## THAILAND: BRINGING INFLATION BACK TO TARGET

## Source details

**Canonical URL:** [THAILAND: BRINGING INFLATION BACK TO TARGET](https://www.imf.org/-/media/files/publications/cr/2017/cr17137.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2017/cr17137.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2017/cr17137.pdf.json)

---

### Context and main drivers of inflation
- Headline inflation was below target in 2015–16, driven largely by external factors, notably the sharp decline in oil prices.
  - Energy price inflation declined from 1.7 percent in 2014 to -15 percent in 2015.
  - Core inflation declined from 1.6 percent to 1.1 percent over the same period and reached 0.6 percent by March 2017.
- Headline inflation in Thailand is more sensitive to global oil prices because the tax structure on retail petrol prices provides a relatively smaller cushion.
- Econometric framework: a hybrid New Keynesian Phillips Curve with time-varying parameters was estimated (1995:Q1–2016:Q3), with inflation decomposed into:
  - long-run inflation expectations (trend) e_t^π,
  - persistence (moving average of past four quarters π_{t−1}^{MA4}),
  - economic slack (output gap (y_t − y*_t)),
  - imported inflation (π_t^{IM}, year-on-year growth of import prices in local currency),
  - an error term ε_t.
- Key empirical findings:
  - The impact of lower import prices (especially oil) was a major factor behind the decline in headline inflation in 2015.
  - The forward-looking component weakened: the forward-looking parameter θ_t declined and the estimated long-term inflation trend e_t^π has been on a declining trend in recent years.
  - Declining forward-looking dynamics made headline inflation more vulnerable to oil price declines and the weaker cyclical position.

### Monitoring medium- to long-term inflation expectations (Box 1)
- Survey and market-based indicators diverged:
  - Survey measures (Consensus Economics, 6–10 years ahead) have remained around or above the mid-point inflation target of 2.5 percent.
  - BEIRs (break-even inflation rates) from Thailand’s ILBs (maturities 2021 and 2028) declined significantly since 2013 and remain well below target.
- Caveats on BEIRs: they reflect expected inflation plus inflation risk and liquidity risk premia, so they are overall inflation compensation rather than pure expected inflation.
- Econometric trend estimates indicate the long-term inflation trend in Thailand has been below the mid-point inflation target since early 2015 and is significantly below survey measures—raising risks of de-anchoring of inflation expectations.
- Trend inflation estimates used in analysis are from Garcia and Poon (forthcoming), based on the approach in Chan et al. (2015).

### Monetary policy stance and real interest rates
- Policy rate context:
  - The Bank of Thailand (BOT) cut the policy rate by 50 basis points in early 2015 to a near historical low of 1.5 percent and has kept the policy rate constant since April 2015.
  - After the GFC, the policy rate was cut to 1.25 percent between April 2009 and June 2010.
- Estimated natural real interest rate was low, between 0.1 percent and 0.2 percent in 2015–16.
- Measures of effective real rates:
  - One measure (policy rate minus actual inflation over the last two years) ranged from 2.4 percent to 1.3 percent.
  - Policy rate minus expected inflation over 2016 ranged from 0.3 percent to 1.3 percent.
- Assuming policy rates on hold and using average inflation expectations:
  - BOT average inflation expectations: 1.2 percent.
  - Fund staff average inflation expectations: 1.0 percent.
  - With those expectations, ex-ante real rates would remain above estimated natural rates in 2017.

### Model simulations and policy scenarios
- Simulations use a stylized new Keynesian model with a quadratic central bank policy reaction function considering inflation and output gaps and interest rate smoothing.
- Passive scenario (no monetary or fiscal stimulus):
  - Inflation and inflation expectations remain subdued.
  - Inflation would remain at or below the lower end of the tolerance band, with substantial risk of falling outside the tolerance band once base effects from higher oil prices fully unwind.
  - Small negative output gap would persist and cost of adverse shocks would be large.
- Active scenario (gradual monetary easing combined with fiscal stimulus):
  - Monetary easing plus fiscal stimulus can steer inflation back to the 2.5 percent mid-point target (with a slight overshooting).
  - The output gap would close.
  - Readiness to act and decisive communication are fundamental to prevent de-anchoring of long-term inflation expectations.

