Thailand’s internal battle for power over the economy heats up as the Pheu Thai leader questions Bank of Thailand’s independence. Rising concerns over rocketing debt and falling manufacturing output. Modest first quarter growth of just 1% to be confirmed.
The battle between the Bank of Thailand and the government intensified on Friday. It came as Paetongtarn Shinawatra, the Pheu Thai Party leader, openly questioned the desirability of an independent central bank. Ms Paetongtarn openly raised the possibility of amending the law which was established in 2008. The attack on the bank comes amid nervousness about Thailand’s economic prospects. Key data is expected in mid-May to confirm if there was economic growth in the first three months of the year. It comes against a backdrop of a growing private sector debt problem and falling manufacturing output.
The leader of the Pheu Thai Party, Paetongtarn Shinawatra, on Friday, launched a broadside attack on the Bank of Thailand.
In short, the bank refuses to bow to pressure from the government on interest rates. Similarly, the US Federal Reserve indicated this week that it was in no hurry to cut interest rates in the United States. Therefore, the situation in Thailand is growing more tense.
Most analysts believe that the central bank will cut interest rates twice this year. The consensus is that this will happen in June and September. However, nothing can be taken for granted.
Lower interest rates have adverse effects too. This includes the value of the baht, inflation and the profitability and therefore stability of the banks
Meanwhile, capital outflows from Thailand are continuing. Certainly, there is a growing feeling that it is due to Thailand’s low-interest rates. Currently, the US base loan rate is 5.5% or 3 points above the Thai rate of 2.5%.
Lower interest rates are seen as risky for Thailand right now. Firstly, they would further weaken the baht and simultaneously contribute to inflation. Moreover, they would reduce the scope for Thailand’s banks to make a profit.
Thailand already has a remarkably low-interest rate regime. Nevertheless, the profit span for Thailand’s banks is relatively higher.
Last week, at a meeting with the country’s top four retail banks, Prime Minister Srettha Thavisin managed to secure a 25 basis point drop in lending rates for vulnerable groups.
Paetongtarn raises the issue of central bank independence. The Pheu Thai Party leader openly questioned if it was a problem for Thailand’s economy
However, on Friday, Ms Paetongtarn launched an aggressive attack on the central bank for holding the line. Indeed, she openly questioned whether the independence of the Bank of Thailand was not becoming an obstacle to Thailand’s economic progress.
In short, this is not how the Bank of Thailand sees it.
It views the ailing Thai economy as suffering from a multitude of structural problems. Chief among them is the country’s crippling household debt load.
Certainly, one of the reasons for a drop in economic activity this year has been the tightening of credit by the central bank. For instance, this saw a staggering drop of 29.83% in car sales from the year before in March.
The Bank of Thailand nevertheless sees its role as preserving the stability of the banking system. In addition to its other key missions, it aims to maintain inflation at a target range of 1-2%.
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In truth, in both respects, it is succeeding admirably. On Monday, Governor Sethaput Suthiwartnarueput again reaffirmed satisfaction with the current bank interest rate regime.
Bank of Thailand boss Sethaput Suthiwartnarueput spoke confidently with American news outlet CNBC on Monday. He vowed to hold the line on monetary policy
Speaking on CNBC in the United States on Monday, he was adamant that the bank would not cave to political pressure. Undoubtedly, there has been a campaign of pressure, with a parade of ministers and senior officials led by Prime Minister Srettha Thavisin sharply criticising the central bank.
The line from the government is that the interest rate regime is holding back economic growth.
The economy is presently faltering, with data from the fourth quarter of 2023 showing a 0.6% contraction. Significantly, this week, the Bank of Thailand suggested a 1% growth rate for the first quarter of 2024.
However, this must be confirmed by the country’s central economic agency. This is the National Economic and Social Development Council (NESDC).
In truth, there is anxiety, with manufacturing output continuing to fall. The latest data tranche showed it down for the 18th month in a row.
Manufacturing index down for the 18th straight month but the economy grew 1% in the first quarter says central bank
At the same time, income spent per tourist, according to the central bank, has dropped sharply. In turn, this is linked to the shift of focus to Asia for mass tourism to Thailand. In addition, there are fears that even so, the number of foreign tourist arrivals has weakened.
