IMF Executive Board Concludes 2008 Article IV Consultation with Thailand

Public Information Notice (PIN) No. 08/70
June 18, 2008

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 May 21, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Thailand.1


Thailand's economy grew at 4¾ percent in 2007, notwithstanding a number of factors which affected public sentiment, namely political uncertainties, the imposition of capital controls in December 2006 (removed in March 2008), and proposed amendments to the Foreign Business Act. Nevertheless, as in 2006, net exports provided the main support for growth while domestic demand remained weak.

Headline inflation was on a downward path since peaking in mid-2006, but picked up in 2007 Q4 on the back of escalating energy prices, reaching 5¼ percent in March 2008 on year-on-year basis. Core inflation followed a similar trajectory, falling substantially for the year as a whole, picking up to 1¾ percent in March 2008, but remained within the Bank of Thailand's (BOT) 0-3½ percent target band. For 2007 as a whole, average inflation moderated significantly from 4½ percent in 2006 to 2¼ percent, reflecting weak domestic demand and an exchange rate appreciation.

Following an appreciation of about 14 percent against the U.S. dollar in 2006, the baht appreciated by a more moderate 6.4 percent in 2007, in line with regional currencies. The current account registered a surplus of over 6 percent of GDP, and reserves increased to US$87½ billion by end-2007 (6½ months of imports of goods and services).

Macroeconomic policies supported the recovery, and prospects of an improvement in the political climate boosted private investment in the latter part of 2007. The Bank of Thailand (BOT) cut its policy interest rate by a cumulative 175 basis points between January and July, providing a stimulus to domestic demand. Fiscal policy also eased in FY2007, with the central government cash budget posting a deficit of 1¼ percent of GDP. The general government surplus fell to ¼ percent of GDP (from about 1 percent of GDP in FY2006), and the overall public sector was close to balance (a surplus of less than ½ percent in FY2006).

Commercial banking system soundness indicators improved in 2007, reflecting ongoing progress in the financial sector since the 1997 crisis. Banks' balance sheets were strengthened through seven consecutive years of profit, strengthened risk management in line with international standards such as Basel and International Accounting Standards 39 (IAS39), decline in non-performing loans (NPLs), and successful initiatives by several banks to raise new capital. However, performance across banks varied somewhat, as NPLs of state-owned banks increased. Corporate profitability remained strong on the back of robust exports, and corporations deleveraged relying on internal earnings for financing.

Thailand's economic fundamentals remain favorable. Over the medium term, the growth rate should return to its potential of about 6 percent. This is premised on the assumption of a continued macroeconomic stability and higher productivity dividends from investments in infrastructure.

Executive Board Assessment

Executive Directors welcomed the resilience of the Thai economy against the background of domestic political uncertainties and the turmoil in global financial markets. The current account position is moving toward balance although still in surplus, and international reserves have increased. Inflation, however, has been rising more recently. Directors noted that domestic demand is becoming the main engine of growth in 2008, as contributions from net exports slow down due to weakening demand in some of Thailand's trading partners and increasing imports in response to the pickup of domestic demand.

Directors emphasized that boosting market confidence will remain key in the near term to sustain the nascent economic recovery. They welcomed the removal of capital controls, providing a clear signal of the authorities' intention to support market-friendly policies. In the same spirit, Directors supported the authorities' decision not to move ahead with proposed amendments to the Foreign Business Act that would limit foreign ownership in certain service sectors.

Directors considered that the planned additional expenditure measures and the tax stimulus package for 2008 could help maintain the growth momentum and preserve external stability. Early implementation of infrastructure megaprojects—which Thailand's fiscal position can well accommodate—would support demand in the near term, relieve infrastructure bottlenecks, raise total factor productivity, and sustain faster growth over the medium term. Directors welcomed the recently adopted tax measures, which will provide further support to private demand. Directors emphasized the importance of protecting medium-term fiscal sustainability notwithstanding the short-term loosening of the fiscal stance.

Directors agreed that keeping the policy interest rate on hold remains appropriate. The lagged effects of the rate cuts made in 2007, improvements in consumer and investor sentiment, and the supportive fiscal policy stance should provide an adequate boost to activity for now. Directors recommended that the BOT monitor the monetary policy stance on an ongoing basis and stand ready to adjust it, as needed, in response to the domestic inflation outlook and evolving domestic demand conditions. Directors agreed that maintaining the credibility of the inflation-targeting framework should remain a high priority.