### Financial stability and macroprudential considerations
- Financial stability risks are judged to be contained; monetary policy actions to raise inflation are expected to have positive effects on financial stability:
  - Higher inflation lowers the real burden of highly indebted agents, particularly lower-income households.
  - Restoring inflation may prevent de-anchoring of expectations, which would otherwise raise long-term real rates and debt service costs.
- Policy mix recommendation:
  - Further monetary easing accompanied by tighter regulatory and prudential measures is appropriate if needed.
  - Macroprudential tools targeted at specific pockets of fragility can be used if lower interest rates trigger risks.
  - Example measures: decreasing loan-to-value (LTV) ratios to tame house price increases and closing regulatory arbitrage loopholes.
- Caveats: the policy simulations and analysis do not incorporate a financial sector module or potential asymmetric monetary transmission at low interest rates; they also do not capture the reinforcing effect of improved communication.

### Communication, transparency, and unconventional tools
- BOT transparency improved: Dincer-Eichengreen index score rose from 6 in 2000 to 10 by 2014 (maximum is 15).
- Higher central bank transparency is associated with strengthened forward-looking inflation dynamics.
- BOT communication recommendations:
  - Provide further guidance on envisaged actions to achieve the target over a given horizon to avoid de-anchoring of long-term expectations.
  - Assess past performance, discuss shocks impairing the inflation target, and elaborate internal debates and dissenting views in MPC minutes to guide private sector expectations.
- If further adverse shocks materialize, the BOT could consider additional measures, including forward guidance and other non-standard tools.
- Overview of unconventional monetary policy measures since the GFC (categories listed):
  - A. Interest Rate Policy: setting policy rates and signaling future path; Negative interest rates; Forward guidance on interest rates; Expansion of liquidity-providing facilities.
  - B. Balance Sheet Policies: Quantitative easing and forward guidance on the central bank balance sheet; Credit easing; Expansion of collateral/counterparties; Purchases of commercial paper, corporate bonds, and other securities; Bank reserves policy to enlarge monetary base.
  - C. Exchange Rate Policies: Exchange rate floor.

### Thailand: Current account surplus — key facts and drivers
- Thailand registered a current account surplus of 11.4 percent of GDP in 2016.
- After a deficit in 2012–13, the current account surplus rose sharply since 2014.
- Noteworthy recent features: rising services income, declining imports, and stagnant goods exports.
- Both rising savings and declining investment contributed to external imbalances.
- EBA CA model estimates for 2016:
  - Cyclically adjusted current account: 11.1 percent of GDP
  - Current account norm: 1.1 percent of GDP
  - Policy gap: 2.3 percent of GDP
  - Unexplained residual: 7.6 percent of GDP
- Staff assessment considers cyclical/transitory adjustments for terms of trade shocks, tourism boom, and political uncertainty.

### Savings, investment, and contributions to the current account turnaround
- Findings on savings:
  - National savings rose from 26.3 percent of GDP in 2013 to an estimated 33.5 percent of GDP in 2016, mostly driven by higher corporate savings.
  - Estimated contributions to the turnaround in the current account since 2013:
    - Lower oil prices: accounted for 5.8 percent of GDP (about half of the turnaround).
    - Surge in services income (mainly tourism receipts): accounted for 3 percent of GDP.
- Findings on investment:
  - Gross domestic investment declined from 27.5 percent of GDP in 2013 to 22 percent of GDP in 2016.
  - Public investment increased by 2 percent of GDP over the same period; private investment declined by over 7 percent of GDP.
- Drivers of weak private investment (ordered cyclical/transitory to structural):
  - Weak external demand: private machinery and equipment investment ≈ 80 percent of total private investment; construction ≈ 20 percent.
  - Delays in public investment implementation after political changes in 2014 impacted private investment.
  - Political uncertainty reduced investor confidence and private investment.
  - Structural transformation: firms moving up global value chains face bottlenecks (infrastructure, skilled labor), learning costs, high sunk costs, and coordination problems leading to underinvestment.

