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Thailand and the IMF
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On September 1, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Thailand.1
Thailand's economy performed well in 2003 with strong growth and low inflation. Despite some negative effects from SARS early in the year, real GDP expanded by 6.8 percent with private investment making a significant contribution to growth. Notwithstanding the increase in growth, inflation pressures were absent, with core inflation close to zero (year-on-year) in 2003. The growth momentum is still present, but the economy slowed in the first quarter of 2004 as the avian flu and other factors led to a contraction of agricultural activity. Driven in part by higher oil prices, inflation has increased in 2004 with core inflation at 0.5 percent and headline inflation at 3 percent in June.
Monetary policy was accommodative in 2003. The Bank of Thailand (BOT) cut its policy rate by 50 basis points (to 1.25 percent) in June to counter deflation pressures and to support activity. In the fall of 2003, the BOT imposed selective capital controls to limit speculative inflows while relaxing controls on outflows. The authorities also took measures in 2003 to prevent financial imbalances due to exuberant asset markets—notably the stock market and some segments of the housing market—and increased consumer lending. The measures included tighter regulations on credit cards, real estate lending, and share trading.
The central government accounts recorded a small surplus in FY 2002/03. Strong revenue growth due to increased economic activity and improved tax administration led to a 3 percent improvement in the central government balance compared with the previous year. In FY 2003/04 a supplementary budget of around 2 percent of GDP was passed as the authorities revised revenue projections upward. The central government is expected to have a broadly balanced budget in FY 2003/04.
Thailand continued to improve its external position in 2003. Despite a SARS-related slowdown in tourism, the current account recorded a surplus of 5½ percent of GDP, with exports to China and ASEAN countries growing strongly. At end-June 2004, reserves were US$43 billion, equivalent to over 200 percent of end-2003 short-term debt, while external debt to GDP declined by 11 percentage points in 2003 to 36 percent. The baht appreciated by around 10 percent (year-on-year) against the dollar in 2003, but depreciated slightly in real effective terms. In the first half of 2004, the baht depreciated by around 3 percent against the U.S. dollar.
In the improved economic environment, corporates and banks have strengthened their balance sheets, but structural reforms are still needed. The average debt to equity ratio for nonfinancial companies fell to 1 in 2003. However, some large corporates remain overleveraged. Banks have improved profitability, reduced Non-Performing Loans, and expanded credit. NPLs at Thai private banks have gradually declined from 21 percent in June 2003 to 15 percent in June 2004, and credit growth has mostly come from state-owned banks. The Thai Asset Management Corporation continues to make progress in resolving NPLs under its control, but significant efforts are still needed to complete the restructuring process.
Executive Board Assessment
Executive Directors commended the authorities for implementing sound policies that have contributed to Thailand's continued strong economic performance notwithstanding adverse shocks to tourism and agriculture. Inflation remains low, the unemployment rate is trending downward, the fiscal position is in surplus, and financial market developments have been broadly favorable.
Directors agreed that the foundations for continued growth are likely to remain strong for the near term. Thailand's vulnerability to external shocks has been reduced by the flexible exchange rate regime, lower external debt, and a comfortable level of reserves. Directors emphasized, however, that there are downside risks, and prospects for sustained high growth would be strengthened by further structural and legal reforms. They encouraged the authorities to take advantage of the cyclical upswing for additional progress in these areas, and to shift the focus of monetary and fiscal policies to the task of securing a sustainable expansion with low inflation.
Directors shared the authorities' view that monetary policy needs to be proactive in adapting monetary conditions to emerging price pressures. They welcomed the recent decision of the Bank of Thailand to increase its policy rate to contain inflation risks, noting that a cautious forward-looking approach is warranted by uncertainties about the response of the economy to higher interest rates and the relatively untested inflation targeting framework.
Directors agreed that the authorities' recourse to targeted administrative measures to curb exuberant asset markets in certain sectors and fast-growing consumer borrowing has been appropriate. They encouraged the authorities to continue monitoring household and real estate debt developments to prevent a buildup of financial imbalances.
