IMF Executive Board Concludes 2006 Article IV Consultation with Thailand

Public Information Notice (PIN) No. 07/39
March 23, 2007

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 February 26, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Thailand.1


Thailand's economy, despite a series of negative shocks, grew at around 5 percent in 2006. An unstable political environment and increases in energy prices weighed negatively on domestic demand. Nevertheless, strong exports have supported growth. The robust growth in exports reflects strong demand for Thailand's agricultural products, electronics, and other manufactured goods.

Inflation has been declining steadily from its peak in May 2006. Headline inflation has since moderated to 3.5 percent (year-on-year), in line with the recent fall in oil prices. Core inflation has now fallen to 1.5 percent, well within the 0-3.5 percent target band of the Bank of Thailand.

The baht has appreciated by about 14 percent vis-à-vis the U.S. dollar since end-2005, driven by the continuing strength of capital inflows and by the current account recovery. By end-2006, international reserves had climbed to US$67 billion or 221 percent of short-term debt (an increase of about US$15 billion since end-2005), while external debt fell further to 27.5 percent of GDP.

The financial sector has proven resilient despite swings in oil prices, higher interest rates, and stronger competition. At the same time, financial markets have been volatile reflecting political events and changes in policies.

Thailand's economic fundamentals remain good. In the short term, supporting domestic demand and rebuilding investor confidence are the main economic policy challenges. Meeting these challenges would entail supportive macroeconomic policies and addressing investor concerns regarding Thailand's openness to foreign investment. Over the medium term, the growth rate should return to its potential rate of about 6 percent if there is continued macroeconomic stability, progress on political normalization, and a return of investor confidence.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. Directors commended the resilience of Thailand's economy in the face of significant negative shocks over the past year. They noted that robust export growth has supported economic activity, prudent fiscal and monetary policies have contained inflation and raised foreign reserves, and the financial sector has withstood the increased financial market volatility stemming from political events and policy changes. Directors regarded Thailand's economy as fundamentally strong.

Directors concurred that Thailand's main policy challenge is to raise economic growth while maintaining macroeconomic stability. To accomplish this, the authorities need to boost domestic demand, increase the level and quality of public investment, and strengthen investor confidence. Most Directors considered that the current environment of low inflation and a sound fiscal position warrants an easing of the stance of monetary and fiscal policies. They also emphasized the importance of political normalization in restoring business confidence and raising investment from its current level.

Against this background, most Directors commended the recent decision to cut interest rates, and the mild fiscal stimulus built into the government's budget for fiscal year 2007. They believed there is scope for further cuts in interest rates to boost domestic demand. Likewise, they suggested that a more expansionary fiscal stance in the broader public sector may be appropriate, given that a significant increase in public investment can be accommodated without undermining fiscal sustainability.

Directors welcomed the central bank's commitment to a market-determined exchange rate, even in the face of surging capital inflows and a strong appreciation of the currency, noting that such a policy will help the economy to better absorb balance of payments shocks. They did not consider the economy to be uncompetitive, since exports have performed well.

Directors acknowledged the difficult policy choices that confronted the authorities in the run-up to the decision to use administrative measures to contain the recent surge in capital inflows. A number of Directors believed that conventional tools—such as foreign exchange intervention, interest rate cuts, and liberalization of capital outflows—had failed to curb the inflows, while some felt that those tools could have been more vigorously applied. Many Directors considered that capital controls could be a short-term device to contain excessive exchange rate volatility and its attendant destabilizing effects. However, Directors stressed that in the long run such controls are costly because they adversely affect investor confidence and capital market development. They also emphasized that the authorities' strategy and objectives in imposing such controls should be clearly explained to investors to minimize adverse effects on confidence. In any event, Directors welcomed the recent relaxation of the controls and the authorities' commitment to completely remove them as inflows normalize.

Directors commended the progress in strengthening the banking sector, reflected in strong earnings, improved asset quality, and recapitalization efforts. They encouraged expedited resolution of remaining nonperforming loans, and measures to enhance risk management in financial institutions. Directors also encouraged speedy enactment of planned legislation to strengthen the central bank, other financial institutions, and the deposit insurance scheme, and looked forward to the results of the ongoing Financial Sector Assessment Program.

Directors welcomed the authorities' clarification that the proposed changes to Thailand's foreign investment framework are intended to remove legal ambiguities, not to increase restrictions on foreign investment, and suggested that the authorities might explain this clearly to investors to improve their confidence. More broadly, Directors endorsed efforts to develop the capital market, strengthen state-owned enterprises, further liberalize trade, and improve the business climate. In this regard, they supported, inter alia, liberalization of the securities industry, introduction of a mandatory pension scheme, and corporatization of state-owned enterprises.

Thailand: Selected Economic Indicators, 2002-07

  2002 2003 2004 2005 2006 2007


Real GDP growth (percent)

5.3 7.1 6.3 4.5 5.0 4.5


4.8 5.9 6.1 5.5 3.7 4.0



Headline CPI (period average, percent)

0.6 1.8 2.8 4.5 4.6 2.5

Core CPI (period average, percent)

0.4 0.1 0.4 1.6 2.3 2.0

Fiscal accounts (percent of GDP) 1/


Central government cash balance

-2.2 0.6 0.3 0.2 0.1 -0.6

Revenue and grants

15.9 16.7 17.6 17.7 17.3 17.2

Expenditure and net lending

18.2 16.2 17.3 17.6 17.7 18.0

General government balance 2/

-2.5 1.4 0.8 0.5 1.7 0.9

Public sector balance 3/

-1.7 2.2 1.7 0.1 1.6 0.8

Public sector debt

55.1 50.7 49.5 47.4 42.3 39.2

Monetary accounts (end-period, percent)


M2A growth

-0.1 5.1 6.3 5.3 ... ...

Current account balance

4.7 4.8 2.8 -7.9 0.0 -0.5

(Percent of GDP)

3.7 3.3 1.7 -4.5 0.0 -0.2

Exports, f.o.b.

66.1 78.1 94.9 109.2 127.0 138.3

Imports, c.i.f.

63.4 74.3 93.5 117.7 128.8 140.6

Capital and financial account balance 4/

-1.8 -5.0 3.0 13.3 15.0 4.7

Overall balance

2.9 -0.3 5.7 5.4 14.9 4.2

Gross official reserves (end-year)

38.9 42.1 49.8 52.1 67.0 71.2

(Percent of maturing external debt)

153.6 220.9 201.2 173.9 221.1 215.5

External debt


(In percent of GDP)

46.9 36.2 31.7 29.5 27.5 25.8

(In billions of U.S. dollars)

59.5 51.8 51.3 52.0 56.9 57.2

Public sector

23.3 17.0 14.9 13.5 11.3 10.6

Private sector

36.2 34.8 36.4 38.5 45.6 46.6

Debt-service ratio 5/

20.0 16.3 8.7 10.9 10.9 10.7

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

1/ On a cash and fiscal year basis. The fiscal year ends on September 30.

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

3/ Includes general government and nonfinancial public enterprises

4/ Includes IMF financing package, and errors and omissions.

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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