Expectations for the New BOT Governor

On 1st October 2010, Dr Prasarn Trairatvorakul will replace imminent retiree, Dr Tarisa Wattanaket to become Thailand’s new Bank of Thailand Governor.

Dr Prasarn’s stated first assignment is to sustain stability of domestic economy and Baht exchange rate to see Thailand’s economy recover steadily.

Prime Minister Abhisit Vejjajiva and Finance Minister Korn Chatikavanij have, however, suggested Dr Prasarn create greater financial access and lower financial costs for the poor by reducing the spread, difference between the deposit and loan interest rates, - higher in Thailand’s banks than those of many developed countries that have more developed financial markets, financial products and accessibility to other compensatory income sources to offset income from the spread.

These issues are important problems in financial sector that have been waiting to be solved. However, there are still many other issues exist for the concern of the new BOT governor, such as:

Building international cooperation for financial sector regulation
The subprime crisis dispersed global effects due to freer financial mobility across borders and the increasing complexity of financial products. Thus, the domestic regulation of financial markets is by itself not enough; but it is vital to build transnational and intraregional regulatory financial sector cooperation.

In the past, to some extent, ASEAN countries have tried such initiatives. For example, the Chiang Mai Initiative (CMI), an emergency fund for Asian states, was created to accumulate a portion of international reserve from all ASEAN+3 countries so they can draw money from the fund in the event of short-term liquidity or balance-of-payments difficulties.

In my opinion, these are good appropriate initiatives. However, for real cooperation to become effective toward regional financial stability, the new BOT governor must actively promote discussion on such topics as ASEAN‘s financial landscape, studying to gain an overview of ASEAN financial markets, and push forward the development of ASEAN financial infrastructure.

Preparing for financial market liberalization in the future
The present global trend is to liberalize financial markets, and Thailand’s financial market is increasingly pressurized. Thus, a delegation from the European Commission recently suggested that Thailand also liberalize, reducing the expenses of Thai small and medium enterprises and exporters.

Competition in Thailand’s financial sector is now relatively small. Few large commercial banks dominate the loan market, this high spread a good indicator of few market players.

Therefore, to reduce financial costs for consumers and producers, the new BOT governor should intensify financial market competition by increasing bank operating licenses or revising all regulations to reduce overly strict measures. Moreover, the Foreign Business Act should be carefully reviewed and its advantages and disadvantages studied to know how many foreign investor shares to hold in Thai commercial banks.

The next period will pose a great challenge to the incoming BOT governor because of greater financial breadth and complexity than the past, more volatile financial systems and capital movement between countries in a world that is more deeply connected, thus transferring different effects more easily from one country to another.

Finally, I would like to wish Dr Prasarn, the new BOT Governor every success in the coming term.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com