Directors supported the authorities' commitment to two-way exchange rate flexibility. They considered that the authorities' decision to intervene in the foreign exchange market and impose selective capital controls had helped contain exchange rate volatility in the presence of capital inflows of uncertain duration. At the same time, they observed that continued one-sided intervention could pose risks to the central bank's balance sheet and increase speculative pressure. Directors observed further that capital controls have drawbacks, and that their effectiveness is likely to diminish over time. Directors noted that continued sterilized intervention in a setting of rising inflation would complicate theimplementation of monetary policy, and stressed that greater exchange rate flexibility would allow monetary policy to be better attuned to domestic developments.
Directors considered the budget for the current fiscal year broadly appropriate and cautioned that fiscal stimulus should be avoided at this stage of the cycle. They welcomed the shift to a neutral fiscal stance for the upcoming fiscal year as justified from both a cyclical and a medium-term perspective.
Directors commended the authorities for their prudent fiscal framework and stressed that medium-term fiscal adjustment remains a priority. Running modest budgetary surpluses over the cycle would improve debt dynamics and build a fiscal cushion against future contingencies. Directors cautioned that securing a sound fiscal position will require careful costing and sequencing of initiatives now under consideration. In particular, the authorities' plans to upgrade Thailand's infrastructure need to be implemented in a way that does not undermine macroeconomic stability and debt sustainability, and fiscal decentralization needs to be executed with a clear view to its budgetary impact and an improvement in the quality of public services.
Directors noted the importance for budgetary accountability of strengthening transparency in the financing of policy initiatives, including those funded through state-owned financial institutions, and in the context of quasi-fiscal activities. In this connection, Directors welcomed the authorities' initiatives to improve the system by introducing the public service account system, which will facilitate an assessment of the policy-related activities of specialized financial institutions, and encouraged the authorities to press ahead with further transparency initiatives.
Directors agreed that further progress in corporate and banking sector restructuring is necessary for strong growth based on a durable pickup in investment. In this regard, they encouraged the current effort to accelerate amendment of the legislative framework for a market-based transfer of nonperforming loans from private banks to the Asset Management Corporation. Most Directors also noted that, although the Thailand Asset Management Corporation appears to be making good progress in resolving the impaired assets it acquired, its effectiveness could be better assessed if there was greater disclosure, including of cash recovery targets and progress toward their achievement.
Directors urged the authorities to ensure that the state-owned commercial banks operate on commercial principles rather than as vehicles for policy-related lending. Most Directors expressed concern about the recent sharp increases in NPLs on private lending at the largest state-owned bank and generally welcomed the authorities' reassurances that clear measures were being undertaken to contain them. They emphasized that strong supervisory oversight of all state-owned financial institutions is warranted. More broadly, Directors recommended that regulators should address the risks stemming from new financial products and enhance supervision of non-bank and specialized financial institutions.
Directors welcomed the authorities' intention to undertake in due time a Financial Sector Assessment Program. In their view, early participation in other transparency initiatives such as the data and fiscal Reports on Standards and Codes (ROSCs) should also be considered.
Directors encouraged the authorities to press forward with legal reforms to improve public and corporate governance. They commended the authorities for their commitment to undertake an assessment of corporate governance in the context of the ROSC initiative, which will identify areas for action. Directors also advised the authorities to press ahead with reform of the bankruptcy framework and to enact other important economic laws. They welcomed the intention to reinvigorate the privatization process, and urged the authorities to accelerate regulatory reforms to support privatization.
Directors welcomed recent progress in trade liberalization, but observed that Thailand's tariff system could be further streamlined, including by replacing specific duties with more transparent ad valorem rates. Directors noted that the bilateral and regional free trade agreements (FTAs) under consideration by the authorities could help improve the domestic business climate and expand market access. They encouraged the authorities to ensure that Thailand's FTAs are consistent with the broader goal of multilateral trade liberalization.
Directors commended the authorities for the considerable progress made in reducing poverty in Thailand.
IMF EXTERNAL RELATIONS DEPARTMENT