Thailand can weather rough

That is a rather optimistic outlook on the part of the Bank of Thailand (BOT) deputy governor, considering that is just about the middle of the scale.

Atchana believes the Kingdom could experience a quarterly contraction but not a technical recession, defined as two consecutive quarterly contractions, like other countries. She also believes the full year's economy will even show continued growth, albeit at a very slow pace.

This would of course be far better than the 10percent contraction the economy experienced in 1998, when 4.4 per cent of the labour force, or between 1.2 million and 1.5 million workers, were unemployed, a historic high.

At present, the public sector's balance sheet is solid, the private sector has a low debt-to-equity ratio, and household debts are small.

Atchana hopes "unconventional" global economic policies will prove effective, because many countries have, at extreme cost, practically introduced any measure they could think of. She also anticipates the new Abhisit Vejjajiva government intro¬ducing some unconventional policies of its own.

However, she remains unsure if the global economy will actually recover in the second half of the year or whether it will be Ushaped or Vshaped. The world turmoil could drag into next year or even 2011. Many countries, particularly the US, will possibly encounter a "liquidity trap" in which liquidity cannot be injected into the market in a normal manner.

And Atchana understands that normal fiscal and monetary polices are inefficient during an economic slowdown. A lack of confidence pre¬vents macroeconomic policies alone from boosting consumption or investment during an economic slowdown, she said. Normal monetary policy transmission mechanisms cannot function in any channel, such as interest rates, credit, foreign exchange, asset prices and expectations. This is particularly true when commercial banks do not want to give loans, for fear of rising credit risk and increased numbers of nonperforming loans.

Moreover, government spending is unlikely to meet the target of 94 per cent of the total budget for this fiscal year, she said.

The BOT thus decided to intro¬duce one unconventional measure: slashing the policy interest rate 100 basis points on December 3, thus lowering the policy rate to 2.75 per cent. This historic move was the biggest surprise to the market since the central bank adopted inflation targeting in 2000.

The BOT is regarded as a conservative central bank, because it always makes a more conservative move than what the markets expect. Some said the aggressive rate cut may largely have been influenced by outside Monetary Policy Committee (MPC) members who are prominent economists rather than BOT officials.

But Atchana was one MPC member who voted for the bold move. She argued that preparing for the worst was conservative, as well.

The central bank expected the "front load" move to help bolster confidence amid continued political uncertainty global economic crisis. It anticipated the lower rate discouraging saving and encourage consumption.

With the lower rate, commercial banks are expected to provide more lending instead of relying on interest income they have been taking for a while now from the BOT's short term debt market.

"If we had done it [the aggressive rate cut] without courage, under dosing the economy and letting it grow tardily, the patient might have been in coma," said the deputy governor.

Atchana said the central bank had carefully evaluated five possible risks that could result from its frontload policy.

First, its bullets have all been fired, but the economy has not yet recovered. That would limit the central bank to introducing only quantitative easing policies, and economic growth would remain sluggish for a long time.

The second risk is capital outflow, while the third is no capital inflow, due to a narrowed interest-rate gap.

Fourth is a steeply depreciating baht, although that would encourage export revenue in terms of the currency and be good for the agriculture sector as well, said Atchana.

Fifth is the impact on the BOT's credibility.

But despite these risks, the central bank needed to do what it did.

"The 100basis point cut was a frontload move, which was better than a gradual cut of a quarter or a half of a basis point.

"I think although it's not yet been effective, it was better than doing nothing," said Atchana.

She is not promising another bold move at the next MPC meeting next Wednesday. The deputy governor called economic growth of 23 per cent "dire", because that would be less than the Kingdom's potential.

"But living with a rating of 6 is not the end of the world," she said optimistically.