Press Release No. 15/166

Press Release: IMF Executive Board Completes 2015 Article IV Consultation with Thailand

April 9, 2015

On March 30, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Thailand.

After a sharp contraction in the first quarter of 2014, Thailand’s economy experienced a modest recovery in subsequent quarters, to expand by 0.7 percent in the year as a whole. Inflation decelerated toward the end of 2014 and became negative in January 2015 due to a sharp decline in oil prices. Core inflation has remained stable at near 1.7 percent in the past six months. The exchange rate stayed broadly stable against the U.S. dollar over the course of 2014 but appreciated noticeably in nominal and real effective terms. Lower oil prices and an import contraction triggered by weak domestic demand boosted the current account to 3.8 percent of GDP in 2014 from a -0.6 percent deficit the previous year.

The recovery is expected to continue in 2015 with growth projected at 3.7 percent on account of some rebound in consumption, including from lower fuel prices, and in private investment as backlogs of project approvals have been largely cleared by various government agencies. Accommodative monetary policy will also support the recovery. Nonetheless, private investment is being hampered by low capacity utilization, weak external demand, and concerns over political uncertainty. Private consumption is also weakened by high household debt and tighter credit conditions. The expansion of public investment has proven more difficult than expected. At the same time, global demand for Thailand’s exports is weak. Still, the current account surplus is projected to increase further this year as oil prices are expected to be considerably lower on average than in 2014. Headline inflation is projected to remain subdued in 2015 and recover somewhat toward the end of the year.

Risks to the outlook are tilted somewhat to the downside. Domestic risks to the economy come from possible policy slippages, weaker-than-expected private demand, and political uncertainty. External risks include a surge in global financial volatility and protracted slow growth in advanced and emerging economies. On the upside, consumption, investment and exports may experience a stronger boost from sharply lower oil prices.

The authorities intend to pursue a wide range of reforms to support the economy. They are already implementing a fuel price reform; have replaced the rice pledging scheme with transfers to small-scale farmers; endorsed a large public infrastructure investment program; started a review of state-owned enterprises; and made a decision to extend the Bank of Thailand’s oversight to the state-owned Specialized Financial Institutions. In addition, five special economic zones have been established in border regions and the Board of Investment has announced a new investment promotion strategy aimed at enhancing Thailand’s competitiveness.

Executive Board Assessment²

Executive Directors were encouraged by the rebound of the Thai economy after recent adverse shocks, and noted that the resilience of the economy has been underpinned by solid economic fundamentals and prudent macroeconomic management. Directors agreed, however, that the output gap will be closed only gradually and downside risks weigh on the near-term outlook. Continued fiscal and monetary support will thus be needed for the period ahead, while further structural reforms and infrastructure investment remain key to strong and inclusive growth over the longer term.

Directors concurred that stimulating the economy while introducing a multi-year policy framework to safeguard the sustainability of public finances are appropriate fiscal objectives at this time. In this context, they also welcomed the ongoing reforms to generalized subsidy programs, including the rice pledging scheme and energy pricing, and their replacement with targeted and means-tested support to vulnerable groups. Directors welcomed the authorities’ plan to prepare a new fiscal responsibility law which will require the formulation of a medium-term fiscal framework, as well as their plan to carry out a strategic review of all state-owned enterprises and to formulate a multi-year public investment plan for large infrastructure projects.

Directors viewed the current monetary stance as warranted. They noted that further monetary easing could be considered if the expected recovery is delayed, with due regard for the impact of lower interest rates on financial stability. Directors welcomed the transition to a headline inflation target in the authorities’ policy framework. In this context, they considered that inflation expectations remain well anchored and recent price developments do not suggest the risk of entrenched deflation.

Directors noted that volatile capital inflows have presented challenges to macroeconomic management, and may continue to do so, in view of uncertainties in global financial markets. Directors agreed that Thailand’s strong policy buffers, including ample reserves and a flexible exchange rate regime, have served the country well and have provided the tools to address potential market turbulence.

Directors welcomed the progress made in strengthening financial stability. The authorities’ decision to extend the prudential oversight of the Bank of Thailand to specialized financial institutions represents an additional step in the right direction. Directors noted the importance of continued efforts in this area, including strengthening the supervision of nonbank financial institutions such as credit cooperatives.