## cr17136

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### Current Account Surplus — context and 2016 developments
- Thailand maintained macroeconomic stability supported by a flexible exchange rate, high international reserves, and relatively low public debt.
- Structural constraints: rapid population aging, widespread informality, overdue structural transformation, drag on potential output and weak domestic demand expectations.
- Poverty progress: extreme poverty virtually eradicated by 2013.
- 2016 key figures and drivers:
  - Real GDP growth: 3.2 percent in 2016 (driven mainly by exports of services and public investment).
  - Current account surplus: 11.4 percent of GDP in 2016.
  - Contribution to CA increase since 2015: low oil prices and rising tourism income accounted for about 2 percent of GDP (or two-thirds) of the increase.
  - Capital and financial account: deficit of 6.1 percent of GDP (reflecting Thai corporates' investment overseas; FDI inflows slowed).
  - Gross international reserves: increased by US$29.4 billion (including US$14 billion in the net forward position) to US$197.6 billion in December 2016.
  - Reserves adequacy: 211 percent of the ARA metric unadjusted for capital controls.

### Outlook and staff baseline projections (selected series, 2013–22)
- Baseline assumptions: constant monetary policy rate; fiscal stimulus of the nonfinancial public sector of cumulative 1 percent of GDP over 2017–2019.
- Real GDP growth (y/y percent change): 2013: 2.7; 2014: 0.9; 2015: 2.9; 2016: 3.2; 2017: 3.2; 2018: 3.3; 2019: 3.2; 2020: 3.1; 2021: 3.0; 2022: 3.0.
- Output gap (percent of potential output): 2013: 1.5; 2014: -0.7; 2015: -0.8; 2016: -0.7; 2017: -0.5; 2018: -0.2; 2019: 0.0; 2020: 0.0; 2021: 0.0; 2022: 0.0.
- Headline CPI inflation (period average, y/y percent change): 2013: 2.2; 2014: 1.9; 2015: -0.9; 2016: 0.2; 2017: 1.0; 2018: 1.2; 2019: 1.6; 2020: 2.0; 2021: 2.3; 2022: 2.5.
- Current account balance (percent of GDP): 2013: -1.2; 2014: 3.7; 2015: 8.1; 2016: 11.4; 2017: 9.6; 2018: 7.7; 2019: 6.1; 2020: 4.8; 2021: 3.5; 2022: 2.7.
- Credit to the private sector by depository corporations (end of period, y/y percent change): 2013: 9.6; 2014: 5.1; 2015: 4.9; 2016: 4.8; 2017: 5.3; 2018: 5.0; 2019: 5.0; 2020: 4.8; 2021: 4.7; 2022: 4.4.
- Outlook narrative:
  - Growth projected at 3.2 percent in 2017; convergence to about 3.0 percent over the medium term.
  - Output gap closes gradually; inflation at the low end of the tolerance band in 2017–18 and below mid-point target for several years.
  - Credit projected to grow in line with nominal GDP.

### Risks to the outlook
- External downside risks:
  - Bumpy rebalancing in China hurting exports.
  - U.S. policy mix shift (more expansionary fiscal and tighter monetary policy) generating capital outflows and higher financing costs.
  - Trade protectionism affecting open economies like Thailand.
- Domestic risks:
  - Delay in calling elections denting private confidence and investment.
  - Weaker crowding-in of private investment reducing domestic demand and potential growth.
  - Low inflation becoming entrenched.
  - Household debt overhang creating stronger-than-expected headwinds to consumption and growth.

### IMF staff strategy and policy recommendations (summary)
- Monetary policy:
  - Ease monetary policy to support domestic demand and steer inflation toward the target, while using macroprudential policies to address systemic risks.
  - Enhanced communication of strong determination to meet the inflation target, including forward guidance if needed.
- Fiscal policy:
  - Use fiscal space with a long-term view: upgrade infrastructure, strengthen social safety nets, and facilitate structural reforms; cumulative primary relaxation of 1 percent of GDP over 2017–19 consistent with broadly stable debt-to-GDP in the medium term.
  - Prioritize macro-critical infrastructure projects over untargeted short-term measures.
- Structural reforms:
  - Lift inclusive potential growth and reduce excessive precautionary savings via social safety net improvements and demographic-related reforms.
  - Reduce barriers to investment in services, improve public investment efficiency, and reform SOEs.
- External rebalancing:
  - Mutually reinforcing fiscal and monetary stimulus, coupled with structural reforms, to support domestic demand and external rebalancing and enable REER appreciation through growth-driven processes.

### External Balance Assessment (EBA) and staff-adjusted estimates (2016)
- Actual current account (CA): 11.4 (percent of GDP).
- EBA CA norm: 1.1 (percent of GDP).
- EBA CA gap: 10.0 (percent of GDP).
- Staff-adjusted CA gap range after cyclical and transitory adjustments: [3.0, 7.0] (percent of GDP).
- Staff adjustments (ranges, percent of GDP): Terms of trade: [1.0, 1.5]; Tourism: [1.0, 1.5]; Political uncertainty: [1.0, 4.0].
- Decomposition (2016): Cyclical adjustment 0.3; Cyclically adjusted CA 11.1; Policy gap 2.3; Unexplained residual 7.6.
- Staff view: 2016 external position substantially stronger than warranted, with CA gap of 3 to 7 percent of GDP and a REER gap of -11 to -5 percent.

### Authorities’ perspective on external position and policy
- Authorities agree the surplus should decline through growth-driven processes and emphasize terms of trade and tourism boom, low private investment, and consumption in explaining the surplus.
- Caution that the EBA regression has a large unexplained residual and may not capture Thailand-specific factors (high oil intensity, net oil imports, surge in tourism, global spillovers).
- Exchange rate policy aimed to avoid abrupt movements and safeguard financial market stability.

---

### Monetary policy effectiveness, communication, and exchange-rate advice (Chapter 16)
- Transmission concerns:
  - Credit channel transmission weak; expectations channel weakened in recent years.
  - Headline inflation vulnerable to negative oil price shocks.
- Policy communication recommendation:
  - Enhanced communication of strong determination to meet the inflation target, including forward guidance if needed, to reinforce policy easing effectiveness.
- Exchange rate policy:
  - Allow exchange rate to adjust flexibly; limit FX intervention to avoiding disorderly market conditions.
  - Rationale: large external buffers, low share of public debt held by nonresidents, declining external financing requirements, and low FX debt provide resilience and monetary autonomy.
- Staff recommendation:
  - Monetary easing as part of a broader expansionary mix with macroprudential measures to contain systemic risks.
  - Rationale: reduce risk of entrenched low inflation, prevent further rise in real interest rates and real debt burden, and counteract sharp steepening of the yield curve (especially 1–3 year segment).

### Authorities’ stance on monetary policy
- Authorities view policy rate of 1.5 percent as appropriately accommodative and complementary to fiscal stimulus.
- Concern about time inconsistency of further easing given dissipation of global disinflationary shock and rising global reflationary forces.
- Preference to preserve policy space for adverse shocks; stand ready to ease if recovery disappoints or shocks materialize.
- Exchange rate: allow flexibility with smoothing of large capital flow impacts; intervention only to avoid excessive volatility.

---

### Financial stability assessment and macroprudential recommendations
- Current assessment:
  - Financial stability risks contained; short-term risks broadly receded in 2016.
  - Declining vulnerabilities: subdued credit growth and strong commercial banks’ balance sheets.
  - SFIs sound but with lower profitability and higher NPLs than commercial banks.
  - Pockets of risk increasing in shadow banking driven by regulatory arbitrage.
- Key financial soundness indicators (selected, latest based on 2016:Q3):
  - Credit-to-GDP change (pp, annual): 3.9; 3.5; -1.4; -1.8; -2.2.
  - Growth of credit / GDP (%, annual): 2.7; 3.0; 2.4; -0.9; -1.2.
  - Deposit-to-loan ratio (commercial banks): 104.0; 102.5; 105.0; 103.3; 102.7.
  - Leverage ratio (commercial banks, %): 11.7; 12.3; 12.2; 12.4; 13.1.
  - ROA (commercial banks): 1.7; 1.4; 1.5; 1.4; 1.4.
  - ROE (commercial banks): 14.7; 11.1; 11.4; 11.0; 11.0.
  - NPL ratio (commercial banks): 2.3; 2.7; 2.8; 2.9; 3.1.
  - NPL ratio (Depository SFIs): 4.2; 3.9; 3.8; 4.0; 4.7.
- Macroprudential and regulatory recommendations:
  - Use targeted macroprudential policies to address risks from policy rate cuts.
  - Harmonize prudential frameworks across institution types to prevent regulatory arbitrage; expand regulatory perimeter and pursue integrated supervision of conglomerates and liquidity risk.
  - Target measures at highly leveraged households and tail risks of deleveraging cycles.
  - For housing markets, apply targeted, time-varying macroprudential tools (tighten credit standards and risk weights; loan-to-value or debt-to-income limits for mortgage loans).
- Regulatory strengthening:
  - BOT’s transfer of SFIs under its umbrella and planned reform for cooperatives will strengthen oversight.
  - Recommendation to build on the Financial Stability Unit and enhance macrofinancial surveillance and cooperation among regulators.
  - Continue to establish resolution authority over SFIs and contingency plans for systemic crises.
  - Effective AML/CFT supervision to keep ML/TF risks contained.
- NBFI risks and balance-sheet shifts (2007 to 2015, percent of GDP):
  - Banks’ net claims on the central bank: 10 → 20.
  - Net central bank claims on the rest of the world: 32 → 42.
  - Banks’ net liabilities to households: 29 → 17.
  - NBFIs net liabilities to households: 25 → 36.