### Inputs in staff judgement for the assessment of the external position
- EBA CA model for 2016:
  - Cyclical adjustment: 0.3 percent of GDP
  - Cyclically adjusted CA: 11.1 percent of GDP
  - CA norm: 1.1 percent of GDP
  - CA gap: 10.0 percent of GDP
    - Policy gap: 2.3 percent of GDP
    - Unexplained residual: 7.6 percent of GDP
- Staff adjustments aimed to improve measurement of:
  - Terms of trade shocks:
    - EBA commodities terms of trade cyclical adjustment: 0.3 percent of GDP
    - Alternative indices indicate terms of trade improved by close to 13 percent over 2013–16; EBA index shows 8 percent improvement.
    - Using alternative indices in EBA raises cyclical contribution of terms of trade by [1.0, 1.5] percent of GDP for 2016.
  - Boom in tourism:
    - Service balance accounted for around 3 percent of GDP of the increase in the CA since 2013.
    - Tourist arrivals increased by 25 percent; tourism receipts increased by nearly 18 percent.
    - Hodrick-Prescott filter estimates transitory contribution from tourism boom in the range [1.0, 1.5] percent of GDP for 2016.
  - Political uncertainty:
    - Incorporating change in political uncertainty can explain about [1.0, 4.0] percent of GDP of the residual for Thailand.
- Staff-adjusted assessment:
  - After country-specific adjustments, total assessed CA gap for 2016: [3.0, 7.0] percent of GDP higher than warranted by medium-term fundamentals and desirable policy settings.
  - Key staff-adjusted contributions for 2016:
    - Terms of trade: [1.0, 1.5]
    - Tourism: [1.0, 1.5]
    - Political uncertainty: [1.0, 4.0]
  - Staff-assessed CA gap after adjustments: [3.0, 7.0]

### Policy implications for demand and structural reform
- Recommended policy mix:
  - Use an expansionary mix of fiscal and structural reforms to strengthen domestic demand and bring inflation back to target.
  - Scale up public investment in infrastructure, facilitate human capital accumulation, and improve productivity to stimulate private investment and support external rebalancing over the medium term.
  - Allow needed real exchange rate appreciation to occur via a flexible exchange rate, driven by growth and boosting real incomes.
- Policies to support private investment:
  - Encourage research and development and international technology transfers.
  - Provide better finance to small- and medium-sized enterprises.
  - Create an environment conducive to new businesses and investments.
  - Maintain a stable economic and political environment to restore private investor confidence.
- Pension and aging-related reforms:
  - Further expand the pension system, particularly for informal workers, while ensuring long-term fiscal sustainability.
  - Undertake a comprehensive review of fragmented pension schemes using long-term projections.
  - Consider extending the pensionable/retirement age and reviewing pension benefit levels.
  - Consider alternative revenue sources to finance spending pressures.
  - These reforms would help lower households’ precautionary savings.

### Demographic transition — key projections and macroeconomic implications
- Fertility and longevity:
  - Total fertility rate: dropped from 6.4 children per woman in the 1950s to 1.5 in 2015; projected to decline further over the next 20 years.
  - Life expectancy at birth: increased from 54 years in 1960 to 74½ years in 2015; projected to increase to 77 years by 2025 and 79 years by 2050.
- Aging and dependency:
  - Thailand is the second-most-aged country in southeast Asia, after Singapore, with elderly people constituting over 10 percent of the population.
  - Old-age dependency ratio projected to increase to 48 percent by 2050.
  - Speed of aging: the increase in the old-age dependency ratio from 15 percent to 20 percent will take six years in Thailand (IMF, 2017), compared with 26 years in Europe and more than 50 years in the United States.
- Working-age population:
  - The fraction of the population that is of working age already peaked in 2015 and is projected to decline rapidly in coming years.
  - Staff projects the demographic shift will turn Thailand’s historical “demographic dividend” into a “demographic drag” on real GDP growth of 0.5-1 percentage point per year in the coming two decades.
  - Population aging is projected to increase public spending in pensions and health by at least 3 percent of GDP in Thailand in the coming two decades.
  - Improving replacement ratios to more adequate levels would entail even higher fiscal costs.
  - Thailand’s per capita income (in purchasing power parity relative to the United States) stands at a significantly lower level than those reached by matured, advanced economies at the same stage of the aging cycle (IMF, 2017), implying Thailand is “getting old before achieving high-income status.”

