Having efficient resource allocation is particularly important now for the Thai economy, given the ongoing structural shift in relative prices of commodities and asset prices which render some businesses obsolete while opening up many other new opportunities. Indeed, the vast body of research over the past decade strongly suggests that improvements in financial developments precede and contribute to economic performance. In other words, the widespread desire to see an effectively functioning financial system is warranted by its clear causal link to growth, macroeconomic stability, and poverty reduction. As for the specific form of financial market development, it is also well accepted by policymakers that economies that have well-developed banking sectors and capital markets are advantageous to others that rely mostly on only one type of the financial markets. Indeed, banks and capital markets are complements, and not substitutes. For some industries at certain times of their development, capital market-based financing is advantageous. For example, financing through stock markets is optimal for industries where there are continuous technological advances and where there is little consensus on how firms should be valued or managed. The stock market checks whether the manager's view of the firm's production is a sensible one. For other industries, bank-based financing is preferable. This holds in particular for industries which face strong information asymmetries. Financing through financial intermediaries is an effective solution to adverse selection and moral hazard problems that exist between lenders and borrowers.
First, Thailand’s external position remains strong. Our external debt to GDP has hit an alltime low since 1980, recording 29.4 percent last year. Our foreign reserves doubled within three years reaching over 100 billion US dollar at present day. The amount of foreign reserve has by far exceeded the short-term external debt by more than four times. This provides us an ample room to safeguard against instability from volatile capital flows and exchange rate movements. Second, the government’s fiscal position continues to improve as reflected by a falling trend of public debt to GDP. This gives the government the financial flexibility to tackle economic problems and stimulate the economy if necessary. It is no coincidence that credit rating companies often stated the strength of our fiscal and external position in their underlying reasons for affirming Thailand’s sovereign ratings. In fact, to cite James McCormack, the Head of Asia Sovereign of Fitch Ratings, at the firm’s last week annual Thailand conference, unless political uncertainty significantly undermines Thailand’s future growth prospect, it is unlikely that Thailand will be downgraded, for the country’s sovereign credit fundamentals remain sound. Third, the banking sector remains healthy and strong enough to weather the current global financial turmoil. The BIS ratio remains high and the ratios of NPLs to total loans continued to decline. Together with the implementation of IAS39 accounting standard in 2006-2007 and the adoption of Basel II by the end of this year, the banking sector would be less prone to adverse shocks.