## cr18143 - 0.7 percent, below the target band for the third year in a row, reflecting low food prices and

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### Recent developments, outlook, and risks
- Growth momentum:
  - Real GDP growth: 3.9 percent (2017); projected 3.9 percent (2018) and 3.8 percent (2019).
- Domestic demand: remains sluggish; recovery not yet broad-based.
- Inflation:
  - Headline inflation averaged 0.7 percent (2017), below target band (2.5±1.5 percent) for the third year in a row.
  - Headline CPI (end of period): 0.8 (2017); projected 0.8 (2018) and 1.0 (2019).
  - Headline CPI (period average): 0.7 (2017); projected 1.4 (2018) and 0.7 (2019).
  - Core CPI (end of period): 0.6 (2017); projected 1.2 (2018) and 1.3 (2019).
  - Core CPI (period average): 0.6 (2017); projected 0.9 (2018) and 1.3 (2019).
  - Long-term inflation expectations have weakened and are now below the mid-point target.
- External sector:
  - Current account surplus: about 10.6 percent of GDP (2017); projected 9.0 percent (2018) and 8.3 percent (2019).
  - Current account balance (billions of U.S. dollars): 48.1 (2017); projected 43.4 (2018) and 43.3 (2019).
  - Exports, f.o.b. (billions of U.S. dollars): 235.1 (2017); projected 255.0 (2018) and 274.6 (2019).
  - Exports growth rate (dollar terms): 9.7 (2017); projected 8.4 (2018) and 7.7 (2019).
  - Imports, f.o.b. (billions of U.S. dollars): 203.2 (2017); projected 224.9 (2018) and 243.0 (2019).
- Financial stability: financial system broadly sound; vulnerabilities in the nonbank financial sector warrant close monitoring.
- Outlook summary:
  - Growth: 3.9 percent (2018 projection) and 3.8 percent (2019 projection).
  - Inflation: expected to remain below the 2.5 percent target throughout the projection period.
  - Risks: near-term risks from potential external weakness including protectionism; medium-term downside risks from structural challenges; upside: stronger-than-projected rebound in investment and greater regional trade dynamism.

### Executive Board assessment and policy guidance
- Board view: welcomed improving prospects from global and regional trade but recovery not broad-based and inflation dynamics remain weak.
- Fiscal policy guidance:
  - Welcomed fiscal responsibility law and anchoring fiscal policy in a medium-term fiscal framework.
  - Supported scaling up macro-critical infrastructure projects to crowd in private investment and stimulate domestic demand.
  - Emphasized fiscal reforms to strengthen public investment implementation capacity and better targeting of social expenditures.
  - Noted need for additional growth-friendly revenue mobilization in the medium to long term for aging-related expenditure pressures.
- Monetary and macroprudential policy guidance:
  - Several Directors agreed monetary easing, within a broader expansionary policy mix, could help steer inflation back to target; macroprudential policy should address financial stability concerns.
  - Some Directors viewed current monetary stance as sufficiently accommodative and stressed balancing support for inflation against financial stability risks.
  - Importance of enhanced communication to strengthen monetary transmission and exchange rate flexibility emphasized.
  - Debate on disclosure of intervention data: some Directors encouraged publication with appropriate lags; others urged caution given potential sensitivity.
- Financial sector:
  - Commended measures to strengthen financial system stability.
  - Called for close monitoring of nonbank financial sector vulnerabilities and strengthening macroprudential policy.
  - Looked forward to forthcoming FSAP for comprehensive risk assessment.
- Structural reforms:
  - Called for comprehensive package: pension reform, human capital development, higher female labor force participation, improving business environment, expedited infrastructure and logistics investment to deepen ASEAN integration.
- External position:
  - Most Directors: Thailand’s external position substantially higher than warranted by medium-term fundamentals and desirable policies; some urged cautious interpretation citing Thailand-specific factors.

### Key policy recommendations (staff)
- Fiscal:
  - Use available fiscal space judiciously to spur domestic demand and support potential output; implement macro-critical public infrastructure projects to crowd in private investment.
  - Improve public investment implementation capacity and better target social expenditures.
  - Additional medium- to long-term growth-friendly revenue mobilization to prepare for aging-related expenditure pressures.
- Monetary and FX:
  - Monetary easing to help steer inflation to target, complement fiscal stimulus, curtail risks of low inflation, and help balance capital flows.
  - FX intervention should be limited to avoiding disorderly market conditions.
  - Strengthen monetary policy transmission via enhanced communication and forward guidance.
- Macroprudential:
  - Contain systemic risks from search-for-yield behavior and provide monetary policy space to target inflation (e.g., counter-cyclical capital buffer, targeted LTVs, systemic stress testing).
- Structural reforms:
  - Strengthen public investment implementation, improve social safety nets, support labor force participation and education, reform pensions, and improve business environment.

### Selected economic indicators and key statistics (excerpt)
- Real GDP growth (y/y percent change): 1.0 (2014); 3.0 (2015); 3.3 (2016); 3.9 (2017); 3.9 (2018 proj.); 3.8 (2019 proj.).
  - Consumption growth: 1.2 (2014); 2.3 (2015); 2.8 (2016); 2.6 (2017); 3.7 (2018 proj.); 4.4 (2019 proj.).
  - Gross fixed investment: -2.2 (2014); 4.3 (2015); 2.8 (2016); 0.9 (2017); 6.8 (2018 proj.); 7.4 (2019 proj.).
- Saving and investment (percent of GDP):
  - Gross domestic investment: 23.9 (2014); 22.3 (2015); 21.1 (2016); 22.8 (2017); 24.2 (2018 proj.); 24.7 (2019 proj.).
  - Gross national saving: 27.7 (2014); 30.3 (2015); 32.8 (2016); 33.4 (2017); 33.2 (2018 proj.); 33.1 (2019 proj.).
- Fiscal accounts (percent of GDP):
  - General government balance: -0.8 (2014); 0.1 (2015); 0.6 (2016); -0.6 (2017); -0.9 (2018 proj.); -0.9 (2019 proj.).
  - Public sector debt (end of period): 43.3 (2014); 42.5 (2015); 41.8 (2016); 41.9 (2017); 41.6 (2018 proj.); 41.6 (2019 proj.).
- Monetary accounts (end of period, y/y percent change):
  - Broad money growth: 4.6 (2014); 4.4 (2015); 4.2 (2016); 5.1 (2017); 4.5 (2018 proj.); 5.3 (2019 proj.).
  - Credit to the private sector by depository corporations: 4.7 (2014); 5.3 (2015); 3.9 (2016); 4.5 (2017); 4.5 (2018 proj.); 4.3 (2019 proj.).
- Balance of payments and reserves:
  - Current account balance (percent of GDP): 3.7 (2014); 8.0 (2015); 11.7 (2016); 10.6 (2017); 9.0 (2018 proj.); 8.3 (2019 proj.).
  - Gross official reserves (billions of U.S. dollars, end of period): 239.3 (2017); 249.0 (2018 proj.); 249.0 (2019 proj.).
  - Exchange rate (baht/U.S. dollar): 33.9 (2017).
- External debt:
  - (Percent of GDP): 34.8 (2014); 32.7 (2015); 32.1 (2016); 32.7 (2017); 33.7 (2018 proj.); 33.3 (2019 proj.).
  - (Billions of U.S. dollars): 149.0 (2017); 162.9 (2018 proj.); 173.4 (2019 proj.).
- Memorandum:
  - Nominal GDP (billions of baht): 15,450 (2017); 16,150 (2018 proj.); 17,003 (2019 proj.).
  - Nominal GDP (billions of U.S. dollars): 455.3 (2017).

*International Monetary Fund. Staff Report for the 2018 Article IV Consultation (May 2, 2018).*

### Reserve accumulation and exchange rate dynamics
- FX intervention and reserves:
  - Sizable continuous monthly increase in reserves and FX forward position during 2017 suggests FX intervention has been mostly one-sided.
  - As of December 2017, international reserves (including the net forward position): US$239.3 billion, an increase of US$41.7 billion from end-2016 and well above Fund adequacy metrics.
- Exchange rate movements:
  - REER appreciated 3.4 percent (2017).
  - Nominal appreciation versus the U.S. dollar: 9.6 percent (2017).
- Drivers: large current account surplus and sizable portfolio inflows; partially offset by net outflows in FDI and other investment.

### Staff baseline outlook and fiscal assumptions
- Growth momentum expected to continue in 2018 and 2019; domestic and external imbalances narrow only gradually.
- Fiscal policy assumed supportive, with stimulus amounting to 1.4 percent of GDP over the medium term from a rebound in public investment in 2018 and partial implementation of EEC projects starting in 2019.
- Monetary policy rate assumed unchanged in the medium term.
- Inflation expected to remain below the 2.5 percent target throughout projection period; output gap expected to close over the medium term.
- Risks: near-term broadly balanced; medium-term tilted to the downside. Upside: stronger-than-expected tourism and EEC spillovers. Downside: protectionism, insufficient FY 2019 fiscal support, household debt overhang, stagnant household income, low SME investment/productivity, flat Phillips Curve and lower inflation expectations, U.S. tax reform spillovers, global monetary policy normalization, and China rebalancing.