### Demographics and the current account: mechanism and EBA projections
- Life-cycle theory (Modigliani, 1970) and OLG model (Diamond, 1965) mechanisms:
  - Composition effect: a higher dependency ratio lowers savings.
  - Life-cycle effect: higher survival risk and lower old-age income increase saving, attenuating the composition effect.
  - For a given aging speed, a higher dependency ratio implies higher survival risk, attenuating the composition effect and leading to a higher current account.
  - For a given dependency ratio, a higher aging speed implies higher survival risk, reinforcing the life-cycle effect and increasing the current account.
- EBA model treatment:
  - Demographic factors incorporated include population growth, old-age dependency ratio, aging speed, and interaction terms.
  - Expected signs for interaction terms in the current account regression are positive.
- Quantitative projection:
  - Demographic factors are expected to increase Thailand’s current account norm by 0.8 percent of GDP over 2020–30, compared with the Asian average of 0.2 percent of GDP. This is the third largest contribution of demographic factors to the norm among Asian countries, after Japan and Korea (IMF, 2017).
- Policy relevance and urgency:
  - Addressing rapid population aging is urgent given:
    - Projected 0.5-1 percentage point per year drag on real GDP growth over the coming two decades;
    - Projected increase in public pension and health spending of at least 3 percent of GDP over the coming two decades;
    - Sizable expected change in the current account norm (0.8 percent of GDP over 2020–30).

*IMF staff summary based on "THAILAND: BRINGING INFLATION BACK TO TARGET" (May 2, 2017).*

### References ______________________________________________________________________________ 9

### THAILAND: BRINGING INFLATION BACK TO TARGET

### Context and main drivers of inflation
- Headline inflation was below target in 2015–16, driven largely by external factors, notably the sharp decline in oil prices.
  - Energy price inflation declined from 1.7 percent in 2014 to -15 percent in 2015.
  - Core inflation declined from 1.6 percent to 1.1 percent over the same period and reached 0.6 percent by March 2017.
- Headline inflation in Thailand is more sensitive to global oil prices because the tax structure on retail petrol prices provides a relatively smaller cushion.
- Econometric framework: a hybrid New Keynesian Phillips Curve with time-varying parameters was estimated (1995:Q1–2016:Q3), with inflation decomposed into:
  - long-run inflation expectations (trend) e_t^π,
  - persistence (moving average of past four quarters π_{t−1}^{MA4}),
  - economic slack (output gap (y_t − y*_t)),
  - imported inflation (π_t^{IM}, year-on-year growth of import prices in local currency),
  - an error term ε_t.
- Key empirical findings:
  - The impact of lower import prices (especially oil) was a major factor behind the decline in headline inflation in 2015.
  - The forward-looking component weakened: the forward-looking parameter θ_t declined and the estimated long-term inflation trend e_t^π has been on a declining trend in recent years.
  - Declining forward-looking dynamics made headline inflation more vulnerable to oil price declines and the weaker cyclical position.

### Monitoring medium- to long-term inflation expectations (Box 1)
- Survey and market-based indicators diverged:
  - Survey measures (Consensus Economics, 6–10 years ahead) have remained around or above the mid-point inflation target of 2.5 percent.
  - BEIRs (break-even inflation rates) from Thailand’s ILBs (maturities 2021 and 2028) declined significantly since 2013 and remain well below target.
- Caveats on BEIRs: they reflect expected inflation plus inflation risk and liquidity risk premia, so they are overall inflation compensation rather than pure expected inflation.
- Econometric trend estimates indicate the long-term inflation trend in Thailand has been below the mid-point inflation target since early 2015 and is significantly below survey measures—raising risks of de-anchoring of inflation expectations.
- Trend inflation estimates used in analysis are from Garcia and Poon (forthcoming), based on the approach in Chan et al. (2015).

