Having been proactive in taming inflation, Thailand’s central bank governor now faces the challenge of maintaining economic stability with a populist new government in office
Prasarn Trairatvorakul is no stranger to challenging situations. Over the length of his career, the 59-year-old governor of the Bank of Thailand has played a major role in some of the biggest decisions made by Thai policymakers in the country’s recent history.
In 1997, he was deputy secretary-general of the Securities and Exchange Commission when the country abandoned the fixed-rate exchange system and floated the baht, which was promptly devalued.
A decade later, Prasarn was head of the Thai Bankers’ Association and president of one of Thailand’s biggest banks when policymakers, struggling with a strong baht, stunned investors by announcing a levy on currency speculators – only to reverse it the next day after markets tumbled.
His experience in managing these situations has proved invaluable.
Just as Prasarn took office in October 2010, the baht soared to its highest since July 1997 – when it was decoupled from the US dollar. The Bank of Thailand trod a fine line as it imposed capital controls, anxious to avoid a repeat of the fiasco in December 2006.
Its response was measured as it introduced a 15% tax on interest and capital gains earned by foreigners on Thai debt.
Prasarn has subsequently had to grapple with the challenge posed by resurgent inflation against the backdrop of rising commodity prices, a weak currency and the impact of the US Federal Reserve’s quantitative easing.
Since last July, the Bank of Thailand has hiked rates nine times in its longest cycle of tightening for the past five years, outpacing many other Asian central banks. It is this proactive approach as well as the careful implementation of capital controls that has won Prasarn praise from investors and his peers.
This, Prasarn says, was not easy.
“One of my most challenging tasks has been the conduct of monetary policy – when I started my term late last year, the policy rate was very low at 1.75%, and inflationary pressure was already picking up,” he tells Emerging Markets. “At the time we were already starting to see capital inflows from the weak US dollar plus QE2, and certainly we had to explain this to the public and bring the policy rate up gradually.”
Real interest rates in Thailand are now at -0.35%, with headline inflation for the year expected to come in at 3.9%.
But more challenges lie in store.
The new government has pledged a platform of policies that entail significant spending. These include proposals for increases in the minimum wage and the sums paid to rice farmers, as well as cuts in corporate taxes.
There is little clarity yet on the actual detail of the programmes, how quickly they will be introduced or how extensive they will be, says Prasarn.
The government says its policies will help stimulate growth, but the central bank has warned that this could also impact inflation expectations. “We have expressed our preference that the government carries out those policies gradually and adopts fiscal discipline,” says Prasarn.
Prasarn is also avidly monitoring events unfolding in the US and the eurozone, where he believes there is a probability of around one in three of a double-dip recession. And as always, he remains focused on the spectre of inflation – the quandary that prompts some central bankers to act and others to prevaricate.