### External position assessment
- EBA-based staff preliminary estimation:
  - Cyclically adjusted current account (CA) gap: about 3.5 percent to 7.5 percent of GDP.
  - Implied REER gap: -13 percent to -6 percent.
- Staff view: reducing the CA gap requires concerted policy effort to support domestic demand and sustained, albeit gradual, appreciation of the REER over the medium term.
- Authorities’ view: external imbalances reflect structural challenges (e.g., savings from lower imported oil prices, aging population, limited trickle-down from tourism) and called for careful interpretation of the implied exchange rate assessment.

### Fiscal policy recommendations and fiscal space (detailed)
- Staff recommended a more expansionary policy mix: fiscal stimulus, monetary easing, and structural reform.
- Public investment scaling:
  - Staff recommended scaling up public investment by a cumulative 5 percentage points, relative to baseline, frontloaded over the next three years.
  - Address teething problems in new procurement law to reduce delays.
  - Improve capacity and coordination among government agencies; EEC Act approval shortens time to establish PPPs.
- Medium-to-long run revenue:
  - Additional domestic revenue mobilization needed for aging-related spending.
  - Staff noted potential for raising VAT revenues from current low level and rationalizing tax incentives.
- Fiscal recommendations to spur domestic demand and address external rebalancing include:
  - Improvements in public investment management.
  - Better targeting of social expenditures (centralize social assistance, review schemes, improve Low-Income Earners Registry eligibility).
  - Broad strategy for aging-related expenditure pressures (pension system fragmentation, low coverage, low replacement rates, low retirement age and contribution rates).
  - Gender-inclusive policies to improve female labor force participation (e.g., fiscal support for child care services).

### Monetary policy recommendations and inflation dynamics (detailed)
- Staff recommended monetary easing to curtail risks of low inflation becoming entrenched given below-target and declining trend inflation estimates and weak long-term survey forecasts.
- Trade-offs:
  - Monetary easing entails macro risks by bringing nominal interest rates closer to the zero-lower bound and constraining space to counteract adverse shocks.
  - Easing would support domestic demand recovery, aid external rebalancing in short term, and help attenuate capital inflows and nominal appreciation pressures.
- Transmission and liquidity management:
  - Strengthen monetary policy transmission via communication and forward guidance.
  - BOT liquidity management should maintain favorable financing conditions and keep yield curve shape aligned with accommodative stance amid U.S. rate normalization.

### Structural reform priorities
- Address procurement-related delays to realize infrastructure push.
- Improve public investment management and PPP risk monitoring to maximize returns.
- Reform social assistance delivery and targeting to address poverty and inequality without undue fiscal pressure.
- Pension reform priorities:
  - Harmonization, sustainability, coverage (over 60 percent of the working-age population is not covered by a formal pension), adequacy (private sector replacement rate 30 percent), fairness (civil servant pensions more generous), poverty alleviation (old-age allowance low and untargeted).
  - Current retirement age 55 and contribution rate 6 percent for Old Age Benefit under the Social Security Fund are low.
- Improve SOE governance (draft law in Parliament) to contribute to fiscal sustainability and investment efficiency.
- Promote reforms to improve productivity, business climate, labor force participation, and linkages between dynamic export sectors and broader economy.

### Alternative scenarios and simulation highlights
- Active scenario (monetary and fiscal stimulus: frontloaded public investment and monetary easing) shows:
  - Short-run growth pickup relative to baseline.
  - Inflation converging to target faster than baseline.
  - Partial frontloading of external rebalancing (current account declines faster than baseline).
  - Manageable impact on public debt under monetary easing.
- Recommendation: frontload public investment over next three years to crowd in private investment and support external rebalancing.

### Selected historical and projected figures (table excerpts)
- Real GDP growth (y/y percent change): 2014 Prel. 1.0; 2015 3.0; 2016 3.3; 2017 3.9; 2018 3.9; 2019 3.8; 2020 3.6; 2021 3.6; 2022 3.5; 2023 3.5.
- Headline CPI inflation (period average, y/y percent change): 2014 1.9; 2015 -0.9; 2016 0.2; 2017 0.7; 2018 1.4; 2019 0.7; 2020 1.1; 2021 1.4; 2022 1.8; 2023 2.0.
- Public investment (percent of GDP, fiscal year basis) 1/: 2014 5.3; 2015 5.9; 2016 6.4; 2017 5.2; 2018 6.0; 2019 6.4; 2020 6.4; 2021 6.3; 2022 6.3; 2023 6.0.
- Public sector balance (percent of GDP, fiscal year basis): 2014 -1.3; 2015 0.9; 2016 1.4; 2017 0.1; 2018 -0.8; 2019 -0.9; 2020 -1.0; 2021 -1.1; 2022 -1.2; 2023 -1.2.
- Total public sector debt (percent of GDP, fiscal year basis, end of period): 2014 43.3; 2015 42.5; 2016 41.8; 2017 41.9; 2018 41.6; 2019 41.6; 2020 41.6; 2021 41.7; 2022 41.9; 2023 41.9.
- Current account balance (percent of GDP): 2014 3.7; 2015 8.0; 2016 11.7; 2017 10.6; 2018 9.0; 2019 8.3; 2020 7.6; 2021 6.2; 2022 4.7; 2023 3.3.

### Monetary policy should focus on attaining the inflation target, with macroprudential policy used to address financial stability concerns
- Monetary policy stance and communication:
  - Staff view: focus on attaining inflation target and steer inflation back to target over medium term; effective communication can manage expectations.
  - Recommendation: monetary policy easing advisable to complement fiscal stimulus, curtail risks of low inflation becoming entrenched, and balance capital flows.
  - Current policy rate (authorities' view): "the current policy rate of 1.5 percent remains appropriately accommodative."
  - BOT assessment: weak inflation dynamics mainly reflect supply-side and structural factors; BOT did not see imminent de-anchoring of expectations.
  - Caveats: transmission uncertainty and high household debt; easing could fuel search-for-yield and household indebtedness.
  - Staff simulations: focusing monetary policy on inflation target while using counter-cyclical macroprudential policy yields better output and inflation dynamics than a lean-against-the-wind strategy, without additional financial risks.
- Macroprudential policy and interactions:
  - Role: address financial stability concerns, contain risks from search-for-yield behavior.
  - Measures taken: tightening limits on credit card debt and personal loans effective in containing household debt risks.
  - Further strengthening recommended: implement counter-cyclical capital buffer; use targeted LTV ratios; develop systemic solvency and liquidity stress testing capacity.
- Exchange rate policy and FX intervention:
  - Recommend flexible exchange rate as key shock absorber; limit FX intervention to disorderly market conditions.
  - Liberalize capital outflows and deepen FX market to reduce reliance on intervention; consider disclosing intervention data with appropriate lags.
  - Authorities: intervention intended to avoid disorderly conditions, not resist trend appreciation; opposed publication of intervention data due to sensitivity.
- Financial system soundness:
  - Financial system remains sound; banking sector resilience strengthened with capital adequacy ratios well above requirements.
  - Nonbank vulnerabilities persist in cooperatives and pockets of nonbank sector but not expected to be systemic given small size and limited linkages.
  - Recent regulatory measures: five largest banks designated as Systemically Important Banks (SIBs); move toward integrated supervision of financial conglomerates; enhanced collaboration among BOT, SEC, and OIC; efforts to finalize resolution arrangements and address AML/CFT shortcomings.
  - Macroprudential framework enhancements underway and FSAP forthcoming.

### Key financial and market statistics (selected)
- BOT policy rate: 1.5 percent
- Government bond yields, 2017 (Latest yield / Change from end-2016 / 2017 Highest yield / 2017 Lowest yield):
  - 3M: 1.15 / -0.35 / 1.49 / 1.12
  - 1Y: 1.33 / -0.20 / 1.55 / 1.37
  - 3Y: 1.59 / -0.25 / 1.85 / 1.51
  - 5Y: 1.83 / -0.34 / 2.25 / 1.67
  - 10Y: 2.56 / -0.11 / 2.86 / 2.35
- Financial soundness indicators (selected):
  - Credit-to-GDP gap (st. dev): 2014:Q4 -1.2; 2015:Q4 -0.7; 2016:Q4 -0.2; 2017:Q1 -0.4; 2017:Q2 0.7; 2017:Q3 0.5
  - Deposit-to-loan ratio (commercial banks): 2014:Q4 104.0; 2015:Q4 96.5; 2016:Q4 96.9; 2017:Q1 96.0; 2017:Q2 95.3; 2017:Q3 93.2
  - Leverage ratio (commercial banks, %): 2014:Q4 11.7; 2015:Q4 12.4; 2016:Q4 12.8; 2017:Q1 12.5; 2017:Q2 12.7; 2017:Q3 13.1
  - NPL ratio (commercial banks): 2014:Q4 2.3; 2015:Q4 2.6; 2016:Q4 2.8; 2017:Q1 3.0; 2017:Q2 3.0; 2017:Q3 3.0
  - ROA (commercial banks): 2014:Q4 1.7; 2015:Q4 1.3; 2016:Q4 1.3; 2017:Q1 1.3; 2017:Q2 1.3; 2017:Q3 1.2
  - NPL ratio (depository SFIs): 2014:Q4 4.2; 2015:Q4 4.3; 2016:Q4 4.3; 2017:Q1 4.2; 2017:Q2 3.4; 2017:Q3 3.8

### Raising potential growth and strengthening inclusiveness
- Diagnosis: potential growth declined over last two decades; must address drag from population aging and increase TFP.
- Recommended package:
  - Pension reform, fiscal reforms.
  - Improve education quality and alignment with business needs.
  - Promote foreign-skilled migration by removing administrative hurdles.
  - Relax limits on foreign equity stakes; upgrade competition law for services; continue SOE restructuring.
  - Better targeted social safety net to promote inclusion.
- Regional integration: deepen ASEAN integration (including EEC) to raise potential growth and strengthen Thailand’s role in ASEAN and CLMV production chains.

