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AS THAILAND works to accelerate its post-pandemic economic recovery, its central bank is playing a key role.

While a rebound in tourism, a key growth driver, has kindled optimism, South-east Asia’s second-largest economy is still grappling with long-standing issues such as climbing household debt, making interest rate policy a core issue.

In October, the Bank of Thailand (BOT) cut its policy rate, surprising the market. This renewed debate about the country’s monetary policy amid growing global uncertainty, such as the potential impact of Donald Trump’s return to office as US president in January.

While preparing for the unknown, the central bank is also on a mission to innovate the Thai banking sector, such as driving the greater adoption of digital payments and using the sector to facilitate the transition to greener growth.

These issues were raised during Caixin’s interview with BOT governor Sethaput Suthiwartnarueput at the central bank’s headquarters in Bangkok.

Sethaput possesses extensive experience in economics, policy and financial markets. He previously held senior positions at several domestic institutions, including the Stock Exchange of Thailand and the Ministry of Finance. The 59-year-old veteran central banker also had stints working with the World Bank in Washington and McKinsey & Co in New York. He has a PhD in economics from Yale University.

The BOT’s October interest rate cut came as a surprise to some. What’s the rationale behind it?

First, I have to say that we were a bit surprised at how surprised the market was because we had laid out the scenario.

Basically, when we look at setting rates, we look at three things: the growth outlook, the inflation outlook and financial stability. For us, growth and inflation are pretty much on target. But the thing that we have always raised as a concern was financial stability.

Obviously, we have issues around high household debt. When you lower rates, it has two effects: It lowers the burden of the existing debt, but it also encourages new borrowing. So, one issue that we are always trying to balance is what impact interest rates will have on the overall debt trajectory.

What we have seen is that the financial conditions have tightened. Lending growth has been slowing. So, the financial stability risk from cutting rates in terms of increasing debt is now lower. Therefore, we thought it was appropriate to recalibrate the interest rate, while still maintaining a broadly neutral monetary policy stance.

What’s the current state of household debt in Thailand?

Household debt in Thailand is too high, at about 90 per cent of GDP. Part of the reason is that interest rates were low for quite some time, and household borrowings ran up a lot pre-Covid. When Covid-19 hit, they increased even faster.

Most international studies suggest that household debt levels as a share of GDP shouldn’t be higher than 80 per cent. So, we need to get our household debt down, and we need to see an orderly deleveraging.

Can we get it down faster? Yes. But if we do that, it would be like hitting the brakes too fast, and the economy would slow too much. That’s not good. So, it’s a balancing act.

What are the BOT’s potential solutions to getting household debt down?

The most important thing is having the right monetary policy stance. First and foremost is the interest rate. It has to be appropriate for both the economic growth and inflation outlook, as well as the orderly debt deleveraging process that we want to see.

Secondly, we have to look at all the other instruments at our disposal. On the financial policy front, macroprudential measures have to be appropriate. We’ve also spent a lot of time rolling out more targeted measures to address the debt problem.

For example, our Responsible Lending guidelines emphasize that throughout the whole debt cycle, banks should provide the right information to people so they can make informed choices and judgments about borrowing – you don’t want people to borrow too much unnecessarily. That’s important, and we’ve been enforcing that quite strictly.

Another important element of the Responsible Lending guidelines is debt restructuring. There are a lot of borrowers whose incomes are recovering quite slowly.

A lot of the debt restructuring, such as rescheduling debt and extending repayment periods, is to try to match the recovery of their incomes. I think debt restructuring has to be an important component of the way we go about addressing our household debt issue.

The Thai government has been pushing for a lower interest rate as part of its bid to drive up economic growth. How much do you think the government’s pressure factored in the October rate cut?

The short answer is very little. I think government pressure has been there for a long time. Even after the October rate cut, it is still there. We take that as a given.

We’ve mostly been guided by our inflation-targeting framework, especially the outlook. One thing I’d be keen to point out is that when we make decisions about rates, they are outlook-dependent, not data-dependent. The reason is that there’s a lag in policy changes taking effect on the economy.

