Calls for more inflationary growth
August 4, 2000
THAILAND should pursue monetary policies that promote inflation to help lift its sagging economy, economists and financial analysts say.
Supavudh Saicheua, of Merrill Lynch Phatra Securities, said inflation would be good given the recovery's fragility and the high amount of bad loans remaining in the financial system.
This is because the country desperately needs to achieve high nominal economic growth to keep the recovery on track, he said. With nominal Gross Domestic Product (GDP) growth of 8 per cent, real growth, or inflation-adjusted growth, would be 5 to 6 per cent.
Inflation has been targeted to grow at 2 to 3 per cent this year. The absence of an inflationary threat has led the International Monetary Fund to advise the Bank of Thailand to support the recovery with lower interest rates.
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Conventional wisdom holds that real growth below 5 per cent would mean trouble for the recovery, given the massive amount of debt.
Supavudh made his remarks at a seminar on interest rates organised by BoA Asset Management Co. He said monetary policy geared toward higher inflation would help exporters, especially those in the agricultural sector, which rely on a weaker currency to bolster their prices.
Inflation also would reduce the value of non-performing assets now sitting idly in the banking system, and help the government maintain its tax-revenue targets, he said. Inflation also reduces real interest rates and forces domestic consumption to rise.
However, a lax monetary policy engineered to generate inflation would profoundly affect the baht's exchange rate. This raises the question of how far banking authorities are willing to let the baht fall.
Inflation has been targeted to grow at 2 to 3 per cent this year. The absence of an inflationary threat has led the International Monetary Fund to advise the Bank of Thailand to support the recovery with lower interest rates. But it appears banking authorities believe they have done enough, and that any further stimulus must come from the fiscal side.
Nostha Chartikavanij, head of fixed-income research at ABN AMRO Bank, said there was still further room for interest rates to fall because real prime lending rates and deposit rates were not especially low by historical standards (see table).
Nostha said further cuts in real interest rates were needed to stimulate the economy, even as the public pushes for nominal deposit rates to remain the same.
Nostha acknowledged that lower interest rates meant sacrificing the baht's exchange rate to some degree, but said a weaker currency would be good for exports, discourage saving and promote consumption.
After banking officials recently said an exchange rate of Bt42 against the dollar would be tolerable, the financial markets appeared eager to test this target. Along with regional currencies, the baht has slid quickly against the strong dollar.
It recently touched Bt41.65, the lowest level in 10 months, before bouncing back to about Bt40.65 yesterday.Merrill Lynch Phatra's Supavudh said he expects the baht to fall to Bt42 by the end of the year, before recovering slightly.
But ING Baring recently produced a report suggesting the baht would fall to Bt42 this year and Bt44 next year. It also suggested banking authorities increase the money supply by at least 30 per cent - a policy it said it believes will not happen - to inflate the economy out of its troubles.
BY THANONG KHANTHONG