### Monetary policy stance and real interest rates
- Policy rate context:
  - The Bank of Thailand (BOT) cut the policy rate by 50 basis points in early 2015 to a near historical low of 1.5 percent and has kept the policy rate constant since April 2015.
  - After the GFC, the policy rate was cut to 1.25 percent between April 2009 and June 2010.
- Estimated natural real interest rate was low, between 0.1 percent and 0.2 percent in 2015–16.
- Measures of effective real rates:
  - One measure (policy rate minus actual inflation over the last two years) ranged from 2.4 percent to 1.3 percent.
  - Policy rate minus expected inflation over 2016 ranged from 0.3 percent to 1.3 percent.
- Assuming policy rates on hold and using average inflation expectations:
  - BOT average inflation expectations: 1.2 percent.
  - Fund staff average inflation expectations: 1.0 percent.
  - With those expectations, ex-ante real rates would remain above estimated natural rates in 2017.

### Model simulations and policy scenarios
- Simulations use a stylized new Keynesian model with a quadratic central bank policy reaction function considering inflation and output gaps and interest rate smoothing.
- Passive scenario (no monetary or fiscal stimulus):
  - Inflation and inflation expectations remain subdued.
  - Inflation would remain at or below the lower end of the tolerance band, with substantial risk of falling outside the tolerance band once base effects from higher oil prices fully unwind.
  - Small negative output gap would persist and cost of adverse shocks would be large.
- Active scenario (gradual monetary easing combined with fiscal stimulus):
  - Monetary easing plus fiscal stimulus can steer inflation back to the 2.5 percent mid-point target (with a slight overshooting).
  - The output gap would close.
  - Readiness to act and decisive communication are fundamental to prevent de-anchoring of long-term inflation expectations.

### Financial stability and macroprudential considerations
- Financial stability risks are judged to be contained; monetary policy actions to raise inflation are expected to have positive effects on financial stability:
  - Higher inflation lowers the real burden of highly indebted agents, particularly lower-income households.
  - Restoring inflation may prevent de-anchoring of expectations, which would otherwise raise long-term real rates and debt service costs.
- Policy mix recommendation:
  - Further monetary easing accompanied by tighter regulatory and prudential measures is appropriate if needed.
  - Macroprudential tools targeted at specific pockets of fragility can be used if lower interest rates trigger risks.
  - Example measures: decreasing loan-to-value (LTV) ratios to tame house price increases and closing regulatory arbitrage loopholes.
- The policy simulations and analysis do not incorporate a financial sector module or potential asymmetric monetary transmission at low interest rates; they also do not capture the reinforcing effect of improved communication.

### Communication, transparency, and unconventional tools
- BOT transparency improved: Dincer-Eichengreen index score rose from 6 in 2000 to 10 by 2014 (maximum is 15).
- Higher central bank transparency is associated with strengthened forward-looking inflation dynamics.
- BOT communication recommendations:
  - Provide further guidance on envisaged actions to achieve the target over a given horizon to avoid de-anchoring of long-term expectations.
  - Assess past performance, discuss shocks impairing the inflation target, and elaborate internal debates and dissenting views in MPC minutes to guide private sector expectations.
- If further adverse shocks materialize, the BOT could consider additional measures, including forward guidance and other non-standard tools.
- Overview of unconventional monetary policy measures since the GFC (categories listed):
  - A. Interest Rate Policy: setting policy rates and signaling future path; Negative interest rates; Forward guidance on interest rates; Expansion of liquidity-providing facilities.
  - B. Balance Sheet Policies: Quantitative easing and forward guidance on the central bank balance sheet; Credit easing; Expansion of collateral/counterparties; Purchases of commercial paper, corporate bonds, and other securities; Bank reserves policy to enlarge monetary base.
  - C. Exchange Rate Policies: Exchange rate floor.

