InfoQuest (August 20, 2020) - The Monetary Policy Committee (MPC) voted unanimously to leave the policy rate steady at a record low of 0.50 percent On August 5. In deliberating their policy decision, the Committee assessed that the Thai economy would gradually recover, in line with the relaxation of COVID-19 containment measures in Thailand and the gradual improvement in global economic activities. However, overall economic activities would take at least two years before returning to the pre-pandemic level and the Committee would remain cautious about risks of the second wave of the outbreak.
Meanwhile, the Committee viewed that the extra accommodative monetary policy since the beginning of the year as well as the fiscal, financial, and credit measures additionally announced helped alleviate adverse impacts and would support the economic recovery after the pandemic subsided, facilitate the return of inflation to the target, and reduce financial stability risks.
Moreover, a further decrease in the policy rate would be less effective in the current context, where it could affect financial intermediation, increase vulnerabilities in the financial system through underpricing of risks, as well as affect savings. The Committee thus deemed it necessary to preserve the limited policy space in order to act at the appropriate and most effective timing.
The Committee noted that accelerating credit extension and debt restructuring would be necessary to support the economic recovery. Financial and credit measures going forward needed to emphasize on (1) ensuring that liquidity be distributed to have broader impacts on affected business and households through the acceleration of credit extension under various measures, (2) helping financial institutions to significantly accelerate debt restructuring for borrowers especially households and businesses, and (3) preparing additional measures to reduce solvency risks for businesses and establishing mechanisms to standardize and expedite debt restructuring.
Nevertheless, the Committee viewed that fiscal policy needed to play a greater role going forward to support economic recovery and economic restructuring, as the recovery would take time and vary among sectors. As a result, government measures going forward needed to be continuously implemented in a targeted and timely manner. In addition, supply-side policies should be given a greater role in supporting economic restructuring, facilitating changes in business models, as well as reskilling and upskilling the workforce to be ready for the post-pandemic environment. The government should establish platforms to facilitate access to labor market data in local areas as well as establish mechanisms in place for labor skill development especially for those who did not possess the skills required for a job.
The Committee additionally discussed the role of monetary policy to help support fiscal policy going forward. The Committee viewed that as fiscal policy would play a greater role in the period ahead, public debt would increase. However, the significant decrease in financing costs, ample liquidity in the financial system, and the currently low public debt level would allow for the fiscal policy space to restore and restructure the economy in the post-COVID environment.
Looking ahead, the Committee would monitor developments of economic growth, inflation, and financial stability, together with associated risks, including external risks, the impacts of the COVID-19 pandemic, and the effectiveness of the fiscal, financial, and credit measures, in deliberating monetary policy going forward. The Committee would stand ready to use additional appropriate monetary policy tools if necessary.
The Thai economy would gradually recover in line with the relaxation of the containment measures in Thailand and the gradual recovery of global economic activities. Merchandise exports started to recover but remained at a low level. The number of foreign tourists would recover more slowly than the previous assessment. Nonetheless, the number of domestic tourists picked up owing partly to domestic tourism stimulus measures. Meanwhile, domestic demand, both private consumption and private investment, would contract as previously assessed. Employment and household incomes were severely affected by the economic contraction and would take time to recover.
Private investment would contract significantly in line with weak investor confidence. However, private investment going forward would be supported by planned relocation of production base to Thailand under the Eastern Economic Corridor (EEC) and investment in both large-scale infrastructure and infrastructure to support the digital economy that were likely to proceed continuously. Public expenditure would be a major economic driver on the back of disbursements under the Emergency Decree Authorizing the Ministry of Finance to Raise Loans to Solve Problems, to Remedy and Restore the Economy and Society as Affected by the Coronavirus Disease Pandemic.
The Committee extensively discussed the challenges for the Thai economy in the period ahead, especially the economic recovery in the latter half of this year that could be restrained by several factors. These included (1) the number of foreign tourists that could increase less than previously assessed due to risks that the second wave of the outbreak in many countries could result in changes in attitude and behavior regarding international travel, and (2) private consumption that could be dampened by deteriorated household incomes, elevated household debt, and low confidence.
The Committee viewed that the Bank of Thailand needed to cooperate with other agencies to explore additional measures to restore the economy, particularly the appropriate travel protocols for foreign tourists. Such protocols would need thorough assessment of the trade-off between economic and public health considerations, and should be implemented with the public’s confidence in the safety of such procedures. Other measures included those targeting at households, especially measures to create new jobs and support affected workforce as well as measures to reduce debt burden and increase liquidity for households in order to support private consumption.
Furthermore, the Committee discussed policies to support important economic sectors affected by the COVID-19 outbreak such as the hotel industry as well as the automotive and auto parts industry. The Committee noted that recovery would vary among industries and policy implications would be different. Sectors with a slow recovery outlook would entail significant excess capacity and affect employment. Meanwhile, sectors with high recovery potential would need to adjust their business models in preparation for the post-COVID environment. The government would thus need to accelerate the implementation of supply-side policies to support economic restructuring.
The annual average of headline inflation edged up somewhat following increasing crude oil prices but would remain negative in 2020. Core inflation would remain subdued at a low level. However, headline inflation would rise toward the target in 2021 in tandem with gradually rising crude oil prices and the economic recovery. Medium-term inflation expectations remained anchored within the target.
Commercial bank lending rates and government bond yields remained at low levels, whereas corporate bond spreads remained high. Commercial bank loans expanded on the back of large corporates borrowing to substitute for bond issuance. Meanwhile, SME and consumer loans decelerated despite some reliefs provided by the loan repayment holiday. With the level of overall liquidity in the financial system remaining ample, the Committee deemed it important that liquidity be better distributed to affected businesses and households.
The financial system remained sound despite increasing vulnerabilities given the economic outlook. Commercial banks had robust capital fund and loan loss provision levels. Nevertheless, there remained a need in the period ahead to cope with the impacts from the highly uncertain COVID-19 situation and the increased risks from deteriorating debt service capability of businesses and households. The Committee viewed that commercial banks should expedite debt restructuring for retail borrowers and businesses to be in line with the income stream and debt service capability in the post-COVID environment. Banks should accelerate credit extension under various measures such as the provision of soft loans, credit guarantee facilities by the Thai Credit Guarantee Corporation, and lending facilities by specialized financial institutions.
Source: InfoQuest, by Kasamarporn Kittisamphan, translated by Xinhua Silk Road
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