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Public Information Notice (PIN) No. 03/119
September 17, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

Text in Thai


IMF Concludes 2003 Article IV Consultation with Thailand

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On August 25, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Thailand.1

Background

Thailand successfully completed a 34-month, SDR 2.9 billion (268 percent of quota, equivalent to US$4 billion) Stand-By Arrangement on June 19, 2000. The arrangement was part of a $17.2 billion official financing package from multilateral institutions and bilateral contributors, $14.3 billion of which was drawn. Thailand completed repayment of this package on July 31, 2003, some two years ahead of schedule.

Real GDP increased by 5.3 percent in 2002, and 6.7 percent in the first quarter of 2003 (year-on-year). Growth was broadly balanced between private domestic and external demand. In spite of the acceleration in activity, inflation pressures continue to be subdued. Core inflation has hovered around 0.2 percent since the second half of 2002, compared to the Bank of Thailand (BOT)'s target range of 0-3½ percent. In part as a result of lower energy prices, headline inflation has been trending down after cresting at about 2 percent in January.

The BOT cut its policy rate in January and November 2002, and again in June 2003. Deposit and lending rates have declined recently and could fall further in response to the latest easing. Fiscal policy provided timely countercyclical support in the fiscal year that ended in September 2002 (FY 2001/02), but in the current fiscal year the general government balance is expected to improve by 2.1 percent of GDP, due mostly to stronger-than-expected revenues. The economic impact of fiscal consolidation is partially offset by new quasi-fiscal initiatives, in particular expanded operations of state-owned specialized financial institutions (SFIs) aimed at boosting credit and home ownership.

Export performance was very strong in 2002, and the current account is projected to remain in surplus in 2003. Official gross reserves stood at over US$39 billion at end-June 2003, and Thailand's vulnerability to external shocks continued to be reduced. The Stock Exchange of Thailand (SET) index increased about 17 percent in 2002, and over 30 percent more through June 2003, one of the best performances in emerging markets. Bond yields are low and all major credit rating agencies now share a positive outlook for the sovereign rating.

However, prospects for sustained high growth depend on action to address remaining structural weaknesses, especially in the corporate and banking sectors. While enterprises made some advances in de-leveraging, their balance sheets remain fragile. Banks' financial positions, though improving, need to be strengthened further. Lending activity has gathered some steam, but mostly at state-owned institutions, and resolution of nonperforming loans (NPLs) at private banks continues to be slow. While the Thai Asset Management Corporation (TAMC) met its targets for resolving NPLs in 2002, many approved restructurings or foreclosures have yet to be completed.

Executive Board Assessment

Executive Directors commended the authorities for the sound policies that have contributed to the strong growth performance of Thailand in 2002 and early 2003. Directors welcomed the early repayment of the 1997 financing package, made possible by a substantial improvement in Thailand's external position and reduced vulnerability to external shocks.

Directors considered that growth in the remainder of 2003 is likely to be strong. However, despite improvements in corporate balance sheets and the authorities' commitment to tackle NPLs, weaknesses arising from over-leveraged corporates and nonperforming or impaired assets in the financial system remain. They stressed that stronger medium-term growth prospects depend on intensifying structural reforms, and that the current period of economic expansion would provide an opportunity for further progress on the ongoing reform agenda.

Directors agreed that fiscal policy had played an appropriate counter-cyclical role in 2002. They supported the shift to a more contractionary stance for the current fiscal year. However, they noted that fiscal consolidation in the first half of the fiscal year was proceeding faster than intended due in large part to continued strong revenue growth, but also to lower-than-targeted spending from temporary disruptions from reorganization efforts. They welcomed the authorities' efforts to move up spending toward budgeted levels for the rest of the year, in particular to help offset the temporary constraining effects of SARS on the Thai economy.

Directors considered that medium-term fiscal adjustment remains key to strengthening the public finances. They supported the authorities' plans to reduce the debt-to-GDP ratio further, to minimize the potential impact of the costs of financial sector restructuring, other contingent liabilities, and the authorities' plans for fiscal decentralization. A number of Directors recommended that the timeline for the decentralization process, and the target rate for related revenue transfers to local authorities, be reassessed, noting in that light the importance of adequate administrative capacity at the local level in advance of decentralization. Directors welcomed the authorities' medium-term plans for a broad tax reform, which will enhance the efficiency of the tax system and support revenues. They stressed that the fiscal framework would be made more effective by a more responsive, transparent, and flexible budget policy, which would facilitate policy assessment and reduce incentives for placing certain activities outside of the budget.

Directors noted the potential impact of quasi-fiscal activities, including those of the specialized financial institutions (SFIs), on medium-term fiscal consolidation objectives. Some Directors acknowledged the value of the SFIs' objectives; a few Directors also noted the role of the SFIs in stimulating domestic demand. Nevertheless, Directors in general welcomed the authorities' intention to better record policy-related activities of SFIs through improved accounting procedures, and stressed the importance of keeping the SFIs' operations in accordance with their narrowly defined mandates. Directors also recommended that the SFIs' policy-related activities be brought within the official budget to improve transparency and accountability, and that plans to enhance the supervisory and regulatory oversight of the commercially-oriented operations of the SFIs be implemented speedily, to contain risks to the financial sector.