---

### Fiscal policy, public investment, and Active scenario
- Baseline fiscal assumptions:
  - Execution rate of about 50 percent for the 2015 government investment plan.
  - Gradual rise in public spending on health and pensions.
  - Under baseline, fiscal balance weakens due to infrastructure boost, but public debt remains sustainable and broadly stable—within Cabinet ceiling of 60 percent of GDP.
- Staff estimate: relaxation of the primary balance of cumulative 1 percent of GDP during 2017–19 consistent with broadly stable debt-to-GDP.
- Recommended use of fiscal space:
  - Large infrastructure projects that are macro-critical to support domestic demand and inflation, redress external imbalance faster, and increase potential growth.
  - Preconditions: stronger implementation capacity and a modest revenue effort to stabilize debt in the medium term.
- Active Medium-Term Scenario (key elements):
  - Incorporates: (i) monetary easing; (ii) additional public investment of cumulative 1 percent of GDP sustained over the medium term; (iii) increase in the VAT rate to 8.5 percent (still below statutory 10 percent), phased in from 2019 once recovery is entrenched.
  - Outcomes in Active scenario:
    - Inflation reaches the mid-point target by 2019.
    - Private investment crowds-in.
    - VAT hike stabilizes public debt.
    - Boost to investment and inflation contributes to faster external rebalancing and gradual REER appreciation.
  - Staff estimate multiplier from public investment at 0.6 percent.

### Revenue mobilization and long-term fiscal needs
- Projected public spending in pensions and health increases from 2.5 to 5.5 percent of GDP in the coming two decades.
- Old-age dependency ratio projected to rise from 15 to 36 percent in the coming two decades.
- Recommendation: domestic revenue mobilization via growth-friendly taxes; gradual VAT increase with mitigation for vulnerable households.
- Box 3 VAT statistics and estimates:
  - VAT revenue: 3.8 percent of GDP (21 percent of tax revenue) in 2015.
  - VAT rate: 7 percent.
  - Estimate: revenue could increase by about 0.6 percent of GDP per percentage point increase in the VAT rate.
  - Compensating consumption loss of the lowest quintile estimated at 0.15 percent of GDP per point increase in the VAT rate.

---

### Pension, social protection, and inclusion
- Pension system concerns and targets:
  - Fragmented pension system across public, formal private, and informal regimes.
  - Retirement age: 55; contribution rate: 6 percent.
  - Coverage: over 60 percent of the working-age population not covered by a formal pension.
  - Average replacement rate for private sector workers: 19 percent.
  - Recommendation: comprehensive overhaul via national reform committee focusing on equity, efficiency, and sustainability.
- Social inclusion and targeting:
  - Develop robust mechanism to identify and assist vulnerable households.
  - Strengthen means-tested transfers using national e-payment registry to improve targeting and mitigate distributional impacts of reforms.
- Box 5 poverty and inequality key figures:
  - National poverty rate: 67 percent in 1986 → 10 percent in 2014.
  - Poverty headcount ratio at national poverty line (2014): 10.5 percent.
  - More than 80 percent of the poor live in rural areas.
  - Gini coefficient: 45 percent in 1990 → 38 percent in 2012.
  - Universal health coverage implemented in the early 2000s.

---

### Growth drivers, demographics, and structural reform priorities
- Potential growth decline: from over 4 percent in early 2000s to about 3 percent in 2016; could fall to 2 percent by 2035 without reforms.
- Main drivers of slowdown: falling labor contribution due to demographic transition; capital accumulation broadly constant; population aging likely impacted TFP growth.
- Reform priorities to address demographic drag:
  - Close gender gap in labor force participation (women: 60.8 percent; men: 77.6 percent) — subsidize childcare services to offset more than half of the impact of the drop in working-age population (Box 4).
  - Gradually increase the low retirement age and link it to life expectancy.
  - Improve education quality, increase focus on STEM, align vocational training with business needs.
  - Promote foreign-skilled migration by removing administrative hurdles.
- Enhancing capital accumulation and TFP:
  - Upgrade infrastructure, improve investment processes; public investment efficiency gap cited as 16 percent (vs 27 percent in other middle-income countries).
  - Reduce barriers to investment in services, facilitate PPPs with fiscal risk management, streamline regulations to improve ease of doing business.
  - Eliminate untargeted subsidies, upgrade competition law, restructure SOEs, and reduce tax distortions to improve resource allocation and TFP.
- Social policies:
  - Targeted redistributive policies and improved education to maintain poverty and inequality gains given declining potential growth.

---

### Public sector debt sustainability (Appendix VI) — selected projections and dynamics
- Nominal gross public debt (percent of GDP): 2015: 39.9; 2016: 42.7; 2017: 42.2; 2018: 41.5; 2019: 41.3; 2020: 41.7; 2021: 41.7; 2022: 41.6.
- Public gross financing needs (percent of GDP): 2015: 6.0; 2016: 5.4; 2017: 4.9; 2018: 7.3; 2019: 7.9; 2020: 8.2; 2021: 8.1; 2022: 8.0; 2023: 7.9.
- Real GDP growth (percent): 2015: 3.5; 2016: 2.8; 2017: 3.2; 2018: 3.0; 2019: 3.4; 2020: 3.2; 2021: 3.2; 2022: 3.0; 2023: 3.0.
- Inflation (GDP deflator, percent): 2015: 3.0; 2016: 0.4; 2017: 1.4; 2018: 1.9; 2019: 2.1; 2020: 1.5; 2021: 2.3; 2022: 2.5; 2023: 2.5.
- Effective interest rate (percent): 2015: 4.7; 2016: 3.5; 2017: 2.9; 2018: 3.9; 2019: 4.8; 2020: 5.1; 2021: 5.3; 2022: 5.4; 2023: 5.5.
- Contributions to change in gross public sector debt (2015–2022, percent of GDP):
  - Change in gross public sector debt (cumulative) to 2023: -0.9.
  - Identified debt-creating flows (cumulative): -0.9.
  - Primary deficit (cumulative): -0.1.
  - Automatic debt dynamics (cumulative): -0.8.
- Baseline and scenario assumptions (selected):
  - Baseline real GDP growth: 2017: 3.0; 2018: 3.4; 2019: 3.2; 2020: 3.2; 2021: 3.0; 2022: 3.0.
  - Historical scenario primary balance: 2018–2022: 1.1 each year.
  - Constant Primary Balance scenario: primary balance held at 0.3 for 2017–2022.

---

### Public investment, growth, and debt sustainability (DIG model findings, Appendix VII)
- Scenarios simulated:
  - Initial scenario: working-age population declines about 0.5 percent per year; age-related spending increases by 2 percent of GDP by 2030; public investment increases from around 6.5 percent of GDP to nearly 8 percent then stabilizes at about 7 percent; tax rates unchanged; fiscal gaps financed with external debt.
  - Higher public investment: ambitious public investment reaching 8 percent of GDP medium term, stabilizing at 7 percent long run.
  - Higher public investment + VAT increase to 14 percent: ambitious investment path plus gradual VAT increase to 14 percent.
- Main simulation findings:
  - Initial scenario: public debt sustainable in medium term but not in long term; growth slows over long term; public investment crowds in private investment but does not offset labor-driven decline.
  - Higher public investment alone: shifts growth path upward but insufficient to stabilize public debt beyond medium term.
  - Higher public investment combined with VAT increase to 14 percent: shifts growth upward and secures public debt sustainability long run; VAT rise stabilizes primary balance at about 1 percent of GDP.
- Policy implication: public investment can boost growth, but revenue mobilization (e.g., VAT increase) is warranted to address rising age-related spending and secure public debt sustainability.

