In an exclusive interview with Thai PBS World, Bank of Thailand governor Sethaput Suthiwartnarueput talks to Suthichai Yoon about the Thai economy and interest rate policy.

The central bank governor calls the difference of opinions between the Bank of Thailand and the government as ‘creative tension’.

He emphasises that lowering the interest rate, while household debt remains above 90% of GDP, is not in the interests of long-term economic stability.

Q: Governor Sethaput, how is Thailand doing in terms of the economic situation and the forecast that the Bank of Thailand is giving for 2024?

A: Our interim guidance for the economic forecast this year, which we put out in the last MPC (Monetary Policy Committee) statement, pending our official release after the next MPC meeting in April, was that we expect to see GDP growth this year in the range of 2.5 to 3 percent, which is not great. It is a bit lower than what we had forecast, but it is still growth.

A lot of the things that we expected to see in terms of a stronger recovery, in terms of exports have not panned out the way we expected. I think that we are facing a lot of structural challenges as well.

Q: As the governor of the central bank, what is the main concern now?

A: My immediate and near term concern has a lot to do with what is going to happen in terms of manufacturing, exports and tourism, because those are the key drivers for our economy right now.

Domestic consumption has held up quite well, but the things that we are looking for, to help sustain a recovery, are exports and tourism. The key factor in that is China, so we are paying very close attention to what is happening, both in terms of exports to China and to third countries, because we see increased competition from China in third countries that we export to.

In terms of recovery in tourism, we see the tourists coming back, but they are spending less. China seems to be encouraging their people to spend more domestically, so I think those are some changes that will affect us in terms of the outlook.

Q: Thailand’s reliance on China’s economy is quite heavy, what is the way out of that?

A: China is about 12% of our exports and about a third of our tourists, but the thing that will help is to engage in medium term structural reforms to try to find new engines of growth, to try to diversify our reliance. I have to say that we have some advantages on this front. We just need to realise them, actualise them.

Q: We have advantages that we do not know about?

A: Well, we know about them but we are not taking full advantage of them as we should. As we know, right now there is a lot of geopolitical tension and there are talks about friend-shoring, nearshoring, all that stuff, and the danger that the world is trying to bifurcate along the lines that we know but, if you look at that, I would argue that Thailand is actually not that poorly positioned to take advantages of some of that realignment.

Why? Because if you look at Thailand, we are very close to China for the reasons that we cited.

Q: We do not have that many conflicts with China, compared to many other countries.

Exactly. We do not have an issue in the South China Sea, unlike other countries with China, so we are a good friend to China. We are also by history, by tradition, by many things, a very close friend of the United States. We are one, of not many, that has a state of being a major non-NATO US ally.

Q: Then why are we not taking enough advantage of both major powers?

A: We have not made ourselves sufficiently attractive to those production networks. For example, I think one thing that we have seen, which is unfortunate, is we have seen over the years that our market share in attracting FDI drops steadily over time.

We know there are many bright lights out there, very attractive. People are in love with Indonesia, Vietnam, a lot of FDIs go there. I think, given that now, there is probably going to be a greater emphasis on resiliency. Not just the efficiency in trying to get the absolute lowest cost but a place that is resilient, safe and stable.

Another aspect, in which I think we have been lagging as well, is signing and implementing free trade agreements (FTAs). When countries want to invest, obviously they want to be able to access third country markets and other countries in the region. Particularly, Vietnam does a very good job on this front. We tend to lag a bit.

Another example is trying to liberalise our regulatory and legal regimes, to make them more business friendly, more attractive to foreign investors. Indonesia is a good example, I think, of a country which has made good progress on that.

Q: Your relations with the prime minister have been in the headlines, both locally and internationally. How would you describe your relations with Prime Minster Srettha?

A: As I mentioned, they are professional and cordial. It is never a good thing, I think, when a central bank is on the front page of the newspaper.

Q: So, what basically is the issue between you and the prime minister?

A: I think it comes from the fact that we have different roles to play, that we are wearing different hats. I think it is an issue that we see not just in Thailand, but in many countries. I call it a creative tension.

Q: “Creative tension”, you do not enjoy it but it is creative.

