For the advanced economies, it is the uncertainty about the timing of exit policy, and whether the commitment to fiscal consolidation by the major economies can be sustained given the adverse implications for growth. For emerging markets, there is uncertainty about the policy approach that emerging markets will use to manage large capital inflows particularly in Asia. This involves the policy choice between exchange rate management, monetary policy, and the use of macro-prudential and capital control. In my view, uncertainty about policy has been of most concern for financial markets, resulting in increased volatility and a constant shift in investor sentiment between risk aversion and risk appetite. As for Thailand, in addition to the global uncertainties, we also have our own home-grown uncertainty linked to domestic political developments, which have added another dimension of risk to economic recovery and to the prospect of Thailand’s growth in the longer-term. How has the Thai economy performed so far amidst all this risk and challenges? Today, an important decision was made by the Bank of Thailand’s Monetary Policy Committee to begin a process of policy normalization by raising the policy interest rate by 25 basis points to 1.50 percent. The decision represents the first increase in fifteen months since the policy rate was reduced cumulatively by 2.5 percentage points to cushion the economy from the global recession. But more importantly, it also marks an important turning point in our assessment of the economy’s growth and inflation outlook, taking into account the impact of the political situation.
The third point is the risk to growth. For the most part, we still see developments in the global economy as a key downside risk to Thailand’s growth this year. A key risk at this time is the strength of global recovery in the second-half of the year, given a more limited room in the advanced economies for using fiscal stimulus to drive growth because of concern over longer-term fiscal sustainability and the risk of eroding inflation expectations. Another issue is the possible spillover of concerns over sovereign debt onto the European banking sector. Domestically, the drought situation seems to have improved substantially after a bout of plentiful rainfall country-wide. Finally, we have risks relating to how Thailand’s political situation will evolve going forward. This is an issue which remains a known-unknown to most Thais. For this evening, I have been asked to dwell a bit more into the interactions between politics and the economy in the context of what has been happening in Thailand. Without getting too much off track, let me end my remark with three personal observations on this point. First, it is clear that politics does affect the economy and its performance. The channels of impact come largely through: (1) disruption to normal businesses from unsettling political events as we have seen in the last two years; (2) its effects on the country’s image internationally which negatively effects our international sectors such as tourism and exports; and (3) its impact on investor confidence due to the perception of political instability.