Bank of Thailand boss insists there is no quick fix. Thailand has a multitude of structural problems that are in fact getting worse with government inaction
On Monday, Mr Sethaput warned that lower interest rates were no quick fix. He vowed that the central bank would not give in to political pressure.
Thailand’s structural problems are the root of the problem. The list is long and growing. It includes a lack of English proficiency, lack of skilled labour, lower educational standards, lack of investment, falling competitiveness, an eroding manufacturing base, a growing pollution crisis, in addition to a massive private sector debt issue.
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The Bank of Thailand boss was clear. Any possible benefits from cutting interest rates would not offer ‘an efficient trade-off’. In particular, given the danger of other possible consequences.
Nevertheless, on Friday, Ms Paetongtarn tore into the central bank like a terrier.
She was speaking at a Pheu Thai Party meeting. Ms Paetongtarn, also known as ‘Ung Ing’, is the daughter of ex-Premier Thaksin Shinawatra. Mr Thaksin is widely seen as the de facto party leader.
Mr Thaksin is currently on parole after being imprisoned in August 2023 on his return to Thailand.
Independence of the Bank of Thailand was put on the political agenda on Friday by Ms Paetongtarn’s speech
On Friday, Ms Paetongtarn undoubtedly questioned the advisability of an independent Bank of Thailand.
‘The law that keeps the Bank of Thailand (BoT) independent from the government is a problem and a significant obstacle in fixing economic problems,’ she told the party meeting.
In the meantime, Prime Minister Srettha Thavisin, while acknowledging the independence of the central bank, has consistently accused it of being unconcerned about the plight of heavily indebted borrowers and small business firms.
Many unserviceable loans across the financial system have recently exited a loan protection scheme ushered in during the pandemic era. At the same time, it is widely accepted that non-performing loan rates quoted by banks are understated.
Currently quoted at about 3%, many analysts see the figure at 7.5%, with even higher figures for loans called into question. This is based on regular reports from Thailand’s National Credit Bureau (NCB).
Discord between the Bank of Thailand and the government is worrisome. The central bank’s position as an independent agency was strengthened by a 2008 law
In the meantime, the outbound capital outflow from Thailand is also being openly linked to a fall in confidence.
A key factor in this is the ongoing spat between the government and the Bank of Thailand.
Thailand’s central bank is governed by the 1942 Bank of Thailand Act.
However, following the Asian Financial crisis in 1997 and at the behest of the International Monetary Fund (IMF), stronger legislation was desired. The goal was to prop up the independence of the central bank.
In short, this was enacted with the Bank of Thailand Act of 2008. This law made clear that the bank was operationally independent.
Certainly, it removed the power of the cabinet to remove a Bank of Thailand governor. Previously this could be done at the behest of the Minister of Finance in cabinet.
However, this can now only be done if the incumbent is shown to have behaved dishonestly or with impropriety.
Unquestionably, the current Bank of Thailand governor is pursuing a principled and sound path. Indeed, he has been praised by many leading economists for his stewardship.
Government retains key powers over appointments
At the same time, the government, through the Ministry of Finance, retains key powers. Particularly to do with appointments to the board of the Bank of Thailand and key committees.
At this time, it is becoming clear that the government or at least the Pheu Thai Party is seeking a change of governor or further leverage over the bank. That may be pursued through legislation in parliament.
Such a course would be controversial and would severely undermine market confidence. Indeed, this has already been weakened with outflows from both bond and investment markets in 2023/2024.
Before the 2008 law, enacted by the National Council for Peace and Order (NCPO) government, Mr Thaksin as Prime Minister removed the Bank of Thailand governor in May 2001.
Similarly, the then governor, Mr Chatu Mongol Sonakul, found himself at loggerheads with Mr Thaksin’s ministers.
Therefore, a cabinet meeting was called at which he was removed from office. Press reports from the era suggest he was labelled as ‘emotional’ and ‘uncooperative’ by ministers at the fateful cabinet meeting.
He was replaced by Mr Pridiyathorn Devakula. Mr Pridiyathorn was previously the president of Thailand’s Import-Export Bank. Ironically, in 2001, he was considered a strong supporter of higher interest rates.
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