A greying population, education problems and the government's outsize role in society pose risks to the country's economy that must be addressed, says the Bank of Thailand chief.
Central bank governor Veerathai Santiprabhob, in an exclusive interview with the Bangkok Post, sheds some light on threats to the country's economy in the long term, and his views on the current economic circumstances and a bad-loan uptick in the banking sector.
Long-run threats
An older population is a challenge that affects all aspects of the Thai economy including labour, savings and consumption, said Veerathai Santiprabhob. Most Thais have not considered how to prepare for post-retirement life, he said.
"This issue should be put on the national agenda so it is dealt with seriously and systematically," said Mr Veerathai.
Thailand is classified as an "ageing society" by the UN and will become an "aged society" by 2025. A society is considered ageing when one-tenth of its population is aged above 60, and aged when one-fifth is above 60.
The Fiscal Policy Office estimates the percentage of Thais aged 60 and over is expected to increase from 14% of the population to 17.5% in 2020, 21.2% in 2025 and 25.2% in 2030.
The Finance Ministry is keen on reinforcing the retirement safety net to prepare the country for the demographic shift and seeks ways to alleviate the fiscal burden in taking care of the elderly.
Last year, it set up the National Savings Fund (NSF), a voluntary pension fund for 27 million non-formal workers, and allowed provident fund members to make higher contributions than their employers.
Moreover, it is seeking to implement reverse mortgages -- loans for the elderly that allow them to convert the equity in their homes into cash -- as well as a mandatory provident fund.
Mr Veerathai said many questions remain about the ageing society, including who will take responsibility for the care of elderly people, how the aged will pay for their retirement years, and whether immigrant labourers are needed to offset the retiring Thai workforce.
The country needs to encourage a higher birth rate among Thais to alleviate some of its ageing-related challenges, he said.
Thailand also faces long-standing problems concerning its educational system such as a shortage of workers graduating in science and technology fields as well as a dearth of vocational school graduates and researchers who can support Thailand 4.0. There is also a mismatch of skills employers want and workers have, said Mr Veerathai.
People lack life skills needed for a fast-changing environment such as financial literacy and technology know-how, he said, adding language skills are also crucial.
Mr Veerathai said the government's role in the economy should be scaled down in the future to that of a policymaker, regulator and facilitator.
"During the economic downturn, we need the government to play a role in stimulating the economy. But the government's role should be reduced in the next five to 10 years," he said.
Comfort with growth view
Mr Veerathai said he was comfortable with the central bank's 3.2% GDP growth forecast this year, as the economy rose at a fast clip in the first half and indicators were still solid in the third quarter. Activities in some sectors have cooled during the final quarter, he said.
"We need to study the figures from October," Mr Veerathai said. "Some sectors such as food have hardly been hit, but those related to entertainment slowed as expected."
The government's crackdown on zero-dollar tours has dealt a blow to Chinese tourist arrivals and its supply chain, he said. Some tourists may postpone their visit to Thailand as the economy may not be favourable to travel, said Mr Veerathai.
However, the economic fundamentals are unchanged and Thailand remains resilient to unexpected shocks based on low foreign-denominated debt, a high employment rate, and a diversified economy and markets.
Thailand's economy recently picked up the pace, particularly from August to September when exports turned the corner, while a recovery in some countries including the US and robust growth in Cambodia, Laos, Myanmar and Vietnam come as a boon to Thai merchandise shipments, he said.
"The rebound has become more diversified, but it is still far from a real broad-based recovery as rural areas still feel the pinch from the drought and soft crop prices," said Mr Veerathai.
Thailand faces a supply constraint in the labour market and a demand constraint in rural areas, preventing the country's economy from a broad-based rebound, he said.
From a macro perspective, the country still lacks investment, private investment in particular, and this has eroded economic activities in the short term and productivity in the longer term, said Mr Veerathai.
The business sector has decided to hold off on investment because of the lacklustre global economy, surplus production capacity and tepid purchasing power, but it needs to invest in new technology in preparation for a recovery, he said.
"We need investment to prepare for new challenges. I would like to see more investment, especially during a low-interest-rate period," Mr Veerathai said.
Liberalisation of occupations in some sectors where the country has a competitive edge would help unleash investment, he said.
The country's economic momentum should improve next year, but uncertainties remain elevated because Thailand is an open economy.
External headwinds from China's transition to slower growth, the effect of Brexit on Europe, geopolitics and excessive liquidity globally are greater concerns than domestic ones, said Mr Veerathai.
State investment is the main internal concern, in addition to some draft bills pending National Legislative Assembly deliberation. Those bills include reforms on state enterprises and taxes, competition law and improving the business landscape, he said.
The Bank of Thailand projected the Thai economy will grow 3.2% in 2017.
The central bank has monitored and requested banks keep a close watch on non-performing loans (NPLs). The uneven economic turnaround resulted in rising bad loans in some sectors, Mr Veerathai said.
"I don't think NPLs will surge to a level that could lead to problems for financial institutions because they have high [loan-loss and capital] buffers," he said. "However, it doesn't mean we are comfortable with higher NPLs. We want to see declining NPLs that reflect a broad-based economic recovery."
An NPL uptick was observed in small and medium-sized enterprises and businesses relying largely on the purchasing power of rural people. But there is no sign large companies will default, said Mr Veerathai.
The central bank's stress test indicates financial institutions can tolerate even the worst-case GDP projection of growth contracting, he said.
Commercial banks' bad-loan ratio rose for a third consecutive quarter to 2.89% of loans outstanding at the end of September from 2.72% in June. Distressed loans outstanding totalled 394 billion baht at the end of September, up from 374 billion at the end of June, reported the central bank.