IMF Executive Board Concludes 2009 Article IV Consultation with ThailandPublic Information Notice (PIN) No. 09/73
June 5, 2009
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 18, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Thailand.1
Thailand has been in an investment slump since 2006. Political turmoil has led to reduced business confidence and slow private investment growth. The main engine of growth for the economy has been the export sector.
However, since the fourth quarter of 2008, exports have contracted dramatically due to the global recession, thereby removing the only prop of growth. Exports fell by about 18½ percent in Q4 on a quarter-on-quarter seasonally adjusted basis. Manufacturing output contracted by 11 percent, thus bringing the level of manufacturing output to its lowest level since late 2005. GDP fell by about 6 percent, thereby wiping out much of the good growth performance of the first three quarters, and leaving growth for the year at 2½ percent. Indices of economic activity and business and consumer confidence remain depressed in 2009.
After rising on the back of oil and commodity prices in the first half of 2008, inflation has plunged sharply. Headline inflation (period average) was 5½ percent in 2008, while core inflation was 2½ percent, both representing substantial increases from the previous year. But since July, inflation has fallen in line with oil prices, with headline inflation in negative territory for the first three months of 2009. The abatement of price pressures has allowed the Bank of Thailand (BOT) to use monetary policy to aggressively support demand. Since December 2008, the policy rate has been reduced by a cumulative 250 basis points, and now stands at 1¼ percent.
The authorities have focused on fiscal measures to stimulate the economy since the second half of 2008. The 2008/09 (October-September) budget—passed under the old government last year—incorporated a mix of expenditure and tax measures to widen the small fiscal deficit. With the subsequent rapid deterioration of demand conditions, the new government is implementing a supplementary budget incorporating B 100 billion (1 percent of GDP) of additional spending, including fast-disbursing direct income transfers, subsidies for transport and utility services, and higher pensions. Overall, the central government is expected to shift from a deficit of ½ percent of GDP in 2007/08 to a deficit of 4½ percent in 2008/09, delivering a cyclically-adjusted fiscal stimulus of about 2½ percent.
The 2008 current account was close to balance, with the strong export and import performance of the earlier part of the year both being reversed in Q4. Meanwhile, with banks reducing their overseas exposure—switching from foreign assets to domestic lending and exporters’ increased hedging against exchange rate risk—the capital account registered a surplus despite slowing foreign direct investment (FDI) and negative portfolio inflows. International reserves rose to a healthy US$111 billion—equivalent to 9 months of imports—by end-2008. The baht appreciated against the U.S. dollar in the first quarter of 2008, when capital controls were removed, but has subsequently fallen in line with regional currencies.
The Thai banking and corporate sectors entered the global crisis in relatively robust health. Thai banks are well capitalized, non-performing loans (NPLs) have been falling for several years from the high levels reached during the Asian crisis, and direct exposure to the U.S. mortgage market and structured products is low. The corporate sector has seen falling leverage and high profitability in the last few years. Nonetheless, the financial crisis will likely result in stresses to both sectors. Banks would see a rise in NPLs, while corporates—especially small and medium-sized enterprises—may see a tightening of credit conditions in addition to falling demand. The government has responded with a scheme to guarantee loans to small- and medium-sized enterprises (SMEs), with risks shared between the banks and the government.
The output contraction in 2009 could be limited to about 3 percent provided that political stability is maintained and the authorities’ fiscal stimulus speedily and efficiently implemented. Over the medium term, growth is expected to recover as the global economy turns around and public infrastructure spending crowds-in private investment.
Executive Board Assessment
Executive Directors observed that Thailand’s economic growth had slowed sharply last year, on account of the unsettled political situation and the spillovers from the global recession. With a sharp fall in exports and continued sluggish domestic demand, real GDP is projected to contract in 2009—the first time since the Asian crisis—and the near-term outlook is subject to considerable downside risks. Nevertheless, economic fundamentals remain strong, underpinned by a track record of prudent macroeconomic policies and robust financial institutions. Bringing the economy back on a sustained high growth path will, however, require decisive implementation of the policy measures to support domestic demand, and a swift restoration of investor and consumer confidence through a normalization of the political situation.
Directors welcomed the authorities’ fiscal stimulus plans, and underscored that timely and efficient implementation of these plans is critical at the current juncture. They considered it important that the budgeted transfers and subsidies target the most needed and vulnerable groups, and that automatic stabilizers be allowed to operate fully. An early start of the three year public investment program to support demand beyond 2009 would help kick-start public infrastructure projects that are vital to medium-term growth.
Directors considered that, given the available fiscal space, the increases in deficits and public debt are appropriate from a countercyclical perspective and would decline over the medium term as growth picks up. They supported the authorities’ intention to temporarily raise the mandatory ceilings on government borrowings in order to finance the deficits under current circumstances, noting that the temporary nature of the fiscal stimulus measures is an indication of the authorities’ continued fiscal discipline.
Directors welcomed recent aggressive cuts in the policy interest rate. While there remains room for a further easing of monetary policy, Directors noted the already ample liquidity in the banking system and the currently impaired credit transmission mechanism. Accordingly, Directors supported the authorities’ intention to assess the economic conditions and the effectiveness of recent rate reductions before deciding on further action. The time bound plans to guarantee credit for small- and medium-sized enterprises and exporters should help encourage banks to extend new loans to the sectors hardest hit by banks’ elevated risk aversion, enabling them to continue to support employment and domestic demand.
Directors noted that the banking sector remains resilient, with limited exposure to subprime-related and structured products. The strong initial positions of banks and strengthened supervision by the Bank of Thailand have helped the sector weather the global financial turmoil. Nevertheless, the slowing economy and a likely deterioration in banks’ asset quality call for continued close supervision, particularly of state-owned specialized financial institutions. Directors encouraged the authorities to take further steps to implement the Financial Sector Assessment Program (FSAP) recommendations fully.
Directors welcomed the Bank of Thailand’s continued commitment to a flexible exchange rate system. They noted the staff’s assessment that the real effective exchange rate broadly reflects fundamentals.