Directors noted that, although deflation risks are limited, very low inflation makes Thailand vulnerable to deflationary pressure in the event of adverse shocks. They welcomed the Bank of Thailand's recent decision to cut the policy interest rate, which will provide welcome insurance against deflation risks and reinforce the credibility of the inflation targeting framework; they considered that an easing bias would remain appropriate. Most Directors suggested that, in time, the Bank of Thailand consider raising the floor of its inflation target range above zero, to anchor inflation expectations at a positive level.

Directors observed that the managed floating exchange rate regime has served the economy well. They considered that in the current circumstances the exchange rate should be largely market determined, and any intervention should be limited to smoothening short-term volatility.

Directors observed that the recent rapid growth in lending by state-owned banks could reflect the need for a more level playing field between state-owned and private banks, or unwarranted risk-taking. They urged the authorities to remain vigilant in monitoring state banks closely to ensure that they are run on a commercial basis, with appropriate risk-management practices. Privatization of state banks would be welcome, as it would help to ensure the competitiveness of the financial sector.

Directors welcomed the efforts to restructure the banking sector and encouraged the authorities to accelerate the pace of restructuring. They welcomed the authorities' initiative to spur resolution of non-performing loans at private banks, and explore a number of possible options in tackling this problem. They encouraged the Bank of Thailand to use its regulatory powers to resolve problems in weak banks, either through mandated increases in their capital or banking sector consolidation.

Directors noted that the Thai Asset Management Corporation (TAMC) has made progress in some areas of corporate sector restructuring, although much more work remains to be done. The TAMC could improve its disclosure on progress made in restructuring cases, cash recovery, and asset disposal.

Directors encouraged the authorities to press forward with their agenda of legal reforms. Improved bankruptcy procedures and the creation of a predictable framework for restructuring debt that strikes an appropriate balance between the interests of debtors and those of creditors would be crucial for rehabilitating the corporate sector and encouraging new credit. Directors urged the authorities to enact other pending financial sector legislation as quickly as possible.

Directors welcomed Thailand's intention to assess its compliance with international standards and codes, especially in the areas of data and of corporate governance, with a view to identifying areas where action is needed. In particular, a number of Directors stated that a Report on the Observance of Standards and Codes on fiscal transparency would help to identify measures to improve flexibility in the budget process; and a Financial Sector Assessment Program would inform plans to improve the legislative and regulatory framework for the financial sector.

Directors welcomed the adoption of the Emergency Decree stipulating terrorism as a predicated offense under the Thai Anti-Money Laundering Act, which is an important step in the authorities' efforts to combat money laundering and the financing of terrorism.



Thailand: Selected Economic Indicators, 1998-2003


1998

1999

2000

2001

2002

2003

Proj.


Real GDP growth (percent)

-10.5

4.4

4.6

1.9

5.3

5.0

Consumption

-9.5

4.1

4.5

3.6

4.1

4.3

CPI inflation (peroid average, percent)

8.1

0.3

1.6

1.7

0.6

1.3

Saving and investment (percent of GDP)

Gross domestic investment

20.4

20.5

22.7

23.9

23.8

25.8

Gross national saving

33.2

30.7

30.3

29.3

29.9

31.0

Fiscal accounts (percent of GDP) 1/

Budgetary central government balance

-2.4

-3.5

-2.9

-2.9

-2.8

-0.8

Revenue and grants

16.2

15.5

15.5

15.0

15.8

16.3

Expenditure and net lending

18.7

18.9

18.4

17.9

18.6

17.0

General government balance 2/

-2.5

-3.1

-2.5

-1.3

-1.7

0.4

Nonfinancial public enterprise balance

-1.4

-2.0

-0.9

0.3

0.8

0.1

Comprehensive public sector balance

-6.4

-6.0

-4.1

-2.0

-3.0

-0.5

Monetary accounts (end period, percent)

M2A growth 3/

7.1

1.3

2.2

4.6

-0.1

...

Balance of payments (billions of US$)

Current account balance

14.3

12.5

9.3

6.2

7.6

6.9

(Percent of GDP)

12.8

10.2

7.6

5.4

6.0

5.3

Exports, f.o.b.

52.9

56.8

67.9

63.2

66.8

76.3

Imports, c.i.f.

40.6

47.5

62.4

60.7

63.4

73.2

Services account, net

1.6

2.8

3.3

3.1

3.6

3.1

Capital account balance 4/

-13.2

-8.2

-10.8

-3.6

-2.1

-8.5

Overall balance

1.1

4.3

-1.4

2.6

5.6

-1.6

Gross official reserves (end year)

29.5

34.8

32.7

33.0

38.9

36.9

(Percent of maturing external debt)

77.6

122.7

119.1

127.0

150.8

177.8

External debt (billions of US$)

105.1

95.1

79.7

67.5

59.5

49.4

(Percent of GDP)

93.9

77.6

65.0

58.5

47.0

37.8

Public sector

31.6

36.2

33.9

28.3

23.3

17.9

Private sector

73.5

58.8

45.8

39.2

36.2

31.6

Debt service ratio 5/

21.8

19.8

15.8

21.1

19.8

15.5


Sources: Information provided by the Thai authorities; and IMF staff estimates. Historical data may not be identical to that on the BOT website due to different rounding conventions.

1/ On a cash and fiscal year basis. The fiscal year runs from October to September such that, for example, the column for 2002 refers to October 2001 through September 2002.

2/ Includes budgetary central government, extrabudgetary funds, and local governments.

3/ Includes data from 56 closed finance companies.

4/ Includes errors and omissions and excludes net use of Fund resources.

5/ Percent of exports of goods and services.


1 Under 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.




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