### The Eastern Economic Corridor (EEC): Thailand 4.0 in Action (summary)
- EEC covers three provinces: Chonburi, Rayong, and Chachoengsao.
- Objectives: upgrade and expand connectivity; transform Thailand into a strategic gateway to Asia; scale up public infrastructure investment to boost growth.
- Investment plan:
  - 15 groups of infrastructure and development projects spanning 5 years (2018-2023) for total investment of about US$50 billion.
  - Sixty percent of public infrastructure investment expected via PPPs; government and SOEs contribute 30 percent and 10 percent, respectively.
  - Initial focus on five priority projects: Laem Chabang seaport expansion (4.3), Map Ta Phut port expansion (0.3), U-Tapao Int'l Airport & MRO (5.7), High speed rail (5.7), plus Other EEC (33.9) — values in billions of U.S. dollars as labeled in source.
  - Awards expected completed by end-2018; implementation extending to 2025.
- Macro effects:
  - Baseline includes 0.6 percentage points to 0.7 percentage points of GDP in additional public investment.
  - Staff recommended scaling up infrastructure spending by additional cumulative 5 percent of GDP over three years.
  - Additional fiscal stimulus expected to crowd in private investment; growth higher by cumulative 2.3 percentage points over projection period.
  - Infrastructure push can help inflation converge to target faster and frontload external rebalancing if accompanied by accommodative monetary policy.
- Scale Up in Infrastructure Investment (In percent of GDP) — preserved series values:
  - Baseline scenario / EEC execution plus other investment: 2019: 1.1; 2020: 1.0; 2021: 1.0; 2022: 0.9; 2023: 0.4.
  - Total public sector: 2019: 0.7; 2020: 0.7; 2021: 0.6; 2022: 0.6; 2023: 0.3.
  - o/w PPP: 2019: 0.3; 2020: 0.2; 2021: 0.2; 2022: 0.2; 2023: 0.1.
  - Private sector through PPPs: 2019: 0.4; 2020: 0.4; 2021: 0.4; 2022: 0.3; 2023: 0.1.
  - Alternative scenario / EEC execution plus other investment: 2019: 2.1; 2020: 3.0; 2021: 2.5; 2022: 1.4; 2023: 0.4.

### Inspecting the strength of monetary policy transmission (Box 2 highlights)
- Overview:
  - Transmission is somewhat weaker but still active.
  - Components examined: main inflation drivers, bank credit channel, and financial market conditions.
- Inflation dynamics:
  - Phillips Curve flattened; smaller impact of activity on inflation.
  - Expectations channel deteriorated: lower inflation expectations and higher inflation persistence delay return to target.
- Bank credit channel:
  - Remains active though weakened.
  - New loan rates incorporate policy rate changes promptly; credit less responsive to monetary easing possibly due to shift to market-based finance.
- Empirical notes (preserved labels and methods):
  - Impulse response of private sector credit to a 25 bps cut in the policy rate examined using VAR including real GDP growth, GDP deflator, and seasonal dummies.
  - New loan rate evidence from Bank of Thailand database.
  - Selected interest rates and commercial banks' response shown in source charts.

### Financial Stress Index and transmission implications
- The Financial Stress Index comprises: banking-sector beta; stock market returns and volatility; sovereign debt spreads; EMPI capturing exchange rate pressures and reserve movements.
- Higher index values associated with tighter financial conditions and potential impairment of transmission.
- Recent financial conditions in Thailand: favorable (mainly due to global factors); somewhat tighter than neighboring ASEAN countries; monetary policy transmission via financial markets expected to operate more effectively now than in episodes when neighbors were cutting rates.

### Authorities’ statement (excerpt)
- Recent developments and outlook:
  - Economy grew 3.9 percent (2017); staff projected 3.2 percent previously; authorities project growth of 4.1 percent (2018).
  - Public investment and infrastructure expected to support growth.
- Monetary policy:
  - Authorities differ from staff on need for further easing; MPC maintains policy rate of 1.5 percent is appropriately accommodative.
  - Concerns: weak transmission, high household debt, potential search-for-yield effects.
  - Inflation in April: 1.07 percent; business surveys show inflation expectation around 2 percent (within target range 2.5±1.5 percent).
- FX policy:
  - Authorities commit to flexible exchange rate as primary shock absorber; intervention to avoid disorderly adjustments.
  - REER/nominal appreciation in 2017: REER 4.4 percent; around 10 percent versus U.S. dollar.
  - Caution on publishing FX intervention data; reserve publication on a weekly basis already exceeds international standard per authorities.
- Financial sector:
  - Financial system remains sound; five largest banks designated D-SIBs with additional capital requirements.
  - Macroprudential measures introduced (credit card and personal loan limits in September 2017).
  - Authorities developing macro-stress testing and look forward to FSAP.
- Fiscal and structural reforms:
  - Authorities will use fiscal space for infrastructure (EEC) to crowd-in private investment.
  - Revenue measures for aging-related spending considered; VAT increase could dampen nascent demand.
  - National Pension Committee formed to propose national strategy; low-income earner registration to improve targeting of social transfers.
  - Structural reforms underway: Trade Competition Act (effective October 2017), education reforms, welfare program enhancements.

### Appendices: risks, CA assessment, external/debt analyses (highlights)
- Risk Assessment Matrix:
  - External risks include retreat from cross-border integration (Likelihood: M, Impact: H), policy uncertainty (Likelihood: H, Impact: M), tighter global financial conditions (Likelihood: H, Impact: M), significant U.S. slowdown (Likelihood: M), significant China slowdown (Likelihood: L/M, Impact: H), cyber-attacks (Likelihood: M, Impact: M).
  - Domestic risks include heightened political uncertainty (Likelihood: M, Impact: H), weaker crowding-in of private investment (Likelihood: M, Impact: M), entrenched low inflation (Likelihood: M, Impact: H), household debt overhang (Likelihood: M, Impact: M).
- Appendix III — CA assessment:
  - 2017 actual CA: 10.6 percent of GDP.
  - EBA cyclically adjusted CA: 10.2 percent of GDP.
  - CA norm (EBA): 1.2 percent of GDP.
  - EBA CA gap: 9.0 percent of GDP (identified policy gap 2.3 percent of GDP; unexplained residual 6.7 percent of GDP).
  - Staff-adjusted CA gap: 3.5 percent to 7.5 percent of GDP larger than level consistent with fundamentals and desirable policies.
- External and public debt sustainability:
  - External debt projected to remain relatively low; external debt (percent of GDP) projected 32.8 (2023) under baseline.
  - Public gross nominal debt (percent of GDP): 2016 40.4; 2017 41.8; 2018 41.9; 2019 41.6; 2020 41.6; 2021 41.6; 2022 41.7; 2023 41.9.
  - Public gross financing needs (percent of GDP): 2016 6.1; 2017 3.9; 2018 5.1; 2019 5.7; 2020 6.2; 2021 6.1; 2022 5.7; 2023 5.4.
  - Stress test: one-time real depreciation of 30 percent in 2018 would raise debt ratio to about 48.3 percent of GDP (does not account for trade-flow adjustment).
- Exchange rate, reserves and adequacy metrics:
  - Exchange rate arrangement: de jure and de facto floating.
  - International reserves: 44½ percent of GDP (2017); reserves over three times short-term debt.
  - Reserves equal to 234 percent of IMF’s reserve metric unadjusted for capital controls, and 278 percent adjusted for capital controls.
  - Staff considers unadjusted adequacy metric more appropriate; no need to build up reserves for precautionary purposes.

