Public Information Notice: IMF Concludes Article IV Consultation with Thailand

February 10, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On January 12, 2000, the Executive Board concluded the Article IV consultation with Thailand.1


A decade of high growth, averaging almost 10 percent per year from the mid-1980s, generated resource pressures, leading to large current account deficits financed by short-term capital inflows. The resulting buildup in short-term debt, and growing weaknesses in the financial sector, left the economy increasingly vulnerable to domestic and external shocks. By late 1996, investors began to view the currency, which was effectively pegged to the U.S. dollar, as overvalued. A series of speculative attacks ensued, leading the Bank of Thailand (BOT) to defend the peg by intervening in the foreign exchange market. In the process, the BOT nearly exhausted its international reserves, and was forced to abandon the exchange rate peg on July 2, 1997. To replenish reserves and stabilize the economy, the authorities reached agreement with the International Monetary Fund on an economic adjustment program, as part of an official financing package totaling more than $17 billion.

In the initial stages of the program, fiscal and monetary policies were tightened to support external adjustment, and decisive steps were taken to restructure the ailing financial sector. However, initial delays in program implementation and political uncertainties, exacerbated by regional financial market turbulence, led to a further depreciation of the baht, increasing the burden of foreign currency-denominated debt, and adding to the problem of nonperforming loans already afflicting the economy. A severe economic recession ensued, with real GDP in 1998 falling by more than 10 percent.

As the exchange rate stabilized, macroeconomic policies were progressively eased to cushion the impact of the recession and restore economic growth. As the extent of the decline in domestic demand became evident, fiscal policy was eased in early 1998, and thereafter became expansionary. Fiscal stimulus was maintained in 1998/99, with a further increase in the deficit. Central to the stimulus has been an expansion of expenditures on the social safety net, which doubled from 1 percent of GDP before the program to more than 2 percent of GDP in 1998/99. Monetary policy also became supportive of growth when, by mid-1998, the balance of payments position and the exchange rate had stabilized, enabling a steady reduction in interest rates. The BOT's key policy rate, the overnight repurchase rate, was lowered from its peak of more than 25 percent in late 1997 to less than one percent by mid-1999—well below pre-crisis levels.

Financial sector reform has been at the heart of the program. Insolvent banks have been intervened, wiping out shareholder capital, though depositors have been protected, maintaining confidence in the financial system. Insolvent finance companies have had their operations suspended. The government has provided financial assistance for bank recapitalization, tied to progress in debt restructuring, and with strong safeguards on the use of the public funds. To prevent financial sector problems from recurring, an enhanced prudential framework is being phased in through end-2000, which will bring capital adequacy standards and loan classification and provisioning rules into line with international best practice. In addition, the government has taken steps to promote restructuring of corporate debt, through the reform of bankruptcy procedures, elimination of tax disincentives, and the encouragement of voluntary debt restructuring under the auspices of the Corporate Debt Restructuring Advisory Committee chaired by the BOT.

Under the combination of supportive macroeconomic policies and the rebuilding of confidence in the financial system, economic activity rebounded strongly in 1999. Manufacturing production in the last quarter of 1999 increased by more than 15 percent from a year earlier; import growth accelerated to more than 30 percent, evidence of a clear recovery in domestic demand; and export growth in October/November rose to about 18 percent, reflecting a revival in partner country demand. For the year as a whole, the outturn for GDP growth is likely to reach 4 percent, with a virtual absence of inflationary pressures. Thailand's external position has also turned around, with the current account registering a surplus in 1999 of $11 billion (9 percent of GDP), and gross international reserves increasing to almost $35 billion, more than double the stock of outstanding short term external debt.

Despite these achievements, the recovery remains fragile, and the public sector will continue to play a supportive role until a more pronounced increase in private sector activity materializes. Unless resolved soon, problems in the financial sector could hold back recovery once demand picks up. This underscores the importance of advancing financial sector reform, and maintaining progress in corporate debt restructuring.

Executive Board Assessment

Executive Directors commended the authorities for Thailand's impressive progress in economic recovery and in restoring financial stability. International reserves have been rebuilt to healthy levels; exchange rate stability has been restored, and the recovery has become broad-based. Nevertheless, Directors recognized that economic recovery and restructuring are not yet complete. They stressed that sustained recovery will require determined efforts from the authorities in accelerating structural reform—especially regarding corporate debt and the banking system—and continued application of supportive macroeconomic policies.

Directors considered that the present accommodative stance of macroeconomic policy is appropriate in order to sustain the ongoing economic recovery. Against this background, they recommended that the fiscal stimulus be continued through 2000 to ensure that the growth momentum is not lost. Moreover, there is a need to preserve government spending on the social safety net until a decisive turnaround in employment and social conditions materializes. However, in the event the budget turns out to be stronger than expected as a result of significantly higher than expected growth, Directors generally encouraged the authorities to set aside the resulting higher revenues for deficit reduction and so help stabilize the public debt. They noted that fiscal consolidation would be needed over the medium term to reverse the recent increase in public debt. While much of the necessary consolidation should take place more or less automatically with the output recovery, Directors observed that the authorities will also need to consider additional measures to broaden the tax base.

While monetary policy has also been supportive of recovery, Directors noted that the benefits of low money market rates had been slow to be fully transmitted to the real sector in the form of lower bank lending and deposit rates. They considered that, despite the recent decline in both deposit and lending rates, a further generalized fall in interest rates, including deposit rates, would help strengthen both economic recovery and bank balance sheets.

