.21 billion baht.

 

Dr Tarisa said global imbalances remained a key risk for Thailand. She was unsure how much the sub-prime mortgage crisis would hurt the US economy.

 

Policymakers needed to focus on improving the Thai economy's flexibility and efficiency by strengthening the resiliency of the household and the overall competitiveness of the country's business environment, she said.

 

Programmes were needed that ''allow for constant self-correction'' to respond to the global environment.

 

Dr Tarisa noted that Thailand remained a key destination for foreign investors, and indicated that pressure on the baht to appreciate would remain for the near future. The Thai stock market in the first seven months of the year recorded a $4 billion net buy position among foreign investors. Coupled with the current account surplus, the foreign inflows helped make strengthen the baht.

 

''Hot money can fuel asset prices and encourage excessive risk taking behaviour,'' she said.

 

''A central bank may wish to counter that excess in the interest of financial stability. If the central bank chooses to maintain a high interest rate stance, the pressure on currency appreciation will likely mount.''

 

Dr Tarisa added that policymakers also need to balance short-term and long-term development goals.

 

''Only with fast resiliency will a small, open economy like Thailand be able to sail through the waves of global financial turbulence in the years ahead,'' she said.

 

Bangkok Bank, September 20, 2007

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