EXCLUSIVE INTERVIEW

Rate cut would benefit economy and central bank: Virabongsa

ACHARA DEBOONME

THE NATION

BANGKOK: -- Bank of Thailand chairman Virabongsa Ramangkura is adamant that the policy rate could be slashed without damaging long-term economic stability, arguing that lower interest rates would benefit the economy as well as the central bank's finances.

The time is ripe for a rate cut, he said, as the economy is sliding into sluggishness. "With a [gross domestic product] growth forecast of 4-5 per cent, I consider this sluggish," he said in an interview with the Nation Group.

Stressing that this was his own view, Virabongsa, chief economic adviser to Prime Minister Yingluck Shinawatra, said he was not trying to please the government by saying so.

"It's easier to intervene in the government's policies [than the government intervening in the central bank's operations]. I took this job even though I would [only] be in office for slightly over a year, because I wanted to instil some macroeconomic sense into the institution.

"In the corporate world, companies need to show business growth of more than 5 per cent per annum, to ensure a pay rise of at least 5 per cent. No company or its employees can survive if the pay rise is as low as 5 per cent, after inflation," he added.

Against some conservationists' fears that amid buoyant loan growth, lower interest rates could spur unnecessary borrowing, which could lead to economic bubbles, he said the economy would become overheated only when GDP expanded by more than 9 per cent on an annual basis. He insisted that there was currently no sign of overheating in the economy.

"Historically, Thailand has faced only cost-push inflation, not demand-pull," he said.

A lower policy rate would in effect stem foreign-capital inflows to the Kingdom, and hence slow the baht's appreciation. In light of a global crisis that is weakening demand for Thai exports, which contribute 70 per cent of the country's GDP, he sees the benefits of a weak baht to pave the way for annual GDP growth of more than 5 per cent.

Moreover, a weak baht would also reduce the financial cost of the Bank of Thailand's foreign-exchange stabilisation, he said.

FIXING THE CENTRAL BANK'S LOSSES

At his first meeting as the Bank of Thailand's chairman, Virabongsa pinned his focus on the central bank's losses incurred from forex stabilisation.

"Being the chairman of any company, the first thing I look into is the balance sheet. Even though some of it is accounting losses, the [overall] losses are mounting. How sustainable can that be?" he said, rebutting BOT officials' insistence that the central bank should not focus on balance sheets.

A committee was set up to address the institution's losses, following his recommendation.

Capital inflows demand that the central bank issue bonds to absorb excess liquidity. As not all the liquidity can be absorbed, the baht tends to rise against the US dollar, which in turn produces an accounting loss when dollar-denominated foreign reserves are translated into the local currency unit.

Meanwhile, baht bonds also carry a higher interest rate than what is offered by US Treasuries or bonds in other currencies, which make up the majority of the foreign reserves. This translates into actual financial losses for the central bank.

As of Tuesday, the five-year US Treasuries' yield was 0.61 per cent, against the Bank of Thailand's accepted yield of some 3 per cent.

According to Virabongsa, about 40 per cent of the foreign reserves are dollar-denominated. If all of that portion were to be invested in US Treasuries, it would account for about US$72 billion (Bt2.2 trillion). The economic guru is worried that given monetary-easing policies in leading economies in Europe and in the United States and China, the flow of capital to Thailand will only grow.

According to BOT data, as of September 21, the foreign reserves had grown by $800 million to $183.4 billion. Meanwhile, Nomura Economics has estimated that the United States' third round of quantitative easing (QE3) will lead to inflows of $2 billion to the Thai equity market, similar to QE1 and QE2.

Virabongsa is pleased that some BOT officials are heeding his advice, as apparently reflected in the Monetary Policy Committee's previous two meetings. At both meetings, two of the seven members proposed rate cuts to spur the economy in light of the intensifying crisis in the euro zone.

The committee next meets on October 17.

However, he vowed not to interfere with the day-to-day operations of the central bank, leaving that task to the governor. He would prefer to focus on oversight on the institution's policy direction.

"To me, the central bank's duty is to ensure sufficient liquidity in the market, maintain the interest rate at a reasonable level, keep capital flows at a reasonable level and maintain the foreign-exchange rate at a level that will increase the country's advantage," he said.

-- The Nation 2012-10-04

Would be far better to devalue the baht! it is so overvalued at the moment.

I stopped reading after this part .... "No company or its employees can survive if the pay rise is as low as 5 per cent, after inflation," he added." ... WHAT A BUNCH OF BS!

I got confused when he talked about exports making up 70% of the GDP.

That looks as if the comments were all in Thai, talking to somebody literate in economics. Then translated to English by somebody who has no idea what's being talked about or on the shorthand that was used to take notes. Way confusing.

"In the corporate world, companies need to show business growth of more than 5 per cent per annum, to ensure a pay rise of at least 5 per cent. No company or its employees can survive if the pay rise is as low as 5 per cent, after inflation," he added.

Is he trying to say the average worker in most any country, like Thailand, gets an after inflation 5% yearly pay rise. And based on the low pay most Thai's get, Thai employers in conjunction with the government have done a pretty good job in keeping wage growth low when excluding the recent 300 baht minimum wage increase. During my working life sure wish I could have got an average after inflation 5% yearly pay rise when you exclude any promotions, job changes, etc., that give you a pay pop compared just to the run of the mill yearly pay raise (if even getting one).