---

*Italicized source attribution: IMF staff report (cr17136).*

### 1. Current Account Surplus ____________________________________________________________________ 20

### 1. Current Account Surplus

### Context and structural features
- Thailand maintained macroeconomic stability through uncertain political times, supported by a flexible exchange rate, high international reserves, and relatively low public debt.
- Over the last decade, GDP growth trailed regional peers; inflation, investment, and employment rates have steadily declined since 2012.
- Structural constraints include rapid population aging, widespread informality, and overdue structural transformation, creating a drag on potential output and weak domestic demand expectations.
- Progress in poverty alleviation: extreme poverty was virtually eradicated by 2013.

### Recent developments (2016)
- Real GDP growth reached 3.2 percent in 2016, driven mainly by exports of services and public investment.
- Inflation and monetary conditions:
  - Average headline inflation was 0.2 percent in 2016 (below the tolerance band 2.5±1.5 percent).
  - The Bank of Thailand (BOT) kept the policy rate at 1.5 percent since April 2015.
  - The (ex-ante) real interest rate increased from 0.3 percent to 1.3 percent during 2016.
  - Staff estimated the neutral rate at 0.2 percent in 2016.
- Credit and financial conditions:
  - Credit growth to the private sector slowed to 4.0 percent (y/y) in December 2016.
  - Rising NPLs (from a low base); household debt ratio stabilized.
  - Corporate bond issuance continued at a robust pace.
- Fiscal developments:
  - Structural primary balance of the public sector weakened by 1.3 percent of GDP in FY 2016 (public investment accelerated and taxes were cut).
  - Public debt ratio fell slightly given favorable financing conditions.
- External sector:
  - Current account surplus climbed to 11.4 percent of GDP in 2016, supported by strong tourism and import compression.
  - Low oil prices and rising tourism income accounted for about 2 percent of GDP (or two-thirds) of the increase in the current account since 2015.
  - Capital and financial account registered a deficit of 6.1 percent of GDP (outflows reflecting Thai corporates' investment overseas; FDI inflows slowed).
  - Gross international reserves increased by US$29.4 billion (including US$14 billion in the net forward position) to US$197.6 billion in December 2016.
  - Reserves stood at 211 percent of the ARA metric unadjusted for capital controls.
- Market reactions and resilience:
  - Thailand remained highly resilient during global financial volatility episodes (portfolio inflows after Brexit; sizable outflows following the U.S. election but partial recovery).
  - The baht appreciated against the U.S. dollar during these episodes; Thai bond yield curve shifted up with external financial condition changes.

### Outlook and staff baseline projections
- Baseline assumptions:
  - Constant monetary policy rate.
  - Fiscal stimulus of the nonfinancial public sector of cumulative 1 percent of GDP over 2017–2019.
- Growth and inflation projections (staff baseline, selected series 2013–22):
  - Real GDP growth (y/y percent change): 2013: 2.7; 2014: 0.9; 2015: 2.9; 2016: 3.2; 2017: 3.2; 2018: 3.3; 2019: 3.2; 2020: 3.1; 2021: 3.0; 2022: 3.0.
  - Output gap (percent of potential output): 2013: 1.5; 2014: -0.7; 2015: -0.8; 2016: -0.7; 2017: -0.5; 2018: -0.2; 2019: 0.0; 2020: 0.0; 2021: 0.0; 2022: 0.0.
  - Headline CPI inflation (period average, y/y percent change): 2013: 2.2; 2014: 1.9; 2015: -0.9; 2016: 0.2; 2017: 1.0; 2018: 1.2; 2019: 1.6; 2020: 2.0; 2021: 2.3; 2022: 2.5.
  - Current account balance (percent of GDP): 2013: -1.2; 2014: 3.7; 2015: 8.1; 2016: 11.4; 2017: 9.6; 2018: 7.7; 2019: 6.1; 2020: 4.8; 2021: 3.5; 2022: 2.7.
  - Credit to the private sector by depository corporations (end of period, y/y percent change): 2013: 9.6; 2014: 5.1; 2015: 4.9; 2016: 4.8; 2017: 5.3; 2018: 5.0; 2019: 5.0; 2020: 4.8; 2021: 4.7; 2022: 4.4.
- Outlook narrative:
  - Growth projected at 3.2 percent in 2017 (same as 2016) due to carryover from Q4 2016 slowdown; then expected to gain momentum and converge to 3 percent over the medium term.
  - Output gap would close gradually; inflation at the low end of the tolerance band in 2017–18 and below the mid-point target for several years.
  - Credit projected to grow in line with nominal GDP.

### Risks to the outlook
- External downside risks:
  - Bumpy rebalancing in China may hurt exports.
  - A U.S. policy mix shift to more expansionary fiscal policy and tighter monetary policy could generate capital outflows, raise financing costs, and heighten global volatility.
  - Trade protectionism could affect open economies like Thailand.
- Domestic risks:
  - Further delay in calling elections could dent private confidence and investment.
  - Weaker crowding-in of private investment would reduce domestic demand and potential growth.
  - Low inflation could become entrenched.
  - Household debt overhang could create stronger-than-expected headwinds to consumption and growth.

### Strategy recommended by IMF staff
- Policy synergy and structural reforms to align short- and long-term goals:
  - Ease monetary policy to support domestic demand and steer inflation toward target, while using macroprudential policies to address systemic risks.
  - Use fiscal space with a long-term view: upgrade infrastructure, strengthen social safety nets, and facilitate structural reforms, balancing short-term stimulus with long-term sustainability.
  - Structural reforms to lift inclusive potential growth and reduce excessive precautionary savings driven by underdeveloped social safety nets and demographic transition.
- External rebalancing:
  - A mutually reinforcing policy mix of fiscal and monetary stimulus, coupled with structural reforms, should support domestic demand and external rebalancing over the medium term.
  - This approach aims to ensure REER appreciation occurs through a growth-driven process, boosting real incomes.

### External Balance Assessment (EBA) and staff-adjusted estimates
- 2016 assessment:
  - Actual current account (CA): 11.4 (percent of GDP).
  - EBA CA norm: 1.1 (percent of GDP).
  - EBA CA gap: 10.0 (percent of GDP).
  - Staff-adjusted CA gap range after cyclical and transitory adjustments: [3.0, 7.0] (percent of GDP).
  - Staff adjustments (ranges, percent of GDP): Terms of trade: [1.0, 1.5]; Tourism: [1.0, 1.5]; Political uncertainty: [1.0, 4.0].
  - Decomposition (2016): Cyclical adjustment 0.3; Cyclically adjusted CA 11.1; Policy gap 2.3; Unexplained residual 7.6.
- Staff view: 2016 external position assessed as substantially stronger than warranted by medium-term fundamentals and desirable policies, with a current account gap of 3 to 7 percent of GDP and a REER gap of -11 to -5 percent.
- Authorities’ view:
  - Agreed the surplus should decline through growth-driven processes.
  - Emphasized the role of terms of trade and tourism boom, low private investment and consumption in explaining the surplus.
  - Cautioned that the EBA regression has a large unexplained residual and may not capture Thailand-specific factors (high oil intensity, net oil imports, surge in tourism, global spillovers).
  - Argued exchange rate policy aimed to avoid abrupt movements and safeguard financial market stability, not to gain unfair export advantage.

### Reaching the inflation target and monetary policy advice
- Inflation dynamics:
  - Headline inflation recovered to 1.6 percent in early 2017 (within band) but slid to 0.8 percent in March 2017 (outside band).
  - Core inflation declined to 0.6 percent in March 2017 and is expected to remain subdued.
  - Staff’s baseline with constant policy rate and modest fiscal stimulus predicts headline inflation at the low end of the tolerance band in 2017 with significant downside risks; inflation projected to undershoot the mid-point target for several years.
- Staff recommendation:
  - Monetary easing to improve the balance of risks and steer inflation toward target, as part of a broader expansionary policy mix with macroprudential measures to contain systemic risks.
  - Rationale: ease the risk of low inflation becoming entrenched; prevent further rise in real interest rates and real debt burden; allow faster convergence to target and faster exit from low-interest-rate environment; counteract sharp steepening of the yield curve (especially 1–3 year segment due to BOT bill issuance for sterilization).

*Source: Thailand — INTERNATIONAL MONETARY FUND, cr17136.*

### 16.      Enhanced communication of the strong determination to meet the inflation target

### 16.      Enhanced communication of the strong determination to meet the inflation target

### Monetary policy effectiveness and communication
- Staff and authorities agreed transmission through the credit channel could be weak in the current environment.
- Staff cautioned that the “expectations channel” had also weakened in recent years, making headline inflation more vulnerable to the negative oil price shock.
- Recommendation: Enhanced communication of the strong determination to meet the inflation target, including forward guidance if needed, would reinforce the effectiveness of policy easing.