Directors noted that Thailand's managed float exchange rate system has served the country well. The increased use of exchange rate hedging by exporters to manage their foreign currency exposure will help to smooth a transition to greater exchange rate flexibility. Exchange market intervention should be limited to smoothing excessive exchange rate volatility. Prudent management of foreign exchange inflows, continued steps to liberalize outflows, and expanding the range of financial market instruments should help absorb further appreciation pressures and reduce exchange rate volatility. Directors noted that Thailand's external competitiveness remains intact owing to productivity gains and successful efforts to diversify Thailand's export markets, as well as diversification of currencies of denomination and payment for exports.

Directors commended the authorities for the significant strides made to strengthen the financial and corporate sectors. They welcomed the completion of the Financial Sector Stability Assessment (FSSA), and called on the authorities to build on the progress already achieved by implementing rapidly the FSSA's recommendations. The strong profitability and sound balance sheets of private banks and corporates have limited their vulnerability to the ongoing turmoil in global financial markets. Directors praised the progress made in upgrading the regulatory and supervisory frameworks, and welcomed the recent passage of key financial sector legislation, including that granting operational independence to the BOT. The financial sector would be further strengthened by addressing the remaining nonperforming loans from the Asian financial crisis and implementing tighter supervision of the state-owned specialized financial institutions. Scaling back government ownership in financial institutions remains an appropriate longer-term goal.

Thailand: Selected Economic Indicators, 2003-08
          Est. Proj.  
  2003 2004 2005 2006 2007 2008

Real GDP growth (percent)

7.1 6.3 4.5 5.1 4.8 5.3


5.9 6.2 5.3 3.0 2.7 4.8

Gross fixed investment

12.1 13.2 10.6 3.8 1.4 10.8



Headline CPI (period average, percent)

1.8 2.7 4.5 4.7 2.3 3.5

Fiscal accounts (percent of GDP) 1/


Central government balance

0.6 0.3 0.2 0.1 -1.2 -1.7

Revenue and grants

16.7 17.8 17.7 17.5 17.4 17.1

Expenditure and net lending

16.2 17.5 17.6 17.7 18.5 18.8

General government balance 2/

1.7 1.4 0.3 0.9 0.3 -0.3

Public sector balance 3/

2.5 2.1 -1.0 0.3 -0.2 -1.0

Public sector debt

50.6 49.3 47.3 40.3 37.5 38.2

Monetary accounts (end-period, percent) 4/


M2 growth

5.3 6.1 5.8 5.8 1.2 ...

Balance of payments (billions of U.S. dollars)


Current account balance

4.8 2.8 -7.6 2.2 14.9 9.2

(Percent of GDP)

3.3 1.7 -4.3 1.0 6.1 3.4

Exports, f.o.b.

78.1 94.9 109.4 127.9 151.1 171.1

Growth rate (in dollar terms)

18.2 21.6 15.2 17.0 18.1 13.2

Imports, c.i.f.

74.3 93.5 117.6 126.9 139.2 164.6

Growth rate (in dollar terms)

17.4 25.7 25.8 7.9 9.6 18.2

Capital and financial account balance 5/

-4.6 3.0 13.1 10.6 2.2 5.1

Overall balance

0.1 5.7 5.4 12.7 17.1 14.3

Gross official reserves (end-year)

42.1 49.8 52.1 67.0 87.5 101.9

(Months of following year's imports)

5.4 5.1 5.0 5.8 6.4 6.7

External debt


(In percent of GDP) 6/

40.3 35.7 32.5 32.8 29.4 27.7

(In billions of U.S. dollars)

51.8 51.3 52.0 59.6 61.7 75.5

Public sector

17.0 14.9 14.0 14.1 12.0 12.5

Private sector

34.8 36.4 38.0 45.6 49.7 63.0

Debt-service ratio 7/

16.0 8.5 10.8 11.3 11.0 9.0

Sources: Data provided by the Thai authorities; and Fund 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/ Figures for 2005 are percentage changes, December 2005 over December 2004.

5/ Includes errors and omissions.

6/ Using three-year average GDP.

7/ Percent of exports of goods and services (exports earning)

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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