Press Release No. 19/294

IMF Staff Concludes Visit to Thailand

July 22, 2019

• Thailand’s economy grew by 4.1 percent in 2018 but has slowed this year amid rising global trade tensions.
• To support domestic demand, the staff team recommends an expansionary policy mix that includes a scaling up of public investment projects combined with fiscal reforms and monetary easing consistent with a data dependent approach, accompanied by macroprudential policies to preserve financial stability.
• Structural reforms would also contribute to addressing the macroeconomic imbalances and promoting inclusive and sustainable growth.

An International Monetary Fund (IMF) staff team, led by Mr. Lamin Leigh, visited Bangkok from July 4–19, 2019, to hold discussions on the 2019 Article IV Consultation with Thailand. At the conclusion of the visit, Mr. Leigh issued the following statement:

“Thailand’s economy has slowed this year. Following real GDP growth of 4.1 percent in 2018, growth decelerated to 2.8 percent (y/y) in the first quarter of 2019 driven largely by declines in exports. Global trade tensions have weighed heavily on exports which continued to decline through May. Weaker external demand and slowing tourism receipts have partly contributed to the narrowing of the current account surplus to 6.4 percent of GDP in 2018. Although private consumption has held up, headline inflation remains subdued, averaging 0.9 percent (y/y) in the first half of 2019 and below the Bank of Thailand’s target range on the back of food and energy prices. Growth in 2019–20 is expected to slow as uncertainty over trade tensions weigh on global demand. Risks to the outlook are tilted to the downside, most notably the escalation of protectionism threatening the global trade system.

“To support domestic demand, the team recommends an expansionary policy mix consisting of judicious use of fiscal space, fiscal reforms, and monetary easing consistent with a data dependent approach. The authorities are making steady progress on implementing the medium-term fiscal framework in support of the fiscal responsibility law, increasing the efficiency of the tax structure, and preparing a bill to improve the pension system. Going forward, the mission recommends a frontloaded increase in public investment in FY 2020, including through PPPs (e.g. Eastern Economic Corridor projects), supported by stronger public investment management, which can catalyze private investment and raise productivity growth. Given the delay in the enactment of the FY 2020 Budget with the transition to the new government and the resulting lack of fiscal stimulus in the remaining months of 2019, as well as the moderation of the financial cycle, monetary easing would help support domestic demand and external rebalancing. The exchange rate should remain flexible to serve as a key shock absorber in response to volatile capital flows while using macroprudential policies to address possible financial stability risks. Foreign exchange intervention should be limited to avoiding disorderly market conditions.

“The authorities have also made commendable progress in improving the coverage and effectiveness of financial supervision and macroprudential policies (MPPs). The recently concluded Financial Sector Assessment Program (FSAP) highlighted that financial vulnerabilities appear to be contained, but household indebtedness is relatively high and there are signs of weaknesses in some corporates and small and medium sized enterprises. Stress test results suggest that the banking sector is resilient to severe shocks and that systemic and contagion risks stemming from interlinkages are limited. To safeguard financial stability, the mission encourages the authorities to continue to implement the FSAP recommendations, including closing existing gaps in the crisis management and resolution frameworks, and enhancing the macroprudential framework and policies. The authorities have already started implementing some of the recommendations, including expanding the MPP toolkit and strengthening further an Early Warning Indicators framework and triggers for early intervention for the banking system.

“Structural reforms would also help address macroeconomic imbalances, promote inclusive growth, and enhance the key drivers of long-run growth. In this context, the authorities’ plan to propel Thailand to higher-value activities and to a digital economy (Thailand 4.0) as outlined in the 20-year National Strategy is an important step forward. Policy priorities should aim to enhance labor productivity, boost competitiveness, promote inclusiveness and address large regional income disparities. Greater investment in human capital across the regions will help unlock growth potential, including through education, health, and equalizing opportunities. Measures to facilitate household deleveraging and better targeted social safety net programs should help spur domestic demand and more inclusive growth. Pension reform, combined with measures to strengthen active labor market policies and more liberal immigration policies to attract foreign skilled labor, can help address demographic headwinds from population aging. The team takes note of the ongoing work by the National Anti-Corruption Commission (NACC) to implement the national anti-corruption strategy phase 3 (2017-2021) that would also help promote growth over the medium term.

“The IMF team exchanged views on recent economic developments and the outlook with officials in the government, the Bank of Thailand, other public institutions, and representatives of the private sector. The team would like to thank the authorities and other interlocutors in Bangkok and Khon Kaen for the constructive dialogue and generous hospitality. The IMF’s Executive Board is tentatively scheduled to discuss the Staff Report in September.”