Tackling global shifts protectionism and technology change
An OMFIF Conversation with Veerathai San prabhob, governor of the Bank of Thailand on a critical issue: Tackling global shifts protectionism and technology change.
Danae Kyriakopoulou: I’d like to start by asking how worried are you about the shifting tides in global monetary policy, especially in the US? The Federal Reserve has resumed its tightening path and Donald Trump’s plans for expansionary scale policy have increased incentives for the Fed to act more aggressively against rising inflation.
At the onset of quantitative easing, capital owed into emerging markets that o ered higher returns and now they are exposed.
The taper tantrum was the rst avour of stronger responses. How worried are you about the vulnerability of the Thai economy to capital ou lows or sudden stops? How well prepared is the economy?
Veerathai San prabhob: I believe that the Thai economy has been well prepared for that. Our external posi ons are rela vely strong compared with other emerging markets. Our international reserves are three times the size of short-term external debt.
Foreigners’ participation in the domestic bond market is on the low side. Non-residents hold 8%-9% of total public bonds outstanding, and most of these bonds are denominated in Thai baht. Our positions are relatively strong compared with other emerging markets. Our international reserves are three times the size of short-term external debt.
On corporate borrowing, the amount of foreign currency borrowing is not substan al. In addition, most corporate borrowers have incurred foreign borrowings for their interna onal operations. The Thai financial system also has ample liquidity. Should sudden capital outflows occur, I don’t think the Thai economy will be vulnerable.
Kyriakopoulou: If anything, it sounds like you’re too over-hedged. Do you think that this is a reac on to the Asian crisis? There is clearly a trade-off between supporting growth in the short term and adopting a prudent approach as you have done. If you have had a more exible approach this me, do you think Thailand could have had higher growth?
San prabhob: I do not think we are too over-hedged under the current global volatility and uncertainties. Moreover, our fiscal engine is working and monetary condi ons have been accommodative. Thai corporates, Thai banks and also policy-makers learned big lessons from the Asian nancial crisis. In the world of uncertain es, it does not hurt to be cautious.
Kyriakopoulou: Policy-makers are shaped by the crises that they experience…
San prabhob: …and corporations as well, large corpora ons and commercial banks learned lessons from the Asian financial crisis.
Having said that I would like to emphasis how resilient economic structures we have built are. Our vigilance has helped us address weak spots in our economy with right policy, unlike when the Asian nancial crisis erupted.
Kyriakopoulou: You make a convincing case for strong fundamentals in the Thai economy and the data support this. But to what extent are you worried that investors some mes don’t really look at the fundamentals of a par cular economy, but they might think emerging markets, as a whole, are vulnerable? That was an important factor in the Asian nancial crisis. Thailand was rela vely more vulnerable and its fundamentals weaker compared to the region. But while other economies, such as Singapore, were more robust, they s ll got similar treatment. This was partly what gave rise to a new genera on of models to explain currency crises, so we have certainly come a long way in terms of modelling such episodes. Do you think investor behaviour and approach have also come a long way?
San prabhob: Investors in emerging markets have come a long way in understanding and di eren a ng economic condi ons across countries. What has happened in Asian emerging markets more recently could re ect how investors reacted di erently across the various countries with di erent economic fundamentals and poli cal situa ons.
Kyriakopoulou: Another important factor is the exposure to China. We saw the di eren al approach of the markets to di erent Asean economies. Malaysia was the one that was hit par cularly hard during the taper tantrum and its currency depreciated the most. Its economy has very close es to China. But Thailand is also an open economy and integrated in the supply chains of China, so how worried are you about a downturn there? The elec on of Donald Tr“ump has created a very real possibility of a more protec onist a tude to China.
Investors in emerging markets have come a long way in understanding the di erences across countries.
This would have an indirect impact on the Thai economy as well and investors will no doubt be paying a en on to that.
If protectionism is a new paradigm of global trade, it will have adverse impacts for all countries. Thailand is a small open economy which is well integrated into the global supply chain of many manufacturing sectors. So, we would be a ected by trade protec onism. At this point, we have to wait and see how the US administra on will implement trade policy going forward and how other major countries will respond. Interna onal trade policy is very complicated, and the devil is in the detail.
Kyriakopoulou: The external factors are one of the things that you look at as a monetary policy-maker. You’ve kept interest rates at a near record low, but there have been pressures on you to lower them even further and you’ve resisted that. Looking at central banking trends around the world, how worried are you about the unintended consequences of extraordinarily loose policies?
San prabhob: As an emerging market economy, we are concerned with possible spillovers from the unconven onal monetary policies of advanced economies, especially through capital ows and too much leverage. Even though the Bank of Thailand believes that our monetary policy has to remain sufficiently accommodative, we need a framework that be er considers adverse consequences of policy easing. In particular, we need a policy framework that also takes into account financial cycle and financial stability.
We should also be reminded that when many countries adopt loose monetary policies, other countries might be under pressure to follow in order not to allow their domes c currency to appreciate. Further policy spillovers are generated.