So, when we make rate decisions, we always look ahead. If the outlook on growth, inflation and financial stability isn’t going where we would like to see, we will take action.

How is the BOT managing the baht amid volatile global markets?

There have been a lot of fluctuations in the baht during 2024. In the initial part of the year, we saw very strong depreciation. In the second half, there was a very sharp appreciation. The volatility has been very high.

Like many other countries, we have a managed floating exchange rate regime. We allow the exchange rate to move but don’t want to see excessive volatility, particularly if it is not underpinned by fundamentals.

Typically, in Thailand or other countries in Asia, moves are often in response to what happens with the U.S. dollar. If there’s news about the Fed, the currency immediately starts to move. That’s underpinned by fundamentals. We’re okay with that.

But if movements are not underpinned by any kind of fundamentals, or there are problems in market functioning, we will undertake interventions as necessary.

We do foreign exchange interventions as part of an integrated policy framework. Having multiple instruments helps share the burden of any particular instrument to do too much of the heavy lifting on its own, whether it involves interest rates or foreign exchange intervention.

The political environment in Thailand hasn’t been particularly stable. What do you think is key to safeguarding the financial system and economy from political volatility?

The main impact on the economy has been more from shocks such as Covid-19 rather than political volatility. Overall, the economy is stable, and the financial sector has been relatively resilient to most political uncertainty.

I think too often, analysts focus too much on political volatility. The important thing is not just political stability, but also what I call administrative stability.

What do I mean by that? You might have the same government, but if the cabinet ministers change often, or the key civil service positions change too often, that can undermine our ability to execute policies. So, it is important not to just look at changes on the political front but also at the administrative level from a policy standpoint.

The uncertainty we’re seeing now is not just politics in Thailand. The uncertainty we’re seeing now is a global thing, including what policy is going to be like with a new administration in the U.S. and where shocks are going to come from.

What’s the right policy response? First, I think this highlights the importance of stability and resiliency, especially when uncertainty is high. There needs to be adequate emphasis on issues about stability and making sure that the system is resilient.

Second, having enough buffers is extremely important. At the macro level, for a country like Thailand – a small, open economy subject to a lot of shocks – this means not running large deficits on the current account, external debt not being too high, and having enough foreign exchange reserves.

That will help shield us from a lot of shocks. On the financial sector front, we need to make sure the banking sector is solid: Banks are adequately capitalized, are liquid and have good-quality portfolios. The reason buffers are important is that you don’t know where the shocks are going to come from; if you know, you can hedge against them by doing specific things.

Third, you need to make sure that your policy is robust, broadly right and appropriate for a wide range of outcomes rather than exactly right for one specific scenario because you don’t know which scenario is going to happen.

The BOT is part of the cross-border central bank digital currency (CBDC) project mBridge. What roles do you think CBDC can serve in the domestic market?

For retail CBDC, its role for me isn’t that clear right now. The bar for putting in place a retail CBDC is a bit high for us.

We did do a retail CBDC pilot because we wanted to make sure we understood the technology and customer experience, so that if we wanted to roll it out, we could. There was a lot that we managed to learn from the pilot.

But that doesn’t mean we’re in a hurry to implement it. The additional value from putting in place a retail CBDC now isn’t that clear because the existing fast-payment system, PromptPay, is working well. We process around 70 million transactions per day on PromptPay. Out of a population of about 70 million, the usage of PromptPay is very high.

Are there possible benefits that we would get from retail CBDC that would be harder to do with PromptPay? The short answer is yes. Programmability was one thing that we were interested in exploring because that’s easier to do on a retail CBDC than a fast-payment system.

But there are other ways of getting that benefit without the retail CBDC. One thing we’re looking at in this vein is possibly through certain types of stablecoins, so we’re doing an enhanced regulatory sandbox and getting people to propose use cases.

For wholesale CBDC, I do see a lot of use cases, both domestically and cross-border. Domestically, we have seen use cases since a long time ago, like interbank settlement and supply chain financing. For wholesale CBDC, the risk is probably lower and more manageable. I can see it as a facilitating infrastructure to allow other kinds of innovations to build on it.