*Italic source: IMF staff summary based on "THAILAND: BRINGING INFLATION BACK TO TARGET" (May 2, 2017).*

### References

### cr17137 - References

### References
- Bank of England, 2011, “Instruments of macroprudential policy,” Discussion Paper, (London: Bank of England)
- Chan, J., Clark, T., and Koop, G., 2015, “A New Model of Inflation, Trend Inflation, and Long-Run Inflation Expectations,” Federal Reserve Bank of Cleveland Working Paper No. 15–20 (Cleveland, OH: Federal Reserve Bank of Cleveland).
- Dany, G., and Garcia, J. A., forthcoming, “Inflation Dynamics in ASEAN–5 Countries,” IMF Working Paper.
- Dincer, N., and Eichengreen, B., 2014, “Central Bank Transparency and Independence: Updates and New Measures,” International Journal of Central Banking, March, pp. 189–253.
- Garcia, J. A., and Poon, A., forthcoming, “Long-Term Inflation Trends in ASEAN–5 Countries,” IMF Working Paper.
- International Monetary Fund, 2016, “Global Disinflation in an Era of Constrained Monetary Policy,” in World Economic Outlook, October, (Washington: International Monetary Fund).
- Lubik, T., and Matthes, C., 2015, “Calculating the Natural Rate of Interest: A Comparison of Two Alternative Approaches,” Economic Brief No. 15–10, (Richmond, VA: Federal Reserve Bank of Richmond).

### Thailand: Current Account Surplus — Introduction
- Thailand registered a current account surplus of 11.4 percent of GDP in 2016.
- After a deficit in 2012–13, the current account surplus rose sharply since 2014.
- Noteworthy recent features: rising services income, declining imports, and stagnant goods exports.
- Both rising savings and declining investment contributed to external imbalances.
- EBA CA model estimates for 2016:
  - Cyclically adjusted current account: 11.1 percent of GDP
  - Current account norm: 1.1 percent of GDP
  - Policy gap: 2.3 percent of GDP
  - Unexplained residual: 7.6 percent of GDP
- Staff assessment considers cyclical/transitory adjustments for terms of trade shocks, tourism boom, and political uncertainty.

### The Current Account from a Saving–Investment Perspective
Findings on savings:
- National savings rose from 26.3 percent of GDP in 2013 to an estimated 33.5 percent of GDP in 2016, mostly driven by higher corporate savings.
- Estimated contributions to the turnaround in the current account since 2013:
  - Lower oil prices: accounted for 5.8 percent of GDP (about half of the turnaround).
  - Surge in services income (mainly tourism receipts): accounted for 3 percent of GDP.
- Rural sector experienced adverse shocks (low export food and rubber prices and a severe drought).
- Pension system features:
  - Replacement ratios vary significantly across worker types and are particularly low for informal workers.
  - Elderly informal workers are relying more on savings; savings have not yet become a major source of their income.
- Demographic transition:
  - Key turning point around 2014–15; Thailand is one of the fastest-aging countries in Asia.
  - Working-age population projected to decline sharply; old-dependency ratio projected to increase fast.
  - Demographic factors expected to be a key driver raising Thailand’s current account norm in coming years.

Findings on investment:
- Gross domestic investment declined from 27.5 percent of GDP in 2013 to 22 percent of GDP in 2016.
- Public investment increased by 2 percent of GDP over the same period; private investment declined by over 7 percent of GDP.
- Drivers of weak private investment (ordered cyclical/transitory to structural):
  - Weak external demand: private machinery and equipment investment ≈ 80 percent of total private investment; construction ≈ 20 percent.
  - Delays in public investment implementation after political changes in 2014 impacted private investment.
  - Political uncertainty reduced investor confidence and private investment.
  - Structural transformation: firms moving up global value chains face bottlenecks (infrastructure, skilled labor), learning costs, high sunk costs, and coordination problems leading to underinvestment.