### Exchange rate policy
- Recommendation: The exchange rate should be allowed to adjust flexibly, with foreign exchange intervention limited to avoiding disorderly market conditions.
- Rationale: Thailand’s large external buffers, low share of public debt held by nonresidents, declining external financing requirements, and low FX debt provide resilience against external shocks and enhance monetary policy autonomy.
- Operational guidance: FX intervention should be limited to avoiding disorderly market conditions to enable the exchange rate to play its role as a shock absorber.

### Authorities’ assessment and policy stance
- The authorities assessed the current monetary policy rate as appropriately accommodative to support the recovery.
- They believed medium-term inflation expectations were still well anchored and did not see evidence of a self-fulfilling low inflation trap.
- Authorities’ view on credit slowdown: Driven by weak demand amid sluggish private investment and global headwinds, questioning effectiveness of transmission through the credit channel.
- Financial stability caveat: Further monetary easing would need to weigh marginal benefits against costs of undesirable side effects (search-for-yield behavior and pockets of financial fragility).
- Policy intent: Preserve policy space but stand ready to ease monetary policy further if the recovery disappoints or significant shocks materialize.
- Exchange rate view: Should continue to adjust flexibly, with smoothing of large capital flow impacts to avoid excessive volatility.

### Key financial stability indicators (selected figures from Financial Soundness tables)
- Credit-to-GDP change (pp, annual): 3.9; 3.5; -1.4; -1.8; -2.2 (quarters shown).
- Growth of credit / GDP (%, annual): 2.7; 3.0; 2.4; -0.9; -1.2.
- Deposit-to-loan ratio (commercial banks): 104.0; 102.5; 105.0; 103.3; 102.7.
- Leverage ratio (commercial banks, %): 11.7; 12.3; 12.2; 12.4; 13.1.
- ROA (commercial banks): 1.7; 1.4; 1.5; 1.4; 1.4.
- ROE (commercial banks): 14.7; 11.1; 11.4; 11.0; 11.0.
- NPL ratio (commercial banks): 2.3; 2.7; 2.8; 2.9; 3.1.
- NPL ratio (Depository SFIs): 4.2; 3.9; 3.8; 4.0; 4.7.
- Note: Latest data based on 2016:Q3; credit cycle analysis includes loans and securities by all financial corporations.

B. Preserving Financial Stability

### Current assessment
- Financial stability risks remain contained; short-term risks broadly receded in 2016.
- Financial Stability Map scores within comparable global emerging market map.
- Financial Soundness Indicator Map suggests declining vulnerabilities: subdued credit growth and strong commercial banks’ balance sheets.
- Specialized Financial Institutions (SFIs) appear sound but many have lower profitability and higher NPLs than commercial banks.
- Pockets of risk may be increasing in the “shadow” banking system driven more by regulatory arbitrage than leverage buildup.

### Macroprudential policy and regulatory reform recommendations
- Use targeted macroprudential policies to address concerns that policy rate cuts could exacerbate systemic risks.
- Close regulatory loopholes by harmonizing prudential frameworks across institution types to prevent regulatory arbitrage.
- Expand regulatory perimeter and pursue integrated supervision of conglomerates and liquidity risk to correct underpricing of risk.

### Specific vulnerabilities and policy actions
- Regulatory arbitrage:
  - Risk is migrating to more lightly regulated NBFIs and credit cooperatives.
  - Households shifting deposits to these institutions enables increased financing; much of the shift occurs within the same financial group.
  - Policy action: Harmonize regulatory treatment across institutions, integrated supervision of conglomerates, and address liquidity risk (see Appendix 5).
- Household debt:
  - Banks hold most household debt and have strengthened balance sheets while slowing lending.
  - Policy action: Target macroprudential measures at highly leveraged households and tail risks of deleveraging cycles.
- Housing markets:
  - Rise in housing prices concentrated in the Bangkok condominium market, supported by mortgage loan growth and foreign buying.
  - Policy action: Use targeted, time-varying macroprudential tools (tighten credit standards and risk weights; loan-to-value or debt-to-income limits for mortgage loans).

### Strengthening the framework
- The BOT’s transfer of SFIs under its regulatory umbrella and planned reform for cooperatives will strengthen oversight.
- Recommendation: Build on the Financial Stability Unit; enhance macrofinancial surveillance and cooperation among regulators.
- Financial regulators for banks, NBFIs, and cooperatives should have explicit financial stability mandates with formal roles and responsibilities under BOT coordination.
- Continue to establish resolution authority over SFIs and contingency plans for systemic crises.
- Effective AML/CFT supervision (drawing on Asia Pacific Group assessment) to keep ML/TF risks contained.

### Authorities’ stance on macroprudential tools
- Authorities view macroprudential tools as complement, not substitute, to sound monetary policy.
- Concern: If policy rate is lowered, tightening macroprudential policies may not quickly contain risks arising from new forms of shadow banking exploiting regulatory loopholes.
- On real estate: Boom concentrated in high-end condominiums channeling excess savings of high-net-worth individuals; banks cautious, large developers in strong position, limited systemic risk but vigilance required.

C. Using Fiscal Space with a Long-Term View

### Baseline fiscal outlook and assumptions
- Staff’s baseline scenario assumes:
  - An execution rate of about 50 percent for the government’s investment plan launched in 2015.
  - A gradual rise in public spending on health and pensions, in line with demographics.
- Under staff’s baseline, fiscal balance expected to weaken with the boost to infrastructure, but public debt would remain sustainable in the medium term and broadly stable—within the Cabinet ceiling of 60 percent of GDP.
- Staff note: Growth-interest rate differentials expected to shrink under tighter external conditions.

### Fiscal space and recommended use
- Staff estimate that a relaxation of the primary balance of cumulative 1 percent of GDP during 2017-19, as in staff’s baseline, is consistent with a broadly stable debt-to-GDP ratio.
- Recommendation: Use existing fiscal space for large infrastructure projects that remain macro-critical rather than untargeted, short-term measures.
- Benefits: Higher public investment than in the baseline would support domestic demand and inflation, redress external imbalance faster, and increase potential growth.
- Preconditions: Stronger implementation capacity and a modest revenue effort to stabilize debt in the medium term (Active Scenario).
- Note: More ambitious revenue is needed over the long term given rising age-related spending.

### Alternative (Active) Medium-Term Scenario (key elements)
- Baseline: constant monetary policy rate, cumulative fiscal stimulus of 1 percent of GDP over 2017–19, and no major tax policy changes.
- Alternative (Active) scenario incorporates:
  - (i) monetary easing,
  - (ii) additional public investment of cumulative 1 percent of GDP sustained over the medium term,
  - (iii) an increase in the VAT rate to 8.5 percent (still below the statutory rate of 10 percent), phased in from 2019, once the recovery is entrenched.
- Outcomes in Active scenario:
  - Inflation reaches the mid-point target by 2019 with a substantial improvement in the balance of risks.
  - Private investment crowds-in.
  - The VAT hike stabilizes public debt.
  - Boost to investment and inflation contributes to faster external rebalancing than in the baseline, with gradual REER appreciation.
- Staff estimate the multiplier from public investment at 0.6 percent.

### Revenue mobilization and long-term fiscal needs
- Public spending in pensions and health projected to increase from 2.5 to 5.5 percent of GDP in the coming two decades.
- Old-age dependency ratio projected to rise from 15 to 36 percent in the coming two decades.
- Recommendation: Domestic revenue mobilization to finance growing social protection needs; focus on growth-friendly taxes.
- Specific tax policy: Gradually increase the VAT rate, while mitigating impacts on vulnerable households, leveraging Thailand’s VAT design.
- Recommendation: Rationalize tax incentives based on rigorous cost-benefit analysis to increase revenues and allocation efficiency.

### Pension system reform
- Staff call for a comprehensive overhaul of the pension system via the national reform committee.
- Reform objectives: Tackle design shortcomings and population aging with attention to equity, efficiency, and sustainability.
- Specific concerns and figures:
  - Harmonization: Pension system fragmented across public, (formal) private, and informal regimes.
  - Sustainability: Retirement age, 55, and contribution rate, 6 percent, are low.
  - Coverage: Over 60 percent of the working-age population is not covered by a formal pension.
  - Adequacy: Average replacement rate for private sector workers is 19 percent.
  - Fairness: Civil servant pensions are much more generous than private sector pensions.
  - Poverty alleviation: The old-age allowance is low and untargeted.
- Health system note: Universal coverage since 2002 with a basic package; recommended to establish a Ministry of Finance unit to monitor costs across systems.