*International Monetary Fund. Staff Report for the 2018 Article IV Consultation (May 2, 2018).*

### 0.7 percent, below the target band for the third year in a row, reflecting low food prices and

### cr18143 - 0.7 percent, below the target band for the third year in a row, reflecting low food prices and

### Recent developments, outlook, and risks
- Growth momentum: Real GDP growth is estimated at 3.9 percent in 2017 and is expected to continue in 2018 and 2019, supported by sustained export dynamism.
- Domestic demand: Remains sluggish amid structural challenges; recovery has yet to become broad-based.
- Inflation:
  - Headline inflation averaged 0.7 percent in 2017, below the target band (2.5±1.5 percent) for the third year in a row.
  - Headline CPI (end of period): 0.8 (2017); projected 0.8 (2018) and 1.0 (2019).
  - Headline CPI (period average): 0.7 (2017); projected 1.4 (2018) and 0.7 (2019).
  - Core CPI (end of period): 0.6 (2017); projected 1.2 (2018) and 1.3 (2019).
  - Core CPI (period average): 0.6 (2017); projected 0.9 (2018) and 1.3 (2019).
  - Long-term inflation expectations have weakened and are now below the mid-point target.
- External sector:
  - Current account surplus remained large, at about 10.6 percent of GDP in 2017; projected 9.0 percent (2018) and 8.3 percent (2019).
  - Current account balance (billions of U.S. dollars): 48.1 (2017); projected 43.4 (2018) and 43.3 (2019).
  - Exports, f.o.b. (billions of U.S. dollars): 235.1 (2017); projected 255.0 (2018) and 274.6 (2019).
  - Exports growth rate (dollar terms): 9.7 (2017); projected 8.4 (2018) and 7.7 (2019).
  - Imports, f.o.b. (billions of U.S. dollars): 203.2 (2017); projected 224.9 (2018) and 243.0 (2019).
- Financial stability: Financial system stability continued to strengthen; the financial system is broadly sound but vulnerabilities in the nonbank financial sector warrant close monitoring.
- Outlook summary:
  - Growth: 3.9 percent (2018 projection) and 3.8 percent (2019 projection).
  - Inflation: Expected to remain below the 2.5 percent target throughout the projection period.
  - Risks: Near-term risks from potential weaknesses in the external environment, including protectionism; medium-term downside risks from structural challenges. Upside risks include a stronger-than-projected rebound in investment and greater regional trade dynamism.

### Executive Board assessment and policy guidance
- Board view: Directors welcomed improving economic prospects supported by strong global and regional trade, but noted recovery is not yet broad-based and inflation dynamics remain weak.
- Fiscal policy:
  - Welcomed enactment of the fiscal responsibility law and efforts to anchor fiscal policy in a medium-term fiscal framework.
  - Supported scaling up macro-critical infrastructure projects to crowd in private investment and stimulate domestic demand.
  - Emphasized fiscal reforms to strengthen public investment implementation capacity and better targeting of social expenditures.
  - Noted need for additional growth-friendly revenue mobilization in the medium to long term to prepare for aging-related expenditure pressures.
- Monetary and macroprudential policy:
  - Several Directors agreed monetary easing, within a broader expansionary policy mix, could help steer inflation back to target; macroprudential policy should address financial stability concerns.
  - Some Directors viewed current monetary stance as sufficiently accommodative and stressed balancing support for inflation against financial stability risks.
  - Importance of enhanced communication to strengthen monetary transmission and exchange rate flexibility was emphasized.
  - Debate on disclosure of intervention data: some Directors encouraged publication with appropriate lags; others urged caution given potential sensitivity.
- Financial sector:
  - Directors commended measures to strengthen financial system stability.
  - Called for close monitoring of nonbank financial sector vulnerabilities and strengthening macroprudential policy.
  - Looked forward to forthcoming FSAP for a comprehensive risk assessment.
- Structural reforms:
  - Called for a comprehensive package to boost potential growth and inclusiveness: pension reform, human capital development, higher female labor force participation, improving the business environment, and expedited investment in infrastructure and logistics to deepen ASEAN integration.
- External position:
  - Most Directors agreed Thailand’s external position is substantially higher than warranted by medium-term fundamentals and desirable policies; some Directors urged a more cautious interpretation citing Thailand-specific factors.

### Key policy recommendations (staff)
- Use available fiscal space judiciously to spur domestic demand and support potential output; implement macro-critical public infrastructure projects to crowd in private investment.
- Monetary easing to help steer inflation to target, complement fiscal stimulus, curtail risks of low inflation, and help balance capital flows; FX intervention should be limited to avoiding disorderly market conditions.
- Macroprudential policy to contain systemic risks from search-for-yield behavior and provide monetary policy space to target inflation.
- Structural reforms to address long-term demographic challenges and increase productivity: strengthen public investment implementation capacity, improve social safety nets, support labor force participation and education, and improve the business environment.

### Selected economic indicators and key statistics (excerpt)
- Real GDP growth (y/y percent change): 1.0 (2014); 3.0 (2015); 3.3 (2016); 3.9 (2017); 3.9 (2018 proj.); 3.8 (2019 proj.).
  - Consumption growth: 1.2 (2014); 2.3 (2015); 2.8 (2016); 2.6 (2017); 3.7 (2018 proj.); 4.4 (2019 proj.).
  - Gross fixed investment: -2.2 (2014); 4.3 (2015); 2.8 (2016); 0.9 (2017); 6.8 (2018 proj.); 7.4 (2019 proj.).
- Saving and investment (percent of GDP):
  - Gross domestic investment: 23.9 (2014); 22.3 (2015); 21.1 (2016); 22.8 (2017); 24.2 (2018 proj.); 24.7 (2019 proj.).
  - Gross national saving: 27.7 (2014); 30.3 (2015); 32.8 (2016); 33.4 (2017); 33.2 (2018 proj.); 33.1 (2019 proj.).
- Fiscal accounts (percent of GDP):
  - General government balance: -0.8 (2014); 0.1 (2015); 0.6 (2016); -0.6 (2017); -0.9 (2018 proj.); -0.9 (2019 proj.).
  - Public sector debt (end of period): 43.3 (2014); 42.5 (2015); 41.8 (2016); 41.9 (2017); 41.6 (2018 proj.); 41.6 (2019 proj.).
- Monetary accounts (end of period, y/y percent change):
  - Broad money growth: 4.6 (2014); 4.4 (2015); 4.2 (2016); 5.1 (2017); 4.5 (2018 proj.); 5.3 (2019 proj.).
  - Credit to the private sector by depository corporations: 4.7 (2014); 5.3 (2015); 3.9 (2016); 4.5 (2017); 4.5 (2018 proj.); 4.3 (2019 proj.).
- Balance of payments and reserves:
  - Current account balance (percent of GDP): 3.7 (2014); 8.0 (2015); 11.7 (2016); 10.6 (2017); 9.0 (2018 proj.); 8.3 (2019 proj.).
  - Gross official reserves (billions of U.S. dollars, end of period): 239.3 (2017); 249.0 (2018 proj.); 249.0 (2019 proj.).
  - Exchange rate (baht/U.S. dollar): 33.9 (2017).
- External debt:
  - (Percent of GDP): 34.8 (2014); 32.7 (2015); 32.1 (2016); 32.7 (2017); 33.7 (2018 proj.); 33.3 (2019 proj.).
  - (Billions of U.S. dollars): 149.0 (2017); 162.9 (2018 proj.); 173.4 (2019 proj.).
- Memorandum:
  - Nominal GDP (billions of baht): 15,450 (2017); 16,150 (2018 proj.); 17,003 (2019 proj.).
  - Nominal GDP (billions of U.S. dollars): 455.3 (2017).

*International Monetary Fund. Staff Report for the 2018 Article IV Consultation (May 2, 2018).*

### 8. The BOT continued to accumulate international reserves at a fast pace, while also

### 8. The BOT continued to accumulate international reserves at a fast pace, while also 

### Reserve accumulation and exchange rate dynamics
- The sizable and continuous monthly increase in the stock of reserves and FX forward position during 2017 suggests that FX intervention has been mostly one-sided.
- The REER appreciated at an increasing pace, resulting in 3.4 percent real effective appreciation in 2017 and a 9.6 percent nominal appreciation versus the U.S. dollar.
- The large current account surplus and sizable portfolio inflows were the main drivers of exchange rate appreciation pressures and reserve accumulation, only partially offset by net outflows in FDI and other investment.
- As of December 2017, international reserves (including the net forward position) stood at US$239.3 billion, an increase of US$41.7 billion from end-2016 and well above Fund adequacy metrics.
- Monthly changes in 2017–early 2018 show notable contributions from International Reserves and Net Forward Position to total reserve changes (monthly changes, in billions of US dollars).

### Staff baseline outlook and projections (selected)
- Staff expects growth momentum to continue in 2018 and 2019, while domestic and external imbalances narrow only gradually.
- Fiscal policy is assumed to be supportive, with stimulus amounting to 1.4 percent of GDP over the medium term, resulting from a strong rebound in public investment in 2018 and partial implementation of the EEC projects starting in 2019.
- The monetary policy rate is assumed to remain unchanged in the medium term.
- Inflation is expected to remain below the 2.5 percent target throughout the projection period, while the output gap is expected to close over the medium term.
- Risks: near-term broadly balanced; medium-term tilted to the downside. Upside: stronger-than-expected tourism and EEC spillovers. Downside: protectionism, insufficient FY 2019 fiscal support, household debt overhang, stagnant household income, low SME investment/productivity, flat Phillips Curve and lower inflation expectations, U.S. tax reform spillovers, global monetary policy normalization, and China rebalancing.