### Inputs in Staff Judgement for the Assessment of the External Position
- EBA CA model for 2016:
  - Cyclically adjusted current account: 11.1 percent of GDP
  - Current account norm: 1.1 percent of GDP
  - Large unexplained residual after policy gap: 7.6 percent of GDP (rising since 2013)
- Staff adjustments aimed to improve measurement of:
  - Terms of trade shocks:
    - EBA commodities terms of trade cyclical adjustment: 0.3 percent of GDP
    - Alternative indices indicate terms of trade improved by close to 13 percent over 2013–16; EBA index shows 8 percent improvement.
    - Using alternative indices in EBA raises cyclical contribution of terms of trade by [1.0, 1.5] percent of GDP for 2016.
  - Boom in tourism:
    - Service balance accounted for around 3 percent of GDP of the increase in the CA since 2013.
    - Tourist arrivals increased by 25 percent; tourism receipts increased by nearly 18 percent.
    - Hodrick-Prescott filter estimates transitory contribution from tourism boom in the range [1.0, 1.5] percent of GDP for 2016.
  - Political uncertainty:
    - EBA proxy based on ICRG may not capture changes during political transition.
    - Rolling regression of private investment on inverse ICRG, controlling for external demand, suggests political uncertainty contributed to weaker private investment.
    - Incorporating change in political uncertainty can explain about [1.0, 4.0] percent of GDP of the residual for Thailand.
- Staff-adjusted assessment:
  - After country-specific adjustments, total assessed CA gap for 2016: [3.0, 7.0] percent of GDP higher than warranted by medium-term fundamentals and desirable policy settings.
  - Wide range reflects large EBA CA regression residuals and uncertainty.

Key quantitative table (Staff summary of EBA and adjustments):
- Actual current account (CA): 11.4
- EBA CA estimates:
  - Cyclical adjustment: 0.3
  - Cyclically adjusted CA: 11.1
  - CA norm: 1.1
  - CA gap: 10.0
    - Policy gap: 2.3
    - Unexplained residual: 7.6
- Staff-adjusted estimates (Cyclical and transitory adjustments) for 2016: [3.0, 7.0]
  - Terms of trade: [1.0, 1.5]
  - Tourism: [1.0, 1.5]
  - Political uncertainty: [1.0, 4.0]
- Staff-assessed CA gap after adjustments: [3.0, 7.0]

### Policy Implications
- Recommended policy mix:
  - Use an expansionary mix of fiscal and structural reforms to strengthen domestic demand and bring inflation back to target.
  - Scale up public investment in infrastructure, facilitate human capital accumulation, and improve productivity to stimulate private investment and support external rebalancing over the medium term.
  - Allow needed real exchange rate appreciation to occur via a flexible exchange rate, driven by growth and boosting real incomes.
- Policies to support private investment:
  - Encourage research and development and international technology transfers.
  - Provide better finance to small- and medium-sized enterprises.
  - Create an environment conducive to new businesses and investments.
  - Maintain a stable economic and political environment to restore private investor confidence.
- Pension and aging-related reforms:
  - Further expand the pension system, particularly for informal workers, while ensuring long-term fiscal sustainability.
  - Undertake a comprehensive review of fragmented pension schemes using long-term projections.
  - Consider extending the pensionable/retirement age and reviewing pension benefit levels.
  - Consider alternative revenue sources to finance spending pressures.
  - These reforms would help lower households’ precautionary savings.

### Appendix I. Demographic Transition and the Current Account — Key Projections and Facts
- Fertility and longevity:
  - Total fertility rate: dropped from 6.4 children per woman in the 1950s to 1.5 in 2015; projected to decline further over the next 20 years.
  - Life expectancy at birth: increased from 54 years in 1960 to 74½ years in 2015; projected to increase to 77 years by 2025 and 79 years by 2050.
- Aging and dependency:
  - Thailand is the second-most-aged country in southeast Asia, after Singapore, with elderly people constituting over 10 percent of the population.
  - Old-age dependency ratio projected to increase to 48 percent by 2050.
  - Speed of aging: the increase in the old-age dependency ratio from 15 percent to 20 percent will take six years in Thailand (IMF, 2017), compared with 26 years in Europe and more than 50 years in the United States.
- Working-age population: overall population expected to start declining (text ends here).