### Medium-term fiscal strategy and transparency
- Recommendation: Communicate a credible strategy for revenue mobilization and pension reform to secure favorable financing terms.
- Medium-term fiscal framework should include forecasts for the general government and the large SOE sector.
- Recommendation: Conduct tax expenditure review and comprehensive debt sustainability and fiscal risk analysis, including PPPs and contingent liabilities.
- Authorities’ stance: Concur with staff on fiscal priorities; believe fiscal space exists to accommodate critical infrastructure; created national pensions committee; intend to operationalize medium-term fiscal framework and improve SOE reporting; agree on cost-benefit analysis for tax incentives.

D. Strengthening Inclusive Growth

### Growth outlook and drivers
- Potential growth declined from over 4 percent in the early 2000s to about 3 percent in 2016.
- Main drivers:
  - Falling contribution from labor, reflecting demographic transition.
  - Contribution from capital accumulation broadly constant.
  - Population aging likely impacted TFP growth.
  - Challenges from widespread informality, low agricultural productivity, and weak competition in services.
- Without reforms: Potential growth could decline to 2 percent by 2035, with population aging subtracting close to 1 percent.

*Italicized source attribution: IMF staff report (cr17136), chapter 16.*

### 30.      Concerted reforms should boost all drivers of potential growth, with priority placed on

### Concerted reforms should boost all drivers of potential growth, with priority placed on addressing the drag from demographics

### Main reform priorities to address the demographic drag
- Close the gender gap in labor force participation by subsidizing childcare services, which could offset more than half of the impact of the drop in the working-age population (Box 4).
- Gradually increase the low retirement age and automatically link it to life expectancy.
- Improve the quality of education, increase the focus on Science, Technology, Engineering and Math subjects, and better align vocational training with business needs.
- Promote foreign-skilled migration by removing administrative hurdles.

### Enhancing capital accumulation
- Upgrade infrastructure and improve investment processes. Note: public investment efficiency gap in Thailand is cited as 16 percent, compared to 27 percent in other middle-income countries.
- Strengthen planning and budgeting, budget coverage, and transparency of execution (see 2016 Staff Report).
- Reduce barriers to investment in services by relaxing limits on foreign equity stakes.
- Facilitate PPPs, subject to proper management of fiscal risks.
- Move to best practices in ease of doing business, including by streamlining regulations.

### Raising total factor productivity (TFP)
- Eliminate untargeted subsidies and provide education and training to facilitate the transition away from the low-productivity and largely informal agricultural sector.
- Foster efficiency in services by upgrading the competition law.
- Continue the restructuring of the SOE sector.
- Reduce tax distortions to improve firms’ resource allocation efficiency and TFP.

### Social inclusion and targeting vulnerable households
- Develop a robust mechanism to identify and assist vulnerable households to advance social inclusion and support structural reforms.
- Strengthen means-tested transfers, building on the national e-payment registry, to improve targeting and mitigate distributional impacts of reforms.
- Better targeted redistributive policies are needed given declining potential growth, despite Thailand’s impressive reduction in poverty over the last three decades.

### Staff appraisal — macroeconomic policy recommendations
- Thailand has maintained macroeconomic stability but faces downside risks from global uncertainty and financial volatility; headline inflation expected to remain at the low end of the tolerance band in 2017–18.
- Fiscal policy:
  - Fiscal stimulus through public investment is appropriate to crowd-in private investment, support growth and inflation, and facilitate external rebalancing.
  - Domestic revenue mobilization focused on growth-friendly taxes is needed to finance expenditure needs and ensure debt sustainability.
  - A comprehensive pension reform should tackle design shortcomings and population aging, considering equity, efficiency, and sustainability.
  - Articulate a medium-term fiscal strategy to enhance fiscal management and transparency.
- Monetary policy:
  - Monetary policy easing should reinforce fiscal stimulus and steer inflation back to target.
  - Enhanced communication on the strong determination to meet the inflation target is needed to improve monetary policy transmission.
  - The exchange rate should be allowed to adjust flexibly, with FX intervention limited to avoiding disorderly market conditions.
- Macroprudential and regulatory policy:
  - Tailor macroprudential policies and close loopholes for regulatory arbitrage to address pockets of vulnerability in the shadow banking system.
  - Tighten macroprudential measures on highly leveraged households and certain segments of the real estate market.
  - Continue upgrading the financial stability framework.

### External position and recommended strategy
- The external position is substantially stronger than warranted by medium-term fundamentals and desired policies.
- A mutually reinforcing monetary and fiscal stimulus, coupled with structural reforms, should support domestic demand and help lower the current account gap over time.
- This strategy would facilitate the needed REER appreciation through a growth-driven process, boosting real incomes.
- Recommendation: next Article IV consultation with Thailand on a standard 12-month cycle.

### Boxed findings and key statistics

- Box 1 — Current account surplus
  - In 2016, the current account surplus reached 11.4 percent of GDP.
  - The 12.6 percent of GDP turnaround in the current account between 2013–16 is attributable to a 5.8 percent of GDP decline in net oil imports and a 3 percent of GDP rise in the services balance (mainly due to tourism from China).
  - The Fund’s EBA model estimated the cyclically-adjusted current account for Thailand at 11.1 percent of GDP and the current account norm at 1.1 percent of GDP in 2016.
  - After considering a policy gap of 2.3 percent of GDP, the unexplained residual remains very large at 7.6 percent of GDP.
  - Staff adjustments yield an estimated current account gap of 3 to 7 percent of GDP after accounting for Thailand-specific factors.

- Box 2 — Recent experience targeting headline inflation
  - The BOT changed its target from core to headline inflation in 2015 and moved from a range target to a point target of 2.5 percent specified as annual average inflation, with a tolerance band of ±1.5 percent.
  - Headline inflation was negative throughout 2015, turned positive in April 2016, but dropped to 0.8 percent in March 2017 (below the tolerance band).
  - Core inflation reached 0.6 percent in March 2017.
  - Policy responses documented:
    - Policy rates cut twice to 1.5 percent by April 2015.
    - In January 2016, MPC kept the policy rate on hold.
    - In January 2017, the MPC kept monetary conditions accommodative.

- Box 3 — Domestic revenue mobilization
  - VAT revenue was 3.8 percent of GDP (21 percent of tax revenue) in 2015.
  - The VAT rate of 7 percent is one of the lowest in the world.
  - Estimates suggest revenue could increase by about 0.6 percent of GDP per percentage point increase in the VAT rate.
  - Compensating the consumption loss of the lowest quintile is estimated at 0.15 percent of GDP per point increase in the VAT rate.
  - Reform priorities for the Tax Revenue Department (TRD) include deploying a compliance risk framework, streamlining processes, reinvigorating the audit function, and accelerating electronic processes.
  - Reform the system of tax incentives and subject them to rigorous cost-benefit analysis; annual disclosure and budget discussion of fiscal costs recommended.

- Box 4 — Gender gap in labor force participation and potential growth
  - Women’s participation rate in Thailand: 60.8 percent; men: 77.6 percent.
  - Under assumptions that employment growth equals growth in the working-age population, the contribution from labor would drop from about zero percent currently to -0.7 percent by 2035.
  - If female labor force participation gradually catches up with that of men, the total annual contribution from labor would remain slightly positive in coming years and then drop to only -0.3 percent by 2035.
  - Options to increase female labor force participation include: expanding after-school programs and affordable early-childhood services; publicly financing parental leave; improving flexibility in working hours; moving towards individual taxation; increasing female education and training; and extending female retirement age.

*International Monetary Fund — Thailand: Selected Staff Findings and Policy Recommendations (cr17136)*

### Box 5. Trends in Poverty and Inequality

### Box 5. Trends in Poverty and Inequality

### Achievements in poverty reduction
- The national poverty rate dropped from 67 percent in 1986 to 10 percent in 2014.
- Extreme poverty (measured by the international poverty line) was virtually eliminated.
- High GDP growth rates, especially in the first two decades, were the main driver of poverty reduction; fiscal policies played a relatively minor role.
- More than 80 percent of the poor live in rural areas.

### Inequality trends
- Thailand is the only country in Asia with a consistent declining trend in inequality since 1990.
- The Gini coefficient declined from 45 percent in 1990 to 38 percent in 2012.
- The decline in inequality was driven by lower inequality in rural areas and between rural and urban areas.
- Universal health coverage in the early 2000s and progress in financial inclusion contributed to reduced inequality.

