Press Release No. PR17/81

IMF Staff Concludes 2017 Article IV Visit to Thailand

March 13, 2017

• Thai economic recovery expected to advance at a moderate pace in the near to medium term
• Outlook subject to significant uncertainty and downside risks remain
• The team recommends a mutually reinforcing policy mix of fiscal and monetary stimulus, coupled with structural reforms

An International Monetary Fund (IMF) team, led by Ana Corbacho, visited Bangkok from February 16–March 1, 2017, for the 2017 Article IV Consultation discussions. The team exchanged views on recent economic developments and the outlook with officials in the government, the Bank of Thailand (BOT), and other public institutions. It also met with representatives of the private sector and academics. At the conclusion of the visit, Ms. Corbacho issued the following statement:

“The Thai economy continued to recover in 2016. GDP growth reached 3.2 percent, mainly driven by exports of services and public investment. Average headline inflation was 0.2 percent, below the target band for the second year in a row, reflecting low energy prices and persistently weak core inflation. Amid subdued import growth, the external current account strengthened further. Financial markets were highly resilient in the face of external and domestic shocks.

“The recovery is expected to advance at a moderate pace in the near to medium term. Public investment would remain a key driver, rising over the next few years in line with the government’s infrastructure plans, and crowding in private investment. Headline inflation is projected to increase in 2017 along with higher energy prices, but would remain below the 2.5 percent target for several years, amid subdued core inflation. The current account surplus is expected to decline gradually, as domestic demand improves over the medium term.

“The outlook is subject to significant uncertainty and downside risks remain. On the external

front, a bumpy rebalancing in China may hurt Thai exports. A shift in the U.S. policy mix to expansionary fiscal policy and tighter monetary policy could generate capital outflows, raise financing costs, and trigger heightened global volatility. Trade protectionism could particularly affect open economies such as Thailand over the medium term. On the other hand, recent momentum in global growth could be sustained, providing upside risk through a faster recovery in Thai exports and tourism in the near term. On the domestic front, weaker crowding-in of private investment would reduce domestic demand and potential growth. Low inflation could become entrenched, while the household debt overhang could create stronger-than-expected headwinds to consumption and growth.

“Thailand’s policy space and ample buffers can be deployed to minimize the risk of a low-inflation, low-growth trap. While cyclical conditions are improving, Thailand is afflicted by features of the “new mediocre” facing some advanced economies. Structural bottlenecks are holding back employment and investment, reinforcing weak expectations of domestic demand. The team recommends a mutually reinforcing policy mix of fiscal and monetary stimulus, coupled with structural reforms, to support domestic demand in the short run and boost potential growth over the long run. Such a strategy would also help reduce the high current account surplus over the medium term, helping to ensure that the needed real exchange rate appreciation takes place through a growth-driven process boosting real incomes. The exchange rate should remain the first line of defense against external shocks, with foreign exchange intervention limited to avoiding disorderly market conditions.

“The team recommends monetary policy easing together with enhanced communication to improve the balance of risks and steer inflation back to the target. Monetary easing, as part of a broader expansionary policy mix, would counteract risks of low inflation becoming entrenched and prevent a further rise in real interest rates and the real debt burden. Moreover, a faster convergence to the target would allow a faster exit from the low interest rate environment, strengthening both macroeconomic and financial stability. Enhanced communication of the strong determination to meet the inflation target would reinforce monetary policy transmission and the effectiveness of policy easing through the expectations channel.

“Financial stability risks remain contained. Macroprudential policy and regulatory reform can address emerging pockets of financial fragility. Concerns that policy rates cuts could exacerbate systemic risks can be addressed by tailoring macroprudential policies to close loopholes for regulatory arbitrage. Also important is strengthening the macroprudential policy framework across different types of financial institutions to ensure that monetary easing does not inadvertently give rise to excessive leverage and financial stability risks. Continuing to upgrade the financial stability framework will reinforce stability.

“The team supports the use of fiscal space to accommodate higher public investment. Large infrastructure projects remain macro-critical to stimulate domestic demand and inflation, crowd-in private investment and imports, and support potential growth and external rebalancing. Fiscal space should not be used for short-term measures that are untargeted and poorly aligned with long-term goals. A gradual increase in domestic fiscal revenues, focused on growth-friendly taxes, is needed to finance growing social protection needs and ensure debt sustainability over the longer term. A comprehensive pension reform should tackle design shortcomings and population aging, with due consideration for equity, efficiency, and sustainability. Articulating a medium-term fiscal strategy would enhance fiscal management, credibility, and transparency.

“The team agrees on the need for structural reforms to anchor sustained, inclusive growth. Concerted reforms should address all drivers of potential growth, with priority placed on the challenges brought about by the fast pace of population aging. Promoting labor force participation (including by closing gender gaps and increasing the retirement age), facilitating skilled migration, and improving the quality of education would help raise labor productivity and mitigate the drag from demographics. There is also scope to enhance private investment capital accumulation and total factor productivity. Developing a robust mechanism to identify poor and vulnerable households would help to improve the targeting of social assistance and to address any adverse impact of structural reforms on income distribution.

“The team would like to thank the authorities and private sector counterparts for their support, hospitality, and constructive dialogue. The IMF’s Executive Board is tentatively scheduled to discuss the Staff Report in May.”