*International Monetary Fund. cr17137 - References.*

### 2023. The fraction of the population that is of working age already peaked in 2015 and is

### cr17137 - 2023. The fraction of the population that is of working age already peaked in 2015 and is

### Demographic trends and headline finding
- The fraction of the population that is of working age already peaked in 2015 and is projected to decline rapidly in coming years.
- The population pyramid shows a visible trend of an aging population (United Nations data cited in figures).

### Implications for potential growth and public finances
- Declining working-age population will reduce potential economic growth.
- Staff projects the demographic shift will turn Thailand’s historical “demographic dividend” into a “demographic drag” on real GDP growth of 0.5-1 percentage point per year in the coming two decades.
- Population aging is projected to increase public spending in pensions and health by at least 3 percent of GDP in Thailand in the coming two decades.
- Improving replacement ratios to more adequate levels would entail even higher fiscal costs.
- Thailand’s per capita income (in purchasing power parity relative to the United States) stands at a significantly lower level than those reached by matured, advanced economies at the same stage of the aging cycle (IMF, 2017), implying Thailand is “getting old before achieving high-income status.”

### Demographics and the current account: theory and evidence
- Life-cycle theory (Modigliani, 1970) implies: young households borrow, middle-age households save, and retired households dissave; countries with relatively young or old populations are more likely to consume more than they produce, yielding current account deficits.
- Interactions among demographic variables matter (illustrated via an OLG model, Diamond, 1965):
  - Composition effect: a higher dependency ratio lowers savings.
  - Life-cycle effect: higher survival risk and lower old-age income increase saving, attenuating the composition effect.
  - For a given aging speed, a higher dependency ratio implies higher survival risk, attenuating the composition effect and leading to a higher current account.
  - For a given dependency ratio, a higher aging speed implies higher survival risk, reinforcing the life-cycle effect and increasing the current account.
- Empirical evidence for East Asian economies:
  - Studies (Kelley and Schmidt, 1995; Higgins and Williamson, 1996 and 1997; Williamson, 2001) support that changes in dependency burdens explain large rises in saving rates.
  - Higgins and Williamson (1996 and 1997) estimate the increase in East Asia’s saving rates due to demographic transition from the early 1970s to early 1990s was 13.6 percentage points of GDP.

### EBA model treatment and projections for Thailand’s current account norm
- Within the EBA framework, demographic factors are incorporated and expected to raise Thailand’s current account norm in coming years.
- The EBA model uses population growth (captures shares of young population), old-age dependency ratio (captures shares of old population), aging speed (a proxy for future old-age dependency ratio), and two interaction terms:
  - Interaction of dependency ratio with aging speed (relative to world average).
  - Interaction of aging speed with dependency ratio (relative to world average).
- The expected signs in the current account regression for these interaction terms are positive:
  - Rel. dependency ratio * aging speed: +
  - Rel. aging speed * dependency ratio: +
- Reflecting a major demographic transition, demographic factors are expected to increase Thailand’s current account norm by 0.8 percent of GDP over 2020–30, compared with the Asian average of 0.2 percent of GDP. This is the third largest contribution of demographic factors to the norm among Asian countries, after Japan and Korea (IMF, 2017).

### Policy relevance and urgency
- Addressing the macroeconomic and social implications of rapid population aging is an urgent priority for Thailand, given:
  - The projected 0.5-1 percentage point per year drag on real GDP growth over the coming two decades;
  - The projected increase in public pension and health spending of at least 3 percent of GDP over the coming two decades;
  - The sizable expected change in the current account norm (0.8 percent of GDP over 2020–30).

*International Monetary Fund (excerpt from cr17137).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17137.pdf_