### Policy recommendations to reduce future poverty and inequality
- Strengthen the progressivity of fiscal policy, since the high growth rates of the past are not expected in the future.
- Tax-side measures:
  - Broaden the base (especially on income taxes).
  - Strengthen compliance.
  - Address the distributional implications of a VAT increase.
  - Consider a refundable income tax credit for low-income earners to improve income distribution, encourage employment, and bring more individuals into the tax net; this would require significant capacity building within the TRD.
- Spending-side measures:
  - Replace untargeted subsidies and soft loans with well targeted transfers to protect the most vulnerable in a cost-effective way.
  - Improve access to quality education to reduce inequality.

### Key statistics and factual highlights
- Poverty headcount ratio at national poverty line (2014): 10.5 percent.
- More than 80 percent of the poor live in rural areas.
- Gini coefficient: 45 percent in 1990; 38 percent in 2012.
- Universal health coverage implemented in the early 2000s.
- Emphasis that past high GDP growth rates were the main driver of poverty reduction; future high growth rates are not expected.

*Source: Box 5. Trends in Poverty and Inequality (cr17136).*

### Appendix I. Staff Policy Advice from the 2016 Article IV

### Appendix I. Staff Policy Advice from the 2016 Article IV Consultation

### Staff Advice and Policy Actions
- Implement the government’s investment plan within a medium-term fiscal framework.
  - Public investment increased by 0.6 percent of GDP in FY2016.
  - The fiscal stance is expected to remain expansionary in 2017, on account of a further increase in public investment.
  - The authorities are working on operationalizing the medium-term fiscal framework.
- Use room for further monetary easing.
  - The policy rate has been kept constant since April 2015.
- Maintain exchange rate flexibility as the first line of defense against external shocks.
  - The authorities maintained a flexible exchange rate regime.
- Tighten macroprudential policies and upgrade the financial stability framework.
  - The authorities tightened regulations for the issuance of unrated bonds by unregistered companies.
  - The BOT assumed regulatory oversight of SFIs.
  - Coordination with other financial sector regulators continues to strengthen.
- Take advantage of regional and global opportunities for trade integration.
  - The authorities have stepped up trade integration efforts and are promoting 10 target industries in the eastern economic corridor.
- Develop social safety nets in line with structural challenges, including on-budget cash transfers and skill-upgrading programs.
  - Efforts are underway to strengthen means-tested transfers and to introduce a low-income household registration program.
- Reform social security to strengthen equity, sustainability, and efficiency.
  - A national reform committee will review pension schemes and propose a reform strategy.

### Risk Assessment Matrix — Key Risks, Likelihood, Impact, and Mitigating Policies
- External Risks
  - Retreat from cross border integration
    - Likelihood: H
    - Impact: H
    - Policy response: Strengthen domestic drivers of growth; deepen regional trade integration and seek new opportunities to enhance position in global value chains; greater orientation toward CLMV could buttress exports.
  - Policy uncertainty and divergence
    - Likelihood: H
    - Impact: M
    - Policy response: Allow exchange rate flexibility as the key shock absorber, with judicious intervention to avoid disorderly markets; if capital outflows affect the real economy and constrain monetary stimulus, accelerate public investment execution.
  - Significant further strengthening of the U.S. dollar and/or higher rates
    - Likelihood: H
    - Impact: M
    - Policy response: Allow exchange rate flexibility as the key shock absorber, with judicious intervention to avoid disorderly markets; if financial volatility and capital outflows affect the real economy and constrain monetary stimulus, accelerate public investment execution.
  - Significant slowdown in China and its spillovers
    - Likelihood: M
    - Impact: H
    - Policy response: Structural reforms and infrastructure development to raise returns to private investment and strengthen domestic-demand-led growth; greater orientation toward CLMV; allow exchange rate flexibility as key shock absorber.
  - Structurally weak growth in key advanced and emerging economies
    - Likelihood: H
    - Impact: M
    - Policy response: Structural reforms and infrastructure development to raise returns to private investment and strengthen domestic-demand-led growth; greater orientation toward CLMV.
- Domestic Risks
  - Heightened political uncertainty
    - Likelihood: M
    - Impact: H
    - Policy response: Allow automatic stabilizers to work; provide adequate liquidity to banks; let the exchange rate be the key shock absorber but use intervention to avoid disorderly markets.
  - Weaker crowding-in of private investment
    - Likelihood: M
    - Impact: M
    - Policy response: Use room for additional fiscal and monetary stimulus; strengthen efforts to implement structural reforms and improve the business and investment environment; accelerate execution of large infrastructure projects and PPPs.
  - Entrenched low inflation
    - Likelihood: M
    - Impact: H
    - Policy response: Lower the policy rate and strengthen communication to anchor inflation expectations; consider additional fiscal stimulus within a credible medium-term fiscal framework.
  - Household debt overhang boiling over
    - Likelihood: M
    - Impact: M
    - Policy response: Use available room for additional fiscal and monetary stimulus; explore options for household debt restructuring.

### External Sector Assessment — Foreign Assets, Liabilities, and Current Account
- Net international investment position (NIIP)
  - Background: NIIP improved from -48 percent of GDP in 2000 to -2 percent of GDP in 2009, then declined to -24 percent of GDP in 2014 despite CA surpluses averaging 1.6 percent of GDP.
  - The NIIP halved to around -10 percent of GDP in 2015-16, accompanied by a rising CA surplus and subdued FDI, amid steadily rising outward investment by residents.
  - Assessment (2016): Gross liabilities were 101.8 percent of GDP and external debt stood at 32.5 percent of GDP (short term debt stood at 13 percent of GDP). External debt projected to continue declining over the medium term and net foreign liabilities (as a percent of GDP) are expected to stabilize.
- Overall external position (2016)
  - Assessment: The external position in 2016 was substantially stronger than warranted by medium-term fundamentals and desirable policy settings.
  - Caveat: The size of the 2016 CA and REER gap are subject to a wide margin of error reflecting Thailand-specific transitory factors not fully captured in the EBA model, such as the sharp improvement in ToT, the boom in tourism, and political uncertainty.
  - Policy responses: Mutually reinforcing monetary and fiscal stimulus, coupled with structural reforms, to support domestic demand and help lower the current account gap over time; boost public infrastructure within available fiscal space to crowd-in private investment; continue reforming social safety nets and reduce barriers to investment in services; exchange rate should move flexibly with limited intervention.
  - Reserves: Reserves exceed all adequacy metrics, thus there is no need to build up reserves for precautionary purposes.
- Current account (CA)
  - Background: CA ranged from a deficit of 4 percent of GDP in 2005 to a surplus of 7¼ percent of GDP in 2009, dropped to a deficit of 1¼ percent of GDP by 2013, and rose to a record surplus of 11.4 percent of GDP in 2016.
  - The 12.6 percent of GDP turnaround in the CA between 2013-16 largely due to a 5.8 percent of GDP decline in net oil imports and a 3 percent of GDP rise in the services balance (mainly tourism). Net oil imports and tourism account for two-thirds of the increase in the CA in 2016.
  - Assessment: EBA cyclically-adjusted 2016 CA of 11.1 percent of GDP and a CA norm of 1.1 percent of GDP. CA gap of 10 percent of GDP consists of an identified policy gap of 2.3 percent of GDP (1.9 percent of GDP from domestic policy gaps) and an unexplained residual of 7.6 percent of GDP.
  - Staff view: Considering Thailand-specific factors, staff assesses the CA gap within 3 percent to 7 percent of GDP of the level consistent with medium-term fundamentals and desirable policies.
  - Outlook: The CA gap is expected to narrow over the medium term as policy stimulus is deployed, political uncertainty dissipates, private confidence recovers, and safety net reforms are taken.
- Real effective exchange rate (REER)
  - Background: Baht has broadly appreciated in REER since the mid-2000s, with episodes of depreciation around mid-2013 and Q1 2015. By February 2017, the REER had appreciated by 2.8 percent relative to 2016.
  - Assessment: The EBA index REER gap in 2016 is estimated at -6.4 percent; the EBA level REER gap is estimated at -16.5 percent, with a large unexplained residual. Using an elasticity of 0.6, staff assesses the 2016 REER to be 5 percent to 11 percent below levels consistent with medium-term fundamentals and desirable policies.
- Capital and financial account
  - Background: Capital and financial account balance negative since 2013; in 2016 the negative balance increased to US$25.7 billion due to Thai firms’ overseas investment, subdued FDI inflows, and other investment outflows despite portfolio inflows.
  - Assessment: Up to 2013 Thailand enjoyed portfolio inflows; since 2013 it has faced headwinds (Fed lift-off, China slowdown, political uncertainty). Capital outflows are manageable given resilient external sector and baht flexibility.
- FX intervention and reserves level
  - Background: Exchange rate regime classified as floating (de jure and de facto). Reserves declined from 52 percent of GDP in 2012 to 49 percent of GDP in 2016, but stand at over three times short-term debt, 211 percent of the IMF’s reserve metric unadjusted for capital controls, and 250 percent of the metric adjusted for capital controls. Staff considers the unadjusted adequacy metric more appropriate.
  - Assessment: Interventions appear two-sided in 2016; gross reserves increased by US$29.4 billion (7.2 percent of GDP) during 2016. Reserves higher than IMF adequacy metrics; exchange rate should move flexibly with intervention limited to avoiding disorderly market conditions.