### External position assessment
- Based on the External Balance Assessment (EBA) model, staff’s preliminary estimation suggests:
  - Cyclically adjusted current account (CA) gap of about 3.5 percent to 7.5 percent of GDP.
  - Implied REER gap of -13 percent to -6 percent.
- Staff view: reducing the CA gap will require a concerted policy effort to support domestic demand and sustained, albeit gradual, appreciation of the REER over the medium term.
- Authorities’ view: external imbalances reflect structural challenges (e.g., savings from lower imported oil prices, aging population, limited trickle-down from tourism) and called for careful interpretation and communication of the implied exchange rate assessment.

### Fiscal policy recommendations and fiscal space
- Staff recommended a more expansionary policy mix based on fiscal stimulus, monetary easing, and structural reform.
- Staff recommended scaling up public investment by a cumulative 5 percentage points, relative to the baseline, on macro-critical projects and frontloading it over the next three years.
- To maximize returns from the infrastructure push, staff urged addressing teething problems associated with the new procurement law that have contributed to delays of investment projects.
- Measures to improve capacity and coordination among government agencies would improve implementation; approval of the EEC Act shortens the time to establish PPPs.
- In the medium to long run, additional domestic revenue mobilization will be needed to finance aging-related spending needs. Staff noted potential for raising VAT revenues by increasing the rate from its current low level, and for rationalizing tax incentives.
- The recently approved fiscal responsibility law mandates preparation of a medium-term fiscal framework.
- Fiscal recommendations to spur domestic demand and address external rebalancing include:
  - Improvements in public investment management (address fragmentation of planning and budgeting; open infrastructure markets to competition; strengthen risk monitoring for PPPs).
  - Better targeting of social expenditures (centralize social assistance schemes; review all social assistance schemes; improve eligibility criteria of the Low-Income Earners Registry).
  - Broad strategy to prepare for aging-related expenditure pressures (address fragmented pension system, low coverage, low replacement rate, low retirement age and contribution rates).
  - Gender-inclusive policies to improve female labor force participation (e.g., fiscal support for child care services).

### Monetary policy recommendations and inflation dynamics
- Staff recommended monetary policy easing to curtail risks of low inflation becoming entrenched, in light of below-target and declining trend inflation estimates and long-term survey forecasts.
- Monetary easing entails macro risks by bringing nominal interest rates closer to the (effective) zero-lower bound and constraining monetary policy space to counteract adverse shocks.
- Monetary easing would support the recovery in domestic demand and external rebalancing in the short term by complementing fiscal stimulus, and help attenuate capital inflows and nominal appreciation pressures.
- Strengthen monetary policy transmission to better anchor inflation expectations, including by enhancing communication and forward guidance.
- BOT liquidity management should aim at maintaining favorable financing conditions and keep the shape of the yield curve, at least the short-end, aligned with an accommodative monetary policy stance amid ongoing U.S. rate normalization.

### Structural reform priorities
- Address procurement-related delays to realize infrastructure push.
- Improve public investment management and PPP risk monitoring to maximize returns.
- Reform social assistance delivery and targeting to address poverty and inequality without undue fiscal pressure.
- Undertake pension reform to address harmonization, sustainability, coverage (over 60 percent of the working-age population is not covered by a formal pension), adequacy (private sector replacement rate 30 percent), fairness (civil servant pensions more generous), and poverty alleviation (old-age allowance low and untargeted); current retirement age 55 and contribution rate 6 percent for Old Age Benefit under the Social Security Fund are low.
- Improve SOE governance (draft law in Parliament) to contribute to fiscal sustainability and investment efficiency.
- Promote reforms that improve productivity, business climate, labor force participation, and linkages between dynamic export sectors and the broader economy.

### Alternative scenarios and simulation highlights
- Active scenario with monetary and fiscal stimulus (frontloaded public investment and monetary easing) shows:
  - Short-run growth pickup relative to baseline.
  - Inflation converging to target at a faster pace than baseline.
  - Partial frontloading of external rebalancing (current account balance declines faster than baseline).
  - Manageable impact on public debt under monetary easing.
- Staff recommended frontloading public investment over the next three years to crowd in private investment and support external rebalancing.

### Selected historical and projected figures (table excerpts)
- Real GDP growth (y/y percent change): 2014 Prel. 1.0; 2015 3.0; 2016 3.3; 2017 3.9; 2018 3.9; 2019 3.8; 2020 3.6; 2021 3.6; 2022 3.5; 2023 3.5.
- Headline CPI inflation (period average, y/y percent change): 2014 1.9; 2015 -0.9; 2016 0.2; 2017 0.7; 2018 1.4; 2019 0.7; 2020 1.1; 2021 1.4; 2022 1.8; 2023 2.0.
- Public investment (percent of GDP, fiscal year basis) 1/: 2014 5.3; 2015 5.9; 2016 6.4; 2017 5.2; 2018 6.0; 2019 6.4; 2020 6.4; 2021 6.3; 2022 6.3; 2023 6.0.
- Public sector balance (percent of GDP, fiscal year basis): 2014 -1.3; 2015 0.9; 2016 1.4; 2017 0.1; 2018 -0.8; 2019 -0.9; 2020 -1.0; 2021 -1.1; 2022 -1.2; 2023 -1.2.
- Structural public sector primary balance (percent of GDP, fiscal year basis): 2014 0.4; 2015 2.7; 2016 1.3; 2017 1.6; 2018 0.6; 2019 0.3; 2020 0.3; 2021 0.2; 2022 0.0; 2023 0.2.
- Total public sector debt (percent of GDP, fiscal year basis, end of period): 2014 43.3; 2015 42.5; 2016 41.8; 2017 41.9; 2018 41.6; 2019 41.6; 2020 41.6; 2021 41.7; 2022 41.9; 2023 41.9.
- Current account balance (percent of GDP): 2014 3.7; 2015 8.0; 2016 11.7; 2017 10.6; 2018 9.0; 2019 8.3; 2020 7.6; 2021 6.2; 2022 4.7; 2023 3.3.
- Credit to the private sector by depository corporations (end of period, y/y percent change): 2014 4.7; 2015 5.3; 2016 3.9; 2017 4.5; 2018 4.5; 2019 4.3; 2020 4.8; 2021 5.0; 2022 5.3; 2023 5.5.

*International Monetary Fund staff summary of chapter content.*

### 23. Monetary policy should focus on attaining the inflation target, with macroprudential

### 23. Monetary policy should focus on attaining the inflation target, with macroprudential policy used to address financial stability concerns

### Monetary policy stance and communication
- Staff view: Monetary policy should focus on attaining the inflation target and steer inflation back to target over the medium term; effective communication can manage inflation expectations and raise policy effectiveness.
- Recommendation: Monetary policy easing is advisable to complement fiscal stimulus, curtail risks of low inflation becoming entrenched, and balance capital flows.
- Current policy rate (authorities' view): "the current policy rate of 1.5 percent remains appropriately accommodative."
- BOT assessment: Weak inflation dynamics in 2017 and early 2018 mainly reflected supply-side factors (notably low fresh food prices) and structural factors not directly addressable by monetary policy; BOT did not see an imminent risk of de-anchoring inflation expectations.
- Caveats cited by BOT: Monetary policy easing effect is relatively uncertain due to a weak monetary transmission mechanism and high household debt; easing could fuel search-for-yield, credit-driven consumption, and household indebtedness.
- Staff simulations: Focusing monetary policy on the inflation target while using counter-cyclical macroprudential policy yields better output and inflation dynamics than a lean-against-the-wind strategy, without additional financial risks (See chapter 3 in the Selected Issues Paper).

### Macroprudential policy and financial-stability interactions
- Role: Macroprudential policy should address financial stability concerns, including containing possible risks from search-for-yield behavior.
- Measures already taken: Tightening of limits on credit card debt and personal loans has proved broadly effective in containing risks from high household debt.
- Further strengthening recommended:
  - Implement a counter-cyclical capital buffer.
  - Make more extensive use of targeted loan-to-value (LTV) ratios.
  - Develop systemic solvency and liquidity risk stress testing capacity.
- Objective: Strengthened macroprudential policy should contain systemic risks from search-for-yield behavior, enabling monetary policy to focus on the inflation target.

### Exchange rate policy and FX intervention
- Recommended approach: A flexible exchange rate should serve as a key shock absorber; FX intervention should be limited to addressing disorderly market conditions.
- Rationale: Allowing the exchange rate to adjust flexibly would:
  - Speed up external rebalancing.
  - Break expectations of further nominal appreciation that encourage speculative portfolio inflows.
  - Reduce the need for continued sterilization.
- Additional measures: Liberalizing capital outflows and promoting a deeper and more liquid FX market would reduce reliance on FX intervention; BOT should consider disclosing data on FX intervention with appropriate lags to improve transparency and communication about its framework.
- Authorities' stance: FX intervention is intended to avoid disorderly market conditions, not to resist trend appreciation; BOT argued against publication of FX intervention data due to sensitivity and potential to induce speculative activities.
- BOT medium-term strategy elements:
  - Gradual and prudent liberalization of the capital account.
  - Liberalization of capital outflows to facilitate diversification by resident investors.
  - Further liberalization of restrictions on instruments and investments abroad by individual qualified investors under consideration.
  - Relaxation of regulation of corporate FX transactions and hedging; improved access to hedging instruments.

