Global monetary policy seen as risky
World Bank warns of possible bubble
The rapid normalisation of monetary policy in advanced economies could create risks for highly leveraged developing countries, including Thailand, warns the World Bank.
“There’s a possibility the normalisation could happen quickly, coupled with the high level of private sector debts in major economies in this region, and this could lead to some risks,” said Sudhir Shetty, chief economist for East Asia and the Pacific region at the World Bank.
He said China, Malaysia and Thailand have the highest percentage of private debt to GDP when compared with other developing countries in the East Asia and Pacific region.
If interest rates rise rapidly, loan defaults and capital outflows from the region could be triggered, undermining the stability of banking systems, said the report.
“Given this condition, there’s reason to be worried about the accumulation of debt in these economies and what will happen when the Federal Reserve and European Central Bank raise rates quickly,” said Mr Shetty.
However, Thailand has a lower degree of risk than Malaysia and China because of lower private sector debt.
The run-up in household debt, which stands at around 80% of the country’s GDP, is also at the centre of Thailand’s economic risk, he said.
“Our suggestion is this needs to be watched very carefully. If credit is offered for bad projects and assets, we could easily get a bubble,” said Mr Shetty.
The report said in terms of growth, Thailand is still subject to a number of risks including trade protectionism, geopolitical risks and political uncertainty.
Mr Shetty said deterioration in global economic prospects, particularly trade protectionism, could weigh on Thai exports and economic recovery.
Trade protectionism and the implementation of the Brexit vote reflect a significant rise in economic uncertainty, which is expected to adversely affect global growth, he added.
“Such an outcome would hamper economic recovery and increase the need for more stimulus,” said Mr Shetty.
Thailand has ample monetary and fiscal buffers but timely implementation of public infrastructure projects may prove challenging, he added.
“Fiscal policies have been expansionary, with an increase in the deficit, primarily reflecting higher public investment in infrastructure but risks remain whether these investments can lure private investment,” he said.
“Improving public investment management system could still be done to improve efficiency and ensure crowdingin investment.”
Mr Shetty said that deepening regional integration through further liberalisation of trade and investment could also help offset protectionism.
He added that geopolitical risks from tensions in the Korean Peninsula and the South China Sea could increase the cost of trade and become obstacles to trade in the region.
Other risks include a possible rise in Thailand’s political uncertainty if ongoing reforms fail to satisfy broad societal segments.
Political uncertainty could delay public spending, planned public infrastructure projects and economic reforms, and dampen investor confidence.
The World Bank recently upgraded Thailand’s growth prediction for this year and 2018 to 3.5% and 3.6%, from 3.2% and 3.3%, respectively, mainly from stronger-than-expected growth in exports and tourism.
Mr Shetty said that Thailand’s growth has exceeded market expectations in the second half of this year, mainly driven by an 8% increase in merchandise exports and a 15.8% growth in the agricultural sector.
The World Bank predicts the Thai economy will grow 3.5% in 2019.
However, Thailand remained the slowest growing economy among developing Asean countries, which also include Indonesia, Malaysia, Philippines, Vietnam, Cambodia, Laos and Myanmar.
“Thailand has been a relative laggard in this group of large economies,” said Mr Shetty.
“Strong financial regulations, which also extend to non-bank financial institutions, should be maintained to keep the balance of risk from expansionary monetary policy,” said Mr Shetty.
According to the report, Thailand’s inflation is expected to return gradually to the inflation targeting range, predicting headline inflation to be 0.9% this year and 1.6% in 2018.