### Financial System Risk Transfer and Nonbank Financial Institutions (NBFIs)
- Pockets of risk may be building outside the banking system, with a substantial increase in NBFIs exposure to households and nonfinancial corporations.
- Balance Sheet Analysis (BSA) key shifts (2007 to 2015, percent of GDP)
  - Banks’ net claims on the central bank: increased from 10 percent to 20 percent of GDP (driven by issuance of central bank bills to absorb excess liquidity).
  - Net central bank claims on the rest of the world: increased from 32 percent to 42 percent of GDP as foreign currency reserves rose.
  - Banks’ net liabilities to households: decreased from 29 percent to 17 percent of GDP.
  - Banks’ net liabilities to corporates: decreased from 21 percent to 14 percent of GDP.
  - NBFIs net liabilities to households: increased from 25 percent to 36 percent of GDP.
  - NBFIs net claims on corporates: rose from 18 percent to 19 percent of GDP.
- Interpretation of gross positions
  - Banks’ decrease in net liabilities to households masks a massive increase in banks’ gross claims on households (of 27 percent of GDP); thus most household debt risk remains on bank balance sheets, which have been strengthened recently.
  - Banks continued to receive deposits, which rose by 12 percent of GDP, and their liquidity position remains adequate.
  - NBFIs experienced a large increase in gross liabilities to households, as households increased holdings of financial products to pick up yield—this could increase systemic liquidity risk due to short maturities and rollover risk for corporate borrowers.
  - NBFIs net claims on corporates rose only 4 percent of GDP, suggesting moderate risk, but NBFIs may be less able to manage this increase in risk than banks.
- Policy implication: Strengthen NBFI regulatory oversight to ensure risks are adequately priced in lending margins, which could help shift some financing back to banks, and better target the buildup of NBFIs risks with macroprudential measures.

_Italic: Appendix I. Staff Policy Advice from the 2016 Article IV Consultation_

### Appendix VI. Public Sector Debt Sustainability

### Appendix VI. Public Sector Debt Sustainability

### Debt dynamics and projections (Figure 1)
- Nominal gross public debt: 2015: 39.9, 2016: 42.7, 2017: 42.2, 2018: 41.5, 2019: 41.3, 2020: 41.7, 2021: 41.7, 2022: 41.6 (in percent of GDP).
- Of which: guarantees: 0.0 for 2015–2022 (in percent of GDP).
- Public gross financing needs: 2015: 6.0, 2016: 5.4, 2017: 4.9, 2018: 7.3, 2019: 7.9, 2020: 8.2, 2021: 8.1, 2022: 8.0, 2023: 7.9 (in percent of GDP).
- Real GDP growth (percent): 2015: 3.5, 2016: 2.8, 2017: 3.2, 2018: 3.0, 2019: 3.4, 2020: 3.2, 2021: 3.2, 2022: 3.0, 2023: 3.0.
- Inflation (GDP deflator, percent): 2015: 3.0, 2016: 0.4, 2017: 1.4, 2018: 1.9, 2019: 2.1, 2020: 1.5, 2021: 2.3, 2022: 2.5, 2023: 2.5.
- Nominal GDP growth (percent): 2015: 6.6, 2016: 3.2, 2017: 4.7, 2018: 5.0, 2019: 5.6, 2020: 4.8, 2021: 5.5, 2022: 5.6, 2023: 5.6.
- Effective interest rate (percent): 2015: 4.7, 2016: 3.5, 2017: 2.9, 2018: 3.9, 2019: 4.8, 2020: 5.1, 2021: 5.3, 2022: 5.4, 2023: 5.5.
- Sovereign spreads: EMBIG (bp) 3/20: 87; 5Y CDS (bp): 87. Ratings: Moody's Baa1/Baa1; S&P's BBB+/BBB+; Fitch BBB+/BBB+.

### Contributions to change in gross public sector debt (2015–2022)
- Change in gross public sector debt (cumulative): 2015: -0.1, 2016: -0.7, 2017: -0.5, 2018: -0.7, 2019: -0.2, 2020: 0.4, 2021: 0.0, 2022: -0.1, 2023: -0.2, cumulative to 2023: -0.9 (in percent of GDP).
- Identified debt-creating flows: 2015: -2.2, 2016: -2.0, 2017: -3.2, 2018: -0.7, 2019: -0.2, 2020: 0.4, 2021: 0.0, 2022: -0.1, 2023: -0.2, cumulative: -0.9 (in percent of GDP).
- Primary deficit: 2015: -1.4, 2016: -2.3, 2017: -2.4, 2018: -0.3, 2019: 0.1, 2020: 0.3, 2021: 0.1, 2022: -0.1, 2023: -0.2, cumulative: -0.1 (in percent of GDP).
- Primary (noninterest) revenue and grants (percent of GDP): 2015: 23.9, 2016: 25.1, 2017: 24.8, 2018: 24.8, 2019: 24.9, 2020: 25.1, 2021: 25.1, 2022: 25.1, cumulative: 150.0 (sum shown).
- Primary (noninterest) expenditure (percent of GDP): 2015: 22.5, 2016: 22.8, 2017: 22.3, 2018: 24.5, 2019: 25.0, 2020: 25.4, 2021: 25.2, 2022: 25.0, cumulative: 150.0 (sum shown).
- Automatic debt dynamics (percent): 2015: -0.8, 2016: 0.3, 2017: -0.8, 2018: -0.4, 2019: -0.3, 2020: 0.1, 2021: -0.1, 2022: -0.1, 2023: 0.0, cumulative: -0.8.
  - Interest rate/growth differential (percent): 2015: -0.7, 2016: 0.1, 2017: -0.7, 2018: -0.4, 2019: -0.3, 2020: 0.1, 2021: -0.1, 2022: -0.1, 2023: 0.0, cumulative: -0.8.
    - Of which: real interest rate: 2006–2014 aggregate: 0.6; 2015: 1.3; 2016: 0.6; 2017: 0.8; 2018: 1.0; 2019: 1.4; 2020: 1.2; 2021: 1.1; 2022: 1.2; cumulative: 6.6.
    - Of which: real GDP growth: 2006–2014 aggregate: -1.3; 2015: -1.2; 2016: -1.3; 2017: -1.2; 2018: -1.3; 2019: -1.3; 2020: -1.3; 2021: -1.2; 2022: -1.2; cumulative: -7.5.
- Exchange rate depreciation contribution: 2015: -0.1, 2016: 0.2, 2017: -0.1 (remaining years shown as dots).
- Other identified debt-creating flows: 0.0 for 2015–2022.
- Residual, including asset changes: 2015: 2.2, 2016: 1.3, 2017: 2.7, 2018: 0.0, 2019–2022: 0.0 (in percent of GDP).

### Key assumptions and definitions
- Public sector debt includes central government debt, nonfinancial SOEs' debt, and SFI guaranteed debt.
- Effective interest rate defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.
- Footnote derivations:
  - Automatic dynamics formula uses r = interest rate; π = GDP deflator growth; g = real GDP growth; a = share of FX debt; e = nominal exchange rate depreciation.
  - Real interest rate contribution derived as r - π(1+g); real growth contribution as -g.
  - Exchange rate contribution derived as ae(1+r).
- Projections assume key variables remain at last projection year levels for debt-stabilizing balance.