On the cross-border front, the use case for wholesale CBDC is very clear, like in the mBridge project. It addresses a very clear pain point. The cross-border correspondent banking setup is slow, expensive and not very transparent. Wholesale CBDC can address a lot of those problems, reducing settlement times from days to minutes and eliminating settlement risk.

Besides CBDCs, what other digital payment initiatives is the BOT working on? How will they change domestic and cross-border payments?

Quite a few. On the domestic front, the PromptPay system is working very well in terms of transactions. We’d like to increase its adoption as some merchants have yet to use it and some people prefer using cash for small-ticket items.

We would like to lower the barrier to entry for those people. We want people to use digital payment because cash is expensive due to the costs involved in the entire process, from printing and logistics to retrieving and destroying old banknotes.

On the cross-border front, we’ve had eight bilateral QR payment linkages with other economies, and we did the first fast-payment linkage with Singapore, linking PromptPay with Singapore’s PayNow system. Because we’re a tourism-dependent economy, we want to make sure tourists’ payment can be done easily. We also have many foreign workers in our country and Thai workers abroad.

The next phase for us is doing multilateral linkages that would be more scalable than a bilateral approach. Project Nexus is a fast-payment linkage with a group of other central banks that is quite promising. Project mBridge is an important one as well. Both are key pieces of the cross-border part of our digital journey.

Our vision for a digital financial landscape emphasizes three “opens”: open infrastructure, open competition and open data.

On open infrastructure, our fast-payment system, PromptPay, needs to be more open, allowing access for other players like non-banks. Currently, the participants are primarily banks, with non-banks linking up via banks.

We’re also introducing virtual banks in Thailand that will encourage more competition in our banking system.

The area that is lagging is on the data side. The open data initiative, getting data to flow more and more, is important because it will help us address some pain points, especially the issue of access to financing.

Lastly, we want to make sure that digital finance is safe. I think there are issues related to cybersecurity, concentration risk and protection from fraud. Very importantly, if regulators are not able to address the fraud issue, moving people to digital is not going to be that smooth.

In terms of climate change, how is the BOT incorporating relevant risks into its policy decisions?

Climate change is a big deal for Thailand. Our economy is extremely exposed to climate change risk for several reasons. Our economic infrastructure is pretty brown. A lot of our production capacity is located in flood-prone areas. Our economy depends on tourism, and a lot of coastal tourism is going to be affected by rising sea levels. Also, a good chunk of our labor force is employed in agriculture, so their livelihood is subject to the cycle of floods and droughts.

So, what are we doing? The first thing is we try to get banks and other financial institutions to internalize climate issues into their decision-making by putting in place building blocks, such as standard practices and industry handbooks, climate stress tests, and taxonomy of green/non-green activities.

In 2023, we launched the Thailand Taxonomy for the energy and transport sectors. Now we are working on a second set of taxonomies for other sectors, covering agriculture, building and real estate, manufacturing and waste management.

Apart from putting building blocks in place, we also want to encourage banks to do things that are more concrete. So, in August 2024, we launched an initiative called Financing the Transition. The idea was it’s not just about going green; our big issue is how we make very brown industries less brown. If we were to go green, that implies you’re cutting off financing credit to a broad swath of our industry, particularly small and medium enterprises, and that transition wouldn’t be smooth. We would like to see an orderly transition.

In collaboration with eight systemically important banks, the initiative was for them to take a look at their own portfolio and client base and try to come up with product programs that are appropriate for their clients to become less brown.

The initiative wasn’t driven just by the regulator in a top-down way. It involved the engagement of a lot of stakeholders, with banks talking to their client base and thinking about what made sense for them to design a product program that would facilitate this transition.

For example, one thing that has had a good response is in the hotel space. It’s driven a lot by European tourists who want to go to a hotel that is certified as eco-friendly. So, we need to make hotels less brown. There’s demand for that.

Having the banks come up with a product program in terms of credit means if a client makes itself less brown, then it might get better credit terms. This kind of product is what we would like to see, which is concrete and tangible.

This initiative is a tremendous learning experience for the banks, their clients and us as the regulator. CAIXIN GLOBAL