### Financial system soundness and regulatory framework
- Overall assessment: The financial system remains sound; banking sector resilience has strengthened with capital adequacy ratios well above regulatory requirements.
- Nonbank vulnerabilities: Vulnerabilities persist in some cooperatives and pockets of the nonbanking sector, but not expected to pose systemic risk given small size and limited linkages.
- Recent regulatory measures:
  - Five largest banks designated as Systemically Important Banks (SIBs) required to hold additional capital.
  - Movement toward integrated supervision of financial conglomerates that own SIBs to close regulatory gaps between banking and nonbanking sectors.
  - Enhanced collaboration among BOT, Securities and Exchange Commission, and Office of Insurance Commission through committee structures.
  - Ongoing efforts to finalize resolution arrangements for financial institutions.
  - Efforts to address AML/CFT shortcomings identified in the 2017 Asia Pacific Group Mutual Assessment Report, including strengthening risk-based supervision and enhancing information sharing with the Anti-Money Laundering Office (AMLO).
- Macroprudential framework enhancements underway: Development of systemic solvency and liquidity risk stress testing capacity; consideration of counter-cyclical capital buffer and targeted LTV ratios.
- Forthcoming assessment: A Financial Sector Assessment Program (FSAP) will conduct further assessment of risks—including vulnerabilities in nonbank financial institutions—financial stability, and macroprudential policy frameworks.

### Key financial and market statistics (selected figures from the chapter)
- BOT policy rate: 1.5 percent
- Thailand: Government bond yields, 2017 (Latest yield / Change from end-2016 / 2017 Highest yield / 2017 Lowest yield):
  - 3M: 1.15 / -0.35 / 1.49 / 1.12
  - 1Y: 1.33 / -0.20 / 1.55 / 1.37
  - 3Y: 1.59 / -0.25 / 1.85 / 1.51
  - 5Y: 1.83 / -0.34 / 2.25 / 1.67
  - 10Y: 2.56 / -0.11 / 2.86 / 2.35
- Financial soundness indicators (selected):
  - Credit-to-GDP gap (st. dev): 2014:Q4 -1.2; 2015:Q4 -0.7; 2016:Q4 -0.2; 2017:Q1 -0.4; 2017:Q2 0.7; 2017:Q3 0.5
  - Deposit-to-loan ratio (commercial banks): 2014:Q4 104.0; 2015:Q4 96.5; 2016:Q4 96.9; 2017:Q1 96.0; 2017:Q2 95.3; 2017:Q3 93.2
  - Leverage ratio (commercial banks, %): 2014:Q4 11.7; 2015:Q4 12.4; 2016:Q4 12.8; 2017:Q1 12.5; 2017:Q2 12.7; 2017:Q3 13.1
  - NPL ratio (commercial banks): 2014:Q4 2.3; 2015:Q4 2.6; 2016:Q4 2.8; 2017:Q1 3.0; 2017:Q2 3.0; 2017:Q3 3.0
  - ROA (commercial banks): 2014:Q4 1.7; 2015:Q4 1.3; 2016:Q4 1.3; 2017:Q1 1.3; 2017:Q2 1.3; 2017:Q3 1.2
  - NPL ratio (depository SFIs): 2014:Q4 4.2; 2015:Q4 4.3; 2016:Q4 4.3; 2017:Q1 4.2; 2017:Q2 3.4; 2017:Q3 3.8
- Thailand: Potential GDP growth accounting (2000–2016) components shown in figure: Capital, Labor, Total factor productivity.

### Raising potential growth and strengthening inclusiveness
- Diagnosis: Potential growth has declined over the last two decades; address drag from population aging and increase TFP.
- Recommended comprehensive package:
  - Fiscal reforms, most notably pension reform.
  - Improve quality of education and alignment with business needs to increase labor participation and productivity.
  - Promote foreign-skilled migration by removing administrative hurdles.
  - Relax limits on foreign equity stakes, upgrade competition law for services, continue SOE restructuring.
  - Better targeted social safety net to share benefits of growth and promote inclusion.
- Regional integration: Deepening regional integration (including EEC projects) to raise potential growth and strengthen Thailand’s role in ASEAN and CLMV production chains; financial integration can attenuate global shocks but requires stronger domestic financial system and macroprudential framework.

### Staff appraisal — summary policy recommendations
- Use policy space and buffers to spur domestic demand, support broader growth, and steer inflation back to target.
- Monetary policy: Focus on attaining the inflation target; consider monetary easing to support demand and prevent low inflation entrenchment; strengthen monetary transmission through more effective communication.
- Macroprudential policy: Target financial stability risks (search-for-yield, household debt) using counter-cyclical and targeted tools so monetary policy can concentrate on inflation.
- Exchange rate: Maintain a flexible exchange rate as shock absorber; limit FX intervention to disorderly conditions; consider greater transparency on FX operations with appropriate lags.
- Fiscal policy: Use fiscal space judiciously to spur domestic demand and support potential output growth; strong implementation of macro-critical public infrastructure (including EEC projects) to crowd in private investment.
- Structural reforms: Prioritize pension reform, education quality, labor participation, skilled migration, liberalization of foreign equity limits, competition law upgrades, SOE restructuring, and improved social transfers to raise potential growth and inclusiveness.
- Financial sector: Continue strengthening regulatory frameworks (SIB capital requirements, integrated supervision, resolution arrangements); prepare for FSAP to assess remaining vulnerabilities, including nonbank financial institutions.

*Source: IMF staff report chapter excerpt.*

### 44. It is recommended that the next Article IV consultation with Thailand take place on a

### 44. It is recommended that the next Article IV consultation with Thailand take place on a standard 12-month cycle.

### Recommendation on Article IV timing
- It is recommended that the next Article IV consultation with Thailand take place on a standard 12-month cycle.

### The Eastern Economic Corridor: Thailand 4.0 in Action
- Effective implementation of the Eastern Economic Corridor (EEC) could provide significant fiscal stimulus, crowd in private investment, and raise long-term output.
- The EEC covers three provinces: Chonburi, Rayong, and Chachoengsao.
- Objectives:
  - Upgrade and expand the region’s connectivity.
  - Transform Thailand into a strategic gateway to Asia.
  - Scale up public infrastructure investment and boost short- and medium-term growth.
- Investment plan:
  - Covers 15 groups of infrastructure and development projects spanning 5 years (2018-2023) for a total investment of about US$50 billion.
  - Sixty percent of public infrastructure investment is expected to be executed through PPPs, with government and state-owned enterprises contributing 30 percent and 10 percent, respectively.
  - The initial focus is on five priority projects:
    - Laem Chabang seaport expansion and Map Ta Phut port expansion to become a marine hub for Southeast Asia.
    - Major expansion of the U-Tapao airport to increase capacity to 30 million people per year and transform it into a major hub for aviation logistics and maintenance, repair and overhaul (MRO).
    - Road connectivity upgrades through high-speed and double-track railways linking ports, airports, industrial clusters and major urban centers throughout Thailand.
  - Awards for these projects are expected to be completed by end-2018, with implementation extending to 2025.
- Fiscal stimulus and macro effects:
  - Baseline includes 0.6 percentage points to 0.7 percentage points of GDP in additional public investment.
  - Staff recommended scaling up infrastructure spending by an additional (cumulative) 5 percent of GDP over three years.
  - The additional fiscal stimulus is expected to have a pronounced impact on private investment through crowding in.
  - Growth would be higher by a cumulative 2.3 percentage points over the projection period.
  - Such infrastructure push can help inflation converge to target at a faster pace and frontload the adjustment in external rebalancing, especially if accompanied by an accommodative monetary policy.
- Project execution and efficiency:
  - Thailand’s investment efficiency was assessed by the IMF’s PIMA to be quite strong compared to peers.
  - Identified weaknesses that could impact project implementation include fragmentation of planning and budgeting processes, weak assessment of fiscal risks from PPPs, and slow procurement and land acquisition procedures.
  - Addressing these weaknesses can improve execution and the quality of public investment spending.
- EEC Projects (In billions of U.S. dollars) — preserved labels and values from source figure:
  - High speed rail, 5.7
  - U-Tapao Int'l Airport & MRO, 5.7
  - Map Ta Phut Port, 0.3
  - Laem Chabang Port, 4.3
  - Other EEC, 33.9
- Scale Up in Infrastructure Investment (In percent of GDP) — preserved series labeling and values from source table/figures:
  - Baseline scenario / EEC execution plus other investment:
    - 2019: 1.1
    - 2020: 1.0
    - 2021: 1.0
    - 2022: 0.9
    - 2023: 0.4
  - Total public sector:
    - 2019: 0.7
    - 2020: 0.7
    - 2021: 0.6
    - 2022: 0.6
    - 2023: 0.3
  - o/w PPP:
    - 2019: 0.3
    - 2020: 0.2
    - 2021: 0.2
    - 2022: 0.2
    - 2023: 0.1
  - Private sector through PPPs:
    - 2019: 0.4
    - 2020: 0.4
    - 2021: 0.4
    - 2022: 0.3
    - 2023: 0.1
  - Alternative scenario / EEC execution plus other investment:
    - 2019: 2.1
    - 2020: 3.0
    - 2021: 2.5
    - 2022: 1.4
    - 2023: 0.4