### Composition of public debt and scenario comparisons (Figure 2)
- Baseline scenario underlying assumptions (percent):
  - Real GDP growth: 2017: 3.0, 2018: 3.4, 2019: 3.2, 2020: 3.2, 2021: 3.0, 2022: 3.0.
  - Inflation: 2017: 1.9, 2018: 2.1, 2019: 1.5, 2020: 2.3, 2021: 2.5, 2022: 2.5.
  - Primary Balance: 2017: 0.3, 2018: -0.1, 2019: -0.3, 2020: -0.1, 2021: 0.1, 2022: 0.2.
  - Effective interest rate: 2017: 3.9, 2018: 4.8, 2019: 5.1, 2020: 5.3, 2021: 5.4, 2022: 5.5.
- Historical scenario assumptions (percent):
  - Real GDP growth: 2017: 3.0, 2018: 3.3, 2019: 3.3, 2020: 3.3, 2021: 3.3, 2022: 3.3.
  - Inflation: same as baseline for 2017–2022.
  - Primary Balance: 2017: 0.3, 2018–2022: 1.1 each year.
  - Effective interest rate: 2017: 3.9, 2018: 4.8, 2019: 5.0, 2020: 5.1, 2021: 5.0, 2022: 5.0.
- Constant Primary Balance scenario:
  - Primary Balance held at 0.3 for 2017–2022; other assumptions same as baseline.
- Composition charts (by maturity and by currency) show:
  - Gross nominal public debt projected by year 2015–2022.
  - Public gross financing needs projected by year 2015–2022.
  - By maturity: medium and long-term vs short-term shares (2006–2022 projection).
  - By currency: local currency-denominated vs foreign currency-denominated shares (2006–2022 projection).

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### Appendix VII. Public Investment, Growth, and Debt Sustainability

### Model setup and scenarios
- Model: “Debt, Investment and Growth” (DIG) model, calibrated to the Thai economy.
- Scenarios simulated:
  - Initial scenario:
    - Working age population declines about 0.5 percent per year.
    - Age-related spending increases by 2 percent of GDP by 2030.
    - Public investment increases from around 6.5 percent of GDP to nearly 8 percent of GDP, then stabilizes at about 7 percent of GDP.
    - Tax rates remain unchanged.
    - Fiscal gaps financed with external debt.
  - Higher public investment:
    - Public investment more ambitious: reaches 8 percent of GDP in the medium term and then stabilizes at 7 percent of GDP in the long run.
  - Higher public investment and increase in VAT:
    - Same ambitious public investment path.
    - Fiscal gaps financed partly by government debt, and partly by a gradual increase in the VAT rate from 7 percent to 14 percent.

### Main simulation findings
- Initial scenario (no fiscal adjustment):
  - Public debt is sustainable in the medium term but not in the long term.
  - Growth slows over the long term; primary balance deteriorates steadily; public debt becomes unsustainable.
  - Public investment crowds in private investment but does not offset the decline in growth driven by the labor contribution.
  - Growth slowdown reduces tax revenues and worsens the interest rate–growth differential while age-related expenditures increase fiscal pressure.
- Higher public investment alone:
  - Shifts the growth path upward but is insufficient by itself to stabilize public debt dynamics beyond the medium term.
- Higher public investment combined with VAT increase to 14 percent:
  - Shifts the growth path upward and secures public debt sustainability over the long run.
  - Gradual VAT increase to 14 percent stabilizes the primary balance at about 1 percent of GDP.
  - The VAT rise induces lower consumption and higher investment, leading to higher growth and stabilizing public debt.

### Policy implication highlighted
- Public investment can significantly boost growth, but revenue mobilization (e.g., VAT increase) is warranted to address rising age-related spending and secure public debt sustainability.

*Source: IMF staff.*

### 1.5 percent to be sufficiently accommodative to the economic recovery, and complementary

### cr17136 - 1.5 percent to be sufficiently accommodative to the economic recovery, and complementary

### Monetary policy stance and outlook
- Authorities consider a policy rate of 1.5 percent to be sufficiently accommodative to the economic recovery and complementary to fiscal stimulus in promoting domestic consumption and investment.
- Authorities stand ready to utilize an appropriate mix of available policy tools to ensure that monetary conditions are conducive to economic growth while safeguarding financial stability.
- Authorities view further monetary easing at this juncture as potentially time inconsistent given:
  - The dissipation of the global disinflationary shock and the gaining traction of global reflation since late last year.
  - The Thai economy being on the recovery path and headline inflation continuing to trend upward to the target range of 2.5 ± 1.5 percent.
  - Medium-term inflation expectations remaining well anchored.
- Authorities stress preserving remaining interest rate policy space for use in times of adverse shocks, given the lower effectiveness of transmission channels in the low interest rate environment.

### Exchange rate policy and external balance
- Authorities agree with staff advice to allow exchange rates to adjust flexibly and act as a shock absorber; their foreign exchange practice aligns with this view.
- Market intervention is used only to curb excessive volatility, especially during periods of sizable capital movements caused by changing external sentiments.
- Policies to promote the private sector’s FX risk management and continued liberalization of the capital account are seen as important to ensure more balanced flows of capital.
- On the external balance assessment:
  - Recent large current account surpluses were driven mainly by an import collapse following plunges in oil prices and low investment.
  - Authorities agree the large current account surplus is temporary and should decline over the medium term.
  - Authorities note the EBA does not fully capture Thailand’s specificities, including high oil intensity, fast-aging population, high precautionary savings due to political uncertainty and inadequate social safety nets, and accelerated growth in the service sector, contributing to the large residual in 2016.
  - Authorities call for careful interpretation of the EBA result and believe further refinement to the model could better explain the remaining residual.

### Financial sector developments and macroprudential policy
- Staff assessment: the Thai financial system remains sound and resilient amidst heightened volatility in global financial markets.
- Banking sector characteristics:
  - Profitable with adequate capital buffers and provisions.
- Authorities mindful of vulnerabilities and the risk of shadow banking activities arising from regulatory loopholes.
- Measures undertaken:
  - More stringent regulations for credit and saving cooperatives.
  - Additional requirements for daily fixed income funds.
- Authorities’ view on macroprudential policy:
  - Macroprudential tools should complement the broader monetary policy stance.
  - Preventive tightening of macroprudential regulations in the low interest rate environment might not be most effective because excess liquidity can find its way through loopholes and shadow banking outside regulation and control.
  - Building institutional capacity of financial regulators and formulating optimal choice and calibration of macroprudential tools will take time and effort.
- Ongoing capacity development efforts: macro-financial risk monitoring, inter-agency data sharing, and crisis preparedness.
- Authorities appreciate the Fund’s technical assistance on financial stability.

### Fiscal policy, infrastructure, and social spending
- Authorities continue major infrastructure projects to sustain growth momentum and address supply-side bottlenecks; a large scale investment in transportation is intended to anchor market confidence and crowd-in private investment.
- Authorities believe Thailand has ample fiscal space for necessary reform initiatives but emphasize efficient and well-targeted use of existing space.
- Commitment to fiscal discipline and transparency; ongoing overhaul of fiscal-related legal framework, including:
  - SOEs governing law to enhance governance and operational effectiveness.
  - New Fiscal Responsibility Act (approved by the Cabinet and under consideration by the Council of the State).
- Age-related fiscal pressures:
  - Recognition that age-related spending will increase over the medium to long-term horizon and significantly affect fiscal burden as society ages.
  - Measures taken:
    - Setting up the National Savings Fund (NSF), a voluntary pension fund for non-formal workers.
    - Allowing provident fund members to make higher contributions than their employers.
    - Undertaking a feasibility study on a reverse mortgage scheme for senior citizens to convert housing equity into cash.
  - Review of the pension system to be undertaken through the National Reform Committee in a comprehensive and holistic manner to ensure equity, efficiency and sustainability.
  - Fund’s technical assistance and cross-country experience welcomed to facilitate reform efforts.

### Structural reforms and inclusive growth
- Authorities agree structural issues can become barriers to inclusive and sustainable growth in line with the national 20-year strategy and the 12th National Economic and Social Development Plan (2017-2021).
- Commitments under Thailand 4.0 agenda toward a high-value and innovation-driven economy.
- Ongoing reform policies and measures include:
  - Implementation of the National e-Payment strategic plan.
  - Promotion of higher value added industries in the special economic corridor.
  - Development of human capital and reduction of skill mismatches in the labor market; vocational education and related laws under review to meet business demands.
  - Registration program for low-income earners to identify vulnerable groups and provide better targeted subsidies.

### Final remarks and international engagement
- Authorities firmly committed to the structural reform agenda to achieve higher, sustained, and inclusive medium-term growth.
- Consideration of measures to address population aging, including reform of social safety nets, extension of the retirement age, and productivity enhancement.
- Continued efforts to enhance government efficiency, reduce costs of doing business, and improve education quality to align with business needs.
- Amid rising trade protectionism, Thailand promotes regional connectivity for trade and investment and participates in trade negotiations with dialogue partners.
- Authorities believe Thailand’s strong fundamentals provide a solid foundation to meet future challenges; effective and timely implementation of reforms will lead to sustainable and inclusive long-run growth.
- Authorities look forward to continued support of the Fund to help achieve the stated reform goals.

*IMF — cr17136 (excerpt)*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17136.pdf_