A: I mean the government, obviously, tends to favour growth. The central bank, by nature, with its mandate, tends to put a significant weight on stability. Governments tend to be shorter-term in orientation. The central bank again tends to look at longer term issues.

Then, by nature, we need to look at things in a much more holistic fashion, taking into account unintended consequences of different measures. So, I think that leads to that difference of opinion in that creative tension.

Q: You are under great pressure from the government to reduce interest rates. How do you react to that?

A: Well, it is part of the job to be under pressure.

Q: How do you explain to the politicians that you have your role to play and they have their own role to play? They seem to think that you are not being realistic, that you do not understand the common people’s problems.

 A: That difference comes from the fact that we are wearing different hats and we have that different emphasis. The short term versus long term. Looking at growth versus stability and how you weigh those things.

In terms of explaining our policy stance and policy decisions, what I would like to emphasise is that the policy decisions are from the monetary policy committee, not just me or the Bank of Thailand.

The monetary policy committee in Thailand is fairly unique. We have seven people on the monetary policy committee. What is different in Thailand, compared to a lot of other central banks is that there are more outside members on the committee than there are internal, Bank of Thailand people.

It is by law in Thailand. There are three internal people, me and two deputy governors. The other four are from outside.

Q: Who chooses the outsiders?

A: The Bank of Thailand board chooses the composition of the monetary policy committee based on the recommendation from us, from the Bank of Thailand.

So, again, I want to emphasise that the decisions are from the monetary policy committee, not from the Bank of Thailand or at the behest of the governor. I cannot, in principle or in practice, dictate what the interest will be.

Q: So you do not think lowering the interest rate has anything to do with trying to boost the economy, as the government has suggested. They are suggesting that, if you cut the interest rate, it would stimulate the economy, but you are saying that it may not be that direct, the relationship.

A: No. What we are saying is that it has to be balanced with a lot of different things.

The framework that we have for making interest rate decisions is what we call a ‘flexible inflation targeting framework’.

We look at three things primarily when deciding that. We look at growth. We would like to see growth be close to what we feel is our long-term sustainable rate of growth, which, based on our latest estimates, is ballpark about 3 percent real GDP growth.

We look at inflation, and for that, we would like headline inflation to be within our target range which is 1 to 3 percent. We also, very importantly, need to look at financial stability.

So, when we decide what to do with rates, we can’t just look at any one variable, like GDP growth, and focus just on that. We need to take a look at the totality. Take all of these things into consideration

Getting back to your question. Would lowering rates tend to have a stimulative impact on the economy? The short answer is yes, it would tend to have a stimulative impact on the economy but, one, it has to be in balance with other considerations we have on the table. Notably, things like financial stability.

The other thing that is of quite high concern for us, is that we have very high levels of household debt. Household debt is 90 percent plus of GDP. That does not bode well for long-term financial stability.

We would like to see that get back on a sustainable path. Part of the reasons that debt has gone up to that level so rapidly in the past has to do, either in large or small part, with the fact that rates in Thailand had been low for so long.

There is a second point also, the stimulative impact may not be that large. Why? Because, if you look at the reason that growth has tended to underperform, it has to do with factors like exports and that has a lot to do with structural factors, I think.

It has to do with the fact that tourists are not spending as much as we had expected. Which does not have a lot to do with interest rates. That has to do with the fact government disbursement has been a bit below expectations. Again, this does not have much to do with interest rates.

Interest rates would help, perhaps, to off-set some of that slow growth by boosting consumption and possibly investment at the margin.

But, if you look at consumption, last year consumption grew basically at record levels. So, the additional boost that you would get in consumption, from lowering the rate, is probably not that much.

It is also, probably, not that desirable if it comes at the expense of increasing household debt

So, it is again, taking that totality of factors into account. Some of the longer term implications caused the majority of the MPC members to keep rates where they were, at 2.5 percent.

Which, in the press, is usually referred to as a ‘decade-high interest rate, but I would also point out, while that is true, it is also true that it is among the lowest in the world. There are two countries out there that have policy rates that are lower than ours; Japan and Switzerland.

The point is that, compared to other countries, it is not alarmingly high. Certainly not the level that we see in other countries but, again, I am not saying that it is the main factor in deciding what to do with rates. We will look at, first and foremost, domestic factors. Thank you