### Inspecting the Strength of Monetary Policy Transmission
- Overview:
  - Evidence points to a somewhat weaker but nonetheless still active transmission mechanism.
  - Components examined: main inflation drivers, the bank credit channel, and financial market conditions supporting transmission of monetary impulses.
- Inflation dynamics:
  - The Phillips Curve has flattened, reflecting a smaller impact of economic activity on inflation.
  - The expectations channel has deteriorated, with both lower inflation expectations and higher inflation persistence delaying the return of inflation to target.
  - These findings point to a very slow recovery in inflation, especially compared to previous historical episodes of low inflation, and stress the crucial role of the expectations channel.
- Bank credit channel:
  - The bank credit channel remains active, although it has weakened.
  - New loan rates incorporate policy rate changes promptly, which, with support from growth momentum, may lead to recovery of the credit transmission channel.
  - Credit has become less responsive to monetary easing, which may partly reflect the ongoing transition from bank loans to market-based finance.
- Empirical notes and figures preserved as presented:
  - Impulse response of private sector credit to a 25 bps cut in the policy rate was examined using a VAR including real GDP growth, the GDP deflator, and seasonal dummies.
  - Changes in the impulse response over time are quantified by extending the estimation sample over the last five years.
  - New loan rate evidence is from a Bank of Thailand database on credit rates.
  - PC slope coefficient and output gap contribution series are presented in percent in source charts.
  - Forward-looking contribution, inflation trend, and forward-looking coefficient θt are shown in percent in source charts.
  - Selected interest rates and commercial banks' response to monetary easing are presented in percent and quarters respectively in source charts.

*Source: IMF staff and materials in the provided content unit.*

### Box 2. Inspecting the Strength of Monetary Policy Transmission (concluded)

### Box 2. Inspecting the Strength of Monetary Policy Transmission (concluded)

### Key conclusion on monetary policy transmission
- Beyond the specific credit channel, broader financing conditions are crucial for the transmission of monetary impulses (see Chapter 2 of the Selected Issues Paper).
- As most of the impact takes place through the financial markets, it is important that their condition does not impair transmission (see Balakrishnan et al., 2009).
- Financial indices suggest that financial conditions in Thailand have been favorable in recent years, mainly on account of global factors.
- Although conditions in Thai financial markets remain somewhat tighter than in other neighboring ASEAN countries, monetary policy transmission through the financial market should remain better than when neighboring countries cut rates over recent years.

### Financial Stress Index — composition and interpretation
- The Financial Stress Index (Balakrishnan, R., Danninger, S., Elekdag, S., and Tytell, I., 2009, “The Transmission of Financial Stress from Advanced to Emerging Economies,” IMF Working Paper 09/133) comprises information about five key variables:
  - the “banking-sector beta”
  - stock market returns and volatility
  - sovereign debt spreads
  - the EMPI that captures exchange rate pressures and movements in international reserves
- The index helps assess how well the monetary impulses may be transmitted through the financial system, and allows for some international comparison to the situation in neighboring countries over recent years.
- Higher values of the index are associated to tighter financial conditions and a potential impairment of the transmission mechanism.
- The main insights highlighted here are corroborated by additional analysis using a broader index of financial conditions (See chapter 2 of Selected Issues Paper).

### Comparative and practical implications
- Financial indices indicate:
  - Recent financial conditions in Thailand: favorable (mainly due to global factors).
  - Relative position: somewhat tighter than other neighboring ASEAN countries.
  - Practical implication: monetary policy transmission via financial markets is expected to operate more effectively now than in episodes when neighboring countries were cutting rates.

*Source: Box 2. Inspecting the Strength of Monetary Policy Transmission (concluded), staff text and figures.*

### Appendix I. Staff Policy Advice from the 2017

### Appendix I. Staff Policy Advice from the 2017 Article IV Consultation

### Staff policy advice and implementation status
- Monetary policy
  - Advice: Monetary easing to steer inflation towards its target.
  - Status: Policy rate has been kept constant. Long run inflation expectations continue to weaken and are below the target band.
- Exchange rate
  - Advice: Maintain exchange rate flexibility as first line of defense, with FX intervention limited to avoiding disorderly market conditions.
  - Status: The exchange rate has appreciated by 3.3 percent in real terms and 9 percent versus the U.S. dollar in nominal terms in 2017.
- Financial stability / macroprudential policy
  - Advice: Strengthen financial stability and further develop macroprudential tools to deal with emerging pockets of fragility.
  - Status: Financial stability has strengthened with the designation of five systemically important banks (SIBs) and BOT measures to contain risks from the cooperatives sector. Macroprudential tools, such as LTVs, have been effective in containing risks in the real estate sector and high household debt.
- Fiscal policy / public investment
  - Advice: Use fiscal space to boost public investment.
  - Status: Public investment contracted in 2017, in part due to teething issues with the new procurement law which led to delays in investment execution, especially by SOEs.
  - Advice (medium-term): The medium-term fiscal framework should include forecasts for the general government and SOEs.
  - Status: A Fiscal Responsibility Law was approved in January 2018, under which a medium-term fiscal framework will become compulsory and include forecasts for the general government and SOEs.
- Pensions and social safety nets
  - Advice: Reform pension scheme to address design shortcoming and population aging.
  - Status: A National Pension Committee has been formed to propose a national strategy that addresses system fragmentation and design shortcomings. Forthcoming IMF TA will help with this strategy.
  - Advice: Reform social safety nets to mitigate risks of old-age poverty with better targeting of vulnerable groups.
  - Status: Efforts are ongoing to tap a low-income earner registration database to improve the targeting of social transfers.
- Structural reforms
  - Advice: Structural reforms to upgrade infrastructure investment and enhance capital accumulation.
  - Status: The EEC Act should help accelerate infrastructure investments, including by facilitating PPPs.

### Risk Assessment Matrix — key external and domestic risks and policy responses
- External risks
  - Retreat from cross border integration
    - Likelihood: M
    - Impact: H
    - Risk: Protectionism and economic isolationism reducing trade, capital and labor flows, sentiment, and growth.
    - Policies to minimize impact: 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
    - Likelihood: H
    - Impact: M
    - Risk: Two-sided risks to U.S. growth, uncertainties from tax bill, post-Brexit arrangements, NAFTA, and elections weigh on global growth.
    - Policies: Allow exchange rate flexibility as a key shock absorber, with judicious intervention. If capital outflows affect the real economy and constrain monetary stimulus, accelerate public investment execution to bolster domestic demand.
  - Tighter global financial conditions
    - Likelihood: H
    - Impact: M
    - Risk: Abrupt change in global risk appetite could lead to sharp increases in interest rates, higher debt service and refinancing risks, and capital account pressures.
    - Policies: Allow exchange rate flexibility with judicious intervention; if volatility affects the real economy, redouble efforts to accelerate public investment execution to bolster domestic demand.
  - Significant U.S. slowdown and its spillovers
    - Likelihood: M
    - Risk: Recovery aging and vulnerabilities increase chance of sharper-than-expected slowdown with global spillovers.
    - Policies: Strengthen domestic drivers of growth, deepen regional trade integration, allow exchange rate flexibility as shock absorber.
  - Significant slowdown in China and its spillovers
    - Likelihood: L/M
    - Impact: H
    - Risk: Fast or improperly sequenced de-risking could adversely affect growth; medium-term overreliance on credit could reduce fiscal space and increase imbalances.
    - Policies: Structural reforms and infrastructure development; greater orientation toward CLMV; allow exchange rate flexibility.
  - Structurally weak growth in key advanced economies
    - Likelihood: H
    - Impact: M
    - Policies: Structural reforms and infrastructure development to raise returns to private investment.
  - Cyber-attacks
    - Likelihood: M
    - Impact: M
    - Policies: BOT should sustain efforts to strengthen capacity to deal with cyber attacks and fintech-related challenges.
- Domestic risks
  - Heightened political uncertainty
    - Likelihood: M
    - Impact: H
    - Risk: Damaged confidence, reduced private investment and FDI, slower public investment execution, capital outflows, tourism effects.
    - Policies: Allow automatic stabilizers to work; provide adequate liquidity to banks; let exchange rate be key shock absorber, using intervention to avoid disorderly markets.
  - Weaker crowding-in of private investment
    - Likelihood: M
    - Impact: M
    - Risk: Lower private investment reduces domestic demand and long-term potential.
    - Policies: Use room for additional fiscal and monetary stimulus; implement structural reforms; accelerate execution of large infrastructure projects and PPPs.
  - Entrenched low inflation
    - Likelihood: M
    - Impact: H
    - Risk: Increases real interest rates and real debt burden; risks to balance sheets.
    - Policies: 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
    - Risk: Highly leveraged households may cut spending or face tightened credit supply, damping consumption; deleveraging cycle may constrain debt-servicing capacity.
    - Policies: Use room for additional fiscal and monetary stimulus. Explore options for household debt restructuring.