Kyriakopoulou: And beyond the e ect through nancial markets there are also the concerns on exchange rates. Here there are further policy spillovers in the sense that many countries would also have to ease monetary policies, with a view to not allowing their domes c currency to appreciate. Which is something, of course, that doesn’t work if everyone is doing it, so that is another concern.
San prabhob: Exactly. With very low interest rates, loose monetary policies would trigger search for yield behaviours, and could result in pockets of nancial fragility, as has been observed in both global and domes c nancial systems. The total size of corporate loans has accelerated sharply in some countries during the past ve years.
Kyriakopoulou: …Many of those loans in emerging markets, including dollar-denominated corporate loans, have been increasing substan ally. How do you see this developing in the future?
San prabhob: Now, with the policy normalisa on and the reversal of ows, countries that have large foreign-currency denominated corporate loans will find it a challenge to roll them over. We will be able to observe these consequences globally.
Kyriakopoulou: These are more the side e ects, if you like, of too easing policies, but what about the core issue of monetary transmission? Lowering rates is one way of encouraging lending, but another is to strengthen the transmission mechanism, to increase the possibili es for small and medium-sized enterprises that don’t have access to collateral, to borrow through the use of technology. Informa on- based lending, I think, is something that your bank is exploring.
San prabhob: Yes, there are many technological changes in nancial markets. Fintech would be very helpful in improving nancial access and inclusion. For instance, ntech would allow SMEs to access nancing for working capital, through supply chain nancing or factoring. SMEs would bene t substan ally from technology advances by lowering transac on costs from invoice processing and ensuring that those invoices are authen c and transferable.
Kyriakopoulou: It is as if the developments in technology are crea ng the poten al for ntech to become a new source of nancing…
San prabhob: Financial inclusion is not only about access to credit. With rapid developments in e-commerce pla orms, access to electronic payment infrastructure is equally important. E-commerce pla orms would broaden SMEs’ markets from their local community or province to the global level. We, thus, need to have good and e cient payment systems.
Kyriakopoulou: Also, it would constrain the underground economy in some occasions, when transac ons happen in e-commerce pla orm or through the use of technology.
San prabhob: The informal economy can also bene t from these technologies. Their opera ons will become more transparent and it will be easier to comply with tax and accoun ng regula ons. Electronic payments will also reduce leakages in government’s welfare payments, many of which are currently done in cash.
Kyriakopoulou: Certainly, fintech has a lot of benefits for development, but there are also risks. At OMFIF, we are calling 2017 the year of cybersecurity. This is becoming increasingly important for central banks.
The private sector has been much more on the cu ng edge of this. How important do you feel that is? What level of resources do you devote to that? What prac ces do you employ?
San prabhob: Cybersecurity is crucial not only for the central bank’s opera ons, but also for the whole banking community. We need to develop capabilities to deal with cybersecurity in a big way. It is not simply “investing in newest technology, but also dealing with how banks, regulators, and enforcement agencies work together to combat cybersecurity threats, how commercial banks build trust among themselves to be able to share information on on cybersecurity incidents.
The private sector has been much more on the cu ng edge of this. How important do you feel that is? What level of resources do you devote to that? What prac ces do you employ?
San prabhob: Cybersecurity is crucial not only for the central bank’s operations, but also for the whole banking community. We need to develop capabilities to deal with cybersecurity in a big way. It is not simply investing in newest technology, but also dealing with how banks, regulators, and enforcement agencies work together to combat cybersecurity threats, how commercial banks build trust among themselves to be able to share information on cybersecurity incidents.
Kyriakopoulou: Certainly a very sensitive issue. No doubt you need a very trusted pla orm for that as well as close co-opera on with the banking associa ons to strengthen the skills of personnel and banking professionals that are working on this.
San prabhob: Yes, and you also need a proper regulatory framework to ensure that banks comply with interna onal cybersecurity standards. This is par cularly important for emerging markets with a shortage of cybersecurity professionals. There are multiple dimensions to deal with cybersecurity on top of technology investment. What matters equally is how people work and use technology. They need to be nancial technology literate, as their workplace could be an open door for threats to their institutions.
Veerathai San prabhob has been the governor of the Bank of Thailand since October 2015. San prabhob has more than 20 years of experience as a policy economist in public, private and interna onal ins tu ons.
He was chief strategy o cer of The Stock Exchange of Thailand and execu ve director of the Capital Market Development Fund and Capital Market Research Ins tute. San prabhob has been an economist at the Interna onal Monetary Fund and served as a co-director of Policy Research Ins tute, Fiscal Policy O ce. He was a senior execu ve of Siam Commercial Bank and an independent director at Thai Airways Interna onal, Thanachart Capital and a number of leading corpora ons.
San prabhob holds a BA (Economics) (1st Class Hons) from Thammasat University and AM (Economics) and a PhD (Economics) from Harvard University.
Original text here: conversations-bank-of-thailand
Courtesy Official Monetary and Financial Institutions Forum