Press Release No. 16/264

Press Release: IMF Executive Board Concludes 2016 Article IV Consultation with Thailand

June 7, 2016

On May 23, 2016, the Executive Board of the International Monetary Fund (IMF) Concluded the Article IV Consultation¹ with Thailand.

The Thai economy recovered in 2015 after a slowdown induced by political uncertainty. Output grew by 2.8 percent in 2015 supported by accommodative monetary policy and a boost in public spending. The current account surplus rose to 8 percent of GDP as a result of improving terms of trade, contracting imports associated with tepid domestic demand, and soaring tourism. Headline inflation moved into negative territory, and, at -0.9 percent, significantly undershoot the Bank of Thailand’s new inflation target of 2.5±1.5 percent. Lower inflation mostly reflected the fall in energy prices, but core inflation and inflation expectations also declined in 2015. Financial markets weathered well repeated bouts of global volatility and the financial system remained robust.

The recovery is expected to continue, but at a modest pace and subject to downside risks. Growth is projected to improve to 3 percent in 2016 and 3.2 percent in 2017, still below most other ASEAN economies and Thailand’s historical record. Headline inflation is expected to recover as the effects of lower oil prices gradually abate, but will likely undershoot the central bank’s target again this year, as inflationary pressures continue to be depressed by sluggish demand. Headwinds may arise from further weakness in the international environment as well as from political uncertainty and structural bottlenecks that weigh on potential growth.

Strong fundamentals enhance Thailand’s resilience in the face of external and internal challenges. High international reserves, a sizable current account surplus, and relatively limited foreign debt helped cushion shocks from the weak and volatile global environment. Moderate public debt, a wide investor base, a well-capitalized banking sector, and strong policymaking institutions provide additional layers of protection. Moreover, policy space can be used to maneuver if downside risks were to materialize.

Executive Board Assessment²

Executive Directors recognized the resilience of the Thai economy in the face of external and internal challenges and the strength of its policy making institutions. Directors viewed Thailand’s external position as strong, underpinned by high international reserves and low foreign debt. The current account surplus is expected to narrow over time as domestic demand strengthens and terms-of-trade shocks reverse. Directors noted, however, that the ongoing recovery is modest and subject to downside risks while core inflation remains low due to weak demand. Against this backdrop, Directors encouraged the authorities to secure a strong and lasting recovery through an expansionary policy mix, steps to safeguard financial stability and structural reforms to boost growth potential.

Directors welcomed the expansionary fiscal stance which should be placed within a Medium Term Fiscal Framework (MTFF). They encouraged the authorities to rapidly implement their investment plan with due attention to governance and transparency. Directors also stressed that short-term stimulus measures to support farm income should make way for social safety nets that are better aligned with structural challenges. They underscored that the MTFF should aim to increase tax revenues over the medium term and prepare for the fiscal implications of rapid population aging. Directors commended the high priority attached to enacting the fiscal responsibility law and the ongoing review of the health care system to address sustainability, adequacy, fairness, and efficiency.

Directors noted that the current accommodative monetary policy stance is appropriate. Going forward, while there is room for further easing, this should balance support for the economy against financial stability concerns and the need to preserve policy space. Directors commended the high standard of transparency achieved by Thailand’s monetary policy framework and suggested that communicating a determination to steer inflation toward the medium-term target would enhance the effectiveness of monetary policy transmission. Directors recommended maintaining exchange rate flexibility as the first line of defense against external shocks.

Directors supported tighter macroprudential policies to maintain financial stability in a low interest rate environment. They also supported efforts to strengthen the supervision of specialized financial institutions, foster coordination among regulators, upgrade the macroprudential policy framework, and improve crisis prevention and resolution mechanisms. Directors emphasized close monitoring of potential systemic risks from interconnected financial conglomerates and high household debt.

Directors called for concerted action to lift productivity and potential growth. They underscored the need to promote structural transformation, improve the quality of education and vocational training, and mitigate the impact of population aging by reforming pensions. Enhancing public infrastructure investment could help crowd in private investment and boost economic potential, while advancing trade integration could catalyze structural reforms and enhance competitiveness. Directors welcomed the authorities’ plan to assess the merits of joining the Trans-Pacific Partnership Agreement.