Governments across the globe, Thailand is no exception, have adopted similar strategies to survive the worst economic crisis in eight decades - cut interest rates and increase government spending.
‘‘There is cost incurred from taking care of the exchange rate, assuming that we are successful,’’ says Dr Tarisa. PATTARACHAI PREECHAPANICH
Thailand's first stimulus package, worth 117 billion baht, was mostly aimed at easing the pain of the crisis on lower- and middle-income residents through utilities subsidies for the poor, a 2,000-baht cash handout to workers earning less than 15,000 baht per month, and free education for students.
A more ambitious stimulus plan commits 1.4 trillion baht to infrastructure investments through 2012, including programmes improving rail, irrigation, agriculture and logistics systems.
But monetary policy was the first line of defence against the global storm. The Bank of Thailand's Monetary Policy Committee slashed its one-day policy rate by an unprecedented full percentage point in December. Rates have fallen by 2.5 percentage points since late 2008 to the 1.25% now.
But while liquidity remains plentiful in the market, loan portfolios continue to shrink, as financial institutions tighten screening in light of economic uncertainties. Small and medium-sized companies have been particularly affected, despite support from state-controlled financial institutions.
Tarisa Watanagase, the governor of the Bank of Thailand, expressed sympathy for those frustrated by the parsimonious attitude of local banks.
The central bank has sought to strike a balance between the need to ensure proper risk management in the banking system and the need to ensure that credit flows to the private sector.
"Can the central bank order banks to lend? I don't think so. What is happening is a typical reaction of banks to the downturn," Dr Tarisa told the Bangkok Post.
"It would be worse if banks reacted differently. Our job is to ask local banks to strike a suitable balance, where they do not overreact or ignore the risks."
Thai banks have emerged from the crisis in generally solid shape, with none of the toxic assets on their balance sheets that have brought larger US and European peers to the verge of bankruptcy.
Asset quality and profitability remain solid, and most bankers expect loan growth to pick up going into the second half of the year as the overall economy recovers.
Eased monetary policy has led to a two-percentage-point decline in deposit rates and a 1.4-point fall in lending rates, Dr Tarisa said.
She noted that while banks' caution reflected in part fears of future non-performing loans, the decline in lending also stemmed from a fall in demand for credit as well as declines in inflation.
"It will not be too long before the impact of monetary policy plays out. The central bank cut interest rates by a full percentage point in December. This sent a strong signal to banks. We expect them to adjust [rates] more quickly than in the past," Dr Tarisa said.
Concern over the direction of the baht has also been building, with businesses asking the central bank to push the currency weaker to help support exports.
Dr Tarisa, however, maintains the long-held stance that intervention is only to smooth out volatility, not change the direction of the currency.
Most analysts agree the baht is set to appreciate this year, thanks to hefty current account surpluses and growing concern about the value of the dollar.
Dr Tarisa said intervention was no cure and exacted its own cost on the economy.
The central bank intervenes in the currency markets by buying and selling dollars for baht. If it wishes to stall appreciation in the face of capital inflows, it can buy dollars for baht to affect market forces, pushing up foreign reserves. But such tactics must also be accompanied by bond issues in the local market to control the money supply. The bonds come at a cost in the form of interest payments.
The 1997 crisis, when the central bank was left all but bankrupt following a failed defence of the exchange rate, remains fresh in the memory of the bank.
"There is cost incurred from taking care of the exchange rate, assuming that we are successful. But the real question is can we really be successful? The real sector, capital flows and market expectations all will affect the trend of the baht," Dr Tarisa said.
The strength or weakness of the currency should also not be judged by looking at a single cross-rate, but instead consider Thailand's overall competitiveness in the world market.
Dr Tarisa said the central bank instead uses nominal effective exchange rates (NEER), a weighed average of a basket of currencies, in judging external competitiveness.
The baht, against currencies of 21 trading partners, had a NEER of 77.22 in May, only slightly changed from 77.23 in January, even as the baht appreciated by 1% against the dollar.
According to the central bank, a 1% decline in NEER will increase GDP growth by 0.1 to 0.2 percentage points, assuming the currency trend lasts two years. The net benefit to Thailand of a weak currency is relatively low, due to the high import content of exports and the country's low efficiency in the use of oil and energy.
Pushing the baht in any direction essentially represents a transfer of wealth, from one side of the economy to the other.
"Is this counter-intuitive? No. While exporters earn more [from a weaker baht], importers will pay more," Dr Tarisa said. "And I believe it is an open question of whether the central bank should make this decision, even if it could. It's siding with one part of the economy at the expense of another."
Ultimately, the central bank wants the public to recognise that exchange rates move in unpredictable ways, based not only on economic performance and capital flows, but market expectations and fickle investor sentiment.
"Exporters and importers must understand these risks. We would like to see them manage [currency risk] themselves, rather than hope that the central bank will do so."