Directors welcomed the Bank of Thailand's continued adherence to a flexible exchange rate regime, which had helped restore external viability, and its intention to introduce an inflation targeting framework over the medium term. However, the success of this new arrangement would require putting in place the necessary preconditions, such as transparent institutional arrangements and clear accountability. Some Directors emphasized that it would be essential to establish that price stability was the overriding objective of monetary policy once inflation targeting was formally adopted. In this connection, Directors welcomed the progress toward the new Bank of Thailand Act and the Financial Institutions Law, which should contribute to ensuring the independence of monetary management and increasing the efficiency and transparency of the financial system.

On structural reform, Directors agreed that the immediate priority should be to accelerate decisively the pace of bank and corporate debt restructuring. To date, the drop in private demand and the disintermediation process under way had meant that the increased caution of banks in their lending decisions had not been a binding constraint on economic recovery. However, looking ahead, Directors stressed that broad-based economic recovery would entail higher credit demand—especially from newly emerging and smaller borrowers—and that it was essential that the health of the financial system be restored as quickly as possible.

Against this background, Directors were concerned about the continuing high level of nonperforming loans. They considered that the authorities would need to take additional measures in three key areas to strengthen the financial system. First, while some limited success had been achieved in strengthening the capital position of banks under the largely private sector-led recapitalization strategy, this should be kept under close review. Second, it was important to strengthen the implementation of the new framework for bankruptcy and foreclosure, to ensure that credit discipline is rebuilt. In this regard, expeditious handling of a few test cases, preferably including some where publicly owned banks are creditors, could have a salutary effect on recalcitrant debtors. At the same time, a number of Directors urged the authorities to assess the shortcomings in the bankruptcy procedures, and to consider necessary modifications to address them. Several Directors were concerned at the risk that current arrangements might be encouraging nonpayment on the part of some debtors who could fully service their debts. Third, to enhance competition and efficiency in the banking system, Directors stressed the importance of reprivatizing the remaining intervened banks. It was also essential to ensure that restructuring of the state-owned Krung Thai Bank is not further delayed. With regard to corporate debt restructuring, Directors welcomed the progress made by the Corporate Debt Restructuring Advisory Committee (CDRAC) in facilitating debt restructuring, but recommended that the authorities further strengthen the CDRAC framework as a priority.

Directors agreed that other priorities for the medium-term structural agenda include tax reform, trade liberalization, strengthening education, and improving the statistical database. They considered that supporting policies to mitigate the impact of the structural reforms on employment are critical and would help foster and sustain broad public support for these reforms.

Thailand: Selected Economic Indicators, 1996-99

  1996 1997 1998 1999
      Est. Proj.

Real GDP growth (percent) 5.9 -1.8 -10.4 4.0
Consumption 7.5 -1.2 -12.0 5.5
Gross fixed investment 7.4 -20.3 -38.1 3.0
CPI inflation (end period, percent) 4.8 7.7 4.3 0.7
CPI inflation (period average, percent) 5.9 5.6 8.1 0.3
Saving and investment (percent of GDP)        
Gross domestic investment 41.7 33.2 21.4 22.0
Gross national saving 33.6 31.1 34.1 31.0
Foreign saving 7.9 2.0 -12.7 -9.0
Fiscal accounts (percent of GDP) 1/        
Central government balance 1.9 -0.9 -2.4 -3.0
Revenue and grants 18.9 18.6 16.2 15.1
Expenditure and net lending 17.1 19.5 18.7 18.1
Overall public sector balance 2/ 1.7 -2.1 -3.3 -4.8
Cost of financial sector assistance 3/ ... 0.6 2.5 1.7
Overall public sector balance,augmented for the cost of financial sector assistance 1.7 -2.7 -5.8 -6.6
Monetary accounts (end period, percent)        
M2A growth 12.7 2.0 6.1 3.3
Balance of payments (billions of US$)        
Current account balance -14.4 -3.1 14.3 11.2
(percent of GDP) -7.9 -2.0 12.7 9.0
Exports, f.o.b. 54.7 56.7 52.9 55.6
Growth rate (in dollar terms) -1.9 3.8 -6.8 5.1
Growth rate (volume terms) -3.6 9.3 8.1 8.3
Imports, c.i.f. 70.8 61.3 40.6 46.4
Growth rate (in dollar terms) 0.6 -13.4 -33.8 14.2
Growth rate (volume terms) -5.5 -12.5 -29.3 21.4
Capital account balance 4/ 16.5 -15.5 -16.8 -9.6
Medium- and long-term 11.3 9.9 5.7 1.8
Short-term 4/ 5.2 -25.4 -22.5 -11.4
Overall balance 2.2 -10.6 2.6 5.2
Gross official reserves (end year) 38.7 27.0 29.6 34.8
(Months of following year's imports) 7.6 8.0 7.6 7.7
(Percent of short-term external debt) 103.0 77.4 125.7 249.0
Forward position of BOT (end year) -4.9 -18.0 -6.7 -4.8
External debt (percent of GDP) 49.8 62.0 76.5 59.6
(billions of US$) 5/ 90.5 93.4 86.3 76.1
Public sector 16.8 24.3 31.6 36.5
Private sector 73.7 69.1 54.7 39.6
Debt service ratio 6/ 12.0 13.9 20.7 20.4

Sources: Information provided by the Thai authorities; and staff estimates.

1/ On a cash and fiscal year basis.
2/ Includes extrabudgetary funds, local government and state enterprises.
3/ Imputed interest cost of servicing the total stock of financial sector assistance, including off-balance sheet liabilities.
4/ Includes outflows associated with the closing of swap and forward contracts by the Bank of Thailand, and errors and omissions.
5/ Data from end-1997 have been revised to include loans to Thai corporations whose proceeds were not brought into Thailand.
6/ Percent of exports of goods and services.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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