### Appendix III — Assessment of Current Account Surplus (key findings and staff adjustments)
- 2017 headline current account (CA)
  - Actual CA: 10.6 percent of GDP.
  - EBA cyclically adjusted CA: 10.2 percent of GDP.
  - CA norm (EBA): 1.2 percent of GDP.
  - EBA CA gap: 9.0 percent of GDP, composed of:
    - Identified policy gap: 2.3 percent of GDP (1.7 percent of GDP from domestic policy gaps).
    - Unexplained residual: 6.7 percent of GDP.
- Drivers and context
  - CA surplus in 2017 remained high (10.6 percent of GDP), driven by strong exports of goods and services and subdued investment. Private investment remained subdued and corporate savings high, reflecting cautious domestic demand response to political uncertainty and structural factors.
- Staff adjustments to account for cyclical/transitory factors (to assess CA relative to medium-term fundamentals)
  - Boom in tourism
    - Fact: Chinese tourists to Thailand have grown rapidly with average annual growth of 26 percent since mid-2010, nearly twice the average annual growth of 14 percent in Chinese outbound tourists.
    - Staff adjustment: 0.5 percent to 1.0 percent of GDP (one-half in magnitude compared with last year’s).
  - Terms of trade (ToT)
    - EBA model: 0.4 percent of GDP adjustment due to a 6 percent improvement in commodities terms of trade.
    - Alternative indices (national accounts and WEO): suggest close to 13 percent improvement over 2012-17.
    - Staff adjustment: 1.0 percent to 1.5 percent of GDP.
  - Political uncertainty
    - Evidence: Rolling regression of private investment on the ICRG index (controlling for external demand) shows substantial deterioration in private investment owing to political uncertainty; big data measure shows increasingly highly negative correlations with private consumption.
    - Staff adjustment: 0 percent to 3 percent of GDP (one-half in magnitude compared with last year’s).
- Other Thailand-specific structural features affecting CA norm not fully captured by EBA
  - Demographics: Old-age dependency ratio projected to continue increasing to 48 percent by 2050.
  - Duality: Large informal sector with low pensions coverage contributing to high precautionary savings; elderly informal workers relying more on savings.
- Staff-adjusted CA gap
  - Staff’s preliminary assessment: The current account surplus in Thailand was 3.5 percent to 7.5 percent of GDP larger than the level consistent with medium-term fundamentals and desirable policies.
  - Expectation: CA gap expected to narrow over the medium term as policy stimulus is deployed, political uncertainty dissipates, private confidence recovers, and structural reforms proceed.

### Appendix IV — External assessment and policy implications (summary)
- NIIP and external position
  - 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. NIIP further declined to around -7 percent of GDP in 2017 with steady increase in gross assets.
  - 2017 figures: Gross assets were 100 percent of GDP (44 percent being reserve assets). Gross liabilities were 107 percent of GDP (dominated by non-debt liabilities). External debt declined from nearly 35 percent of GDP in 2014 to 32.7 percent of GDP (one-fifth being public debt). Short term debt stood at 14 percent of GDP.
  - Assessment: Limited risks to external debt sustainability as external debt is projected to remain relatively low over the medium term and net foreign liabilities as a share of GDP are expected to stabilize.
- Overall external position assessment (2017)
  - The external position in 2017 was substantially higher than warranted by medium-term fundamentals and desirable policy settings.
  - Despite a modest decline, the current account remained large, reflecting a cautious response of domestic demand to positive income shocks amid political uncertainty, and structural challenges. The REER appreciation trend continued in 2017.
- Potential policy responses for external rebalancing
  - Concerted policy effort to support domestic demand and a gradual, sustained appreciation of the REER over the medium term.
  - Mutually reinforcing monetary and fiscal stimulus, coupled with structural reforms, should support domestic demand and help lower the current account gap over time.
  - Boosting public infrastructure within available fiscal space should crowd-in private investment.
  - Continue addressing structural rigidities by reforming social safety nets (notably fragmented pension schemes and informality) and reducing barriers to investment, especially in the services sector.
  - Exchange rate policy: The exchange rate should move flexibly as the key shock absorber. Intervention should be limited to avoiding disorderly market conditions. Reserves exceed all adequacy metrics, thus there is no need to build up reserves for precautionary purposes.

*Source: IMF staff estimates and analysis as presented in the Appendix I–IV material from the 2017 Article IV Consultation.*

### 3.4 percent relative to 2016 4/.

### cr18143 - 3.4 percent relative to 2016 4/.

### Real exchange rate (REER) and assessment
- Using an elasticity of 0.6, staff assesses the 2017 REER to be 6 percent to 13 percent below levels consistent with medium-term fundamentals and desirable policies.
- The EBA index REER gap in 2017 is estimated at -3.3 percent; the EBA level REER gap is estimated at -12.1 percent.
- The REER appreciated more than 6 percent since 2005.
- Outlook: The REER gap is expected to narrow over the medium term as policy stimulus and structural reform are deployed, supporting domestic demand and a growth-driven real exchange rate appreciation process.

### Capital and financial accounts — flows and policy measures
- Background:
  - The capital and financial account balance has been negative since 2013.
  - In 2017, the net negative balance amounted to 4 percent of GDP.
  - Outward FDI: 4.6 percent of GDP (record high in 2017).
  - Outward portfolio investment: 2.6 percent of GDP (two-thirds are equity securities).
  - Portfolio inflows: 2.1 percent of GDP (mostly concentrated in long-term securities issued by the government and corporate sectors).
  - Net other investment outflows: about 1 percent of GDP.
  - Authorities continued financial account liberalization, encouraging outward investment by residents.
- Assessment:
  - Up to 2013, Thailand enjoyed overall portfolio inflows; from 2013 faced headwinds including the Fed’s interest rate lift-off, China’s slowdown, and political uncertainty.
  - Capital outflows are manageable given the resilient external sector and the flexibility of the baht, partially offsetting the current account surplus.

### FX intervention and reserves level
- Background:
  - Exchange rate regime classified as (de jure and de facto) floating.
  - International reserves were 44½ percent of GDP in 2017.
  - Reserves standing at over three times short-term debt.
  - Reserves equal to 234 percent of the IMF’s reserve metric unadjusted for capital controls, and 278 percent of the metric adjusted for capital controls.
  - Staff considers the unadjusted adequacy metric to be more appropriate.
- Assessment:
  - Interventions appear to have been mostly one-sided, suggested by sizable and continuous monthly increases in the stock of reserves and FX forward position during 2017 (actual intervention data not published).
  - International reserves (including net forward position) increased by US$41.7 billion (9 percent of GDP) during 2017.
  - Reserves are higher than the range of IMF’s adequacy metrics and there is no need to build up reserves for precautionary purposes.
  - Policy recommendation: The exchange rate should move flexibly, acting as a shock absorber, with intervention limited to avoiding disorderly market conditions.

### External Debt Sustainability Analysis — summary and stress tests
- Baseline projection:
  - External debt projected to remain relatively low over the medium term, reaching 32.8 percent of GDP in 2023 under the baseline scenario.
- Stress tests:
  - External debt would remain stable under scenarios of higher interest rate, weaker GDP growth, a lower current account balance, and a one-time 30 percent depreciation of the baht.
  - Under the exchange rate depreciation scenario (one-time real depreciation of 30 percent occurs in 2018), the debt ratio would rise to about 48.3 percent of GDP.
  - Caveat: The depreciation scenario does not take into account the adjustment that trade flows would have (i.e., a sharp improvement in the current account that would significantly bring down the debt ratio).

### Public Debt Sustainability Analysis — baseline projections and key indicators
- Gross nominal public debt (percent of GDP):
  - 2016: 40.4
  - 2017: 41.8
  - 2018: 41.9
  - 2019: 41.6
  - 2020: 41.6
  - 2021: 41.6
  - 2022: 41.7
  - 2023: 41.9
- Public gross financing needs (percent of GDP):
  - 2016: 6.1
  - 2017: 3.9
  - 2018: 5.1
  - 2019: 5.7
  - 2020: 6.2
  - 2021: 6.1
  - 2022: 5.7
  - 2023: 5.4
- Real GDP growth (in percent):
  - 2016: 3.3
  - 2017: 3.3
  - 2018: 3.7
  - 2019: 3.8
  - 2020: 3.9
  - 2021: 3.7
  - 2022: 3.6
  - 2023: 3.5
- Inflation (GDP deflator, in percent):
  - 2016: 2.4
  - 2017: 2.1
  - 2018: 2.4
  - 2019: 1.3
  - 2020: 1.1
  - 2021: 1.2
  - 2022: 1.2
  - 2023: 1.5
- Nominal GDP growth (in percent):
  - 2016: 5.8
  - 2017: 5.4
  - 2018: 6.2
  - 2019: 5.1
  - 2020: 5.0
  - 2021: 4.9
  - 2022: 4.9
  - 2023: 5.2
- Effective interest rate (in percent):
  - 2016: 4.4
  - 2017: 2.9
  - 2018: 3.2
  - 2019: 3.2
  - 2020: 3.0
  - 2021: 3.0
  - 2022: 3.1
  - 2023: 3.4
- Identified debt-creating flows (cumulative 2016–2023):
  - Change in gross public sector debt: 0.4, -0.7, 0.1, -0.3, 0.0, 0.0, 0.1, 0.2, 0.0, 0.0
  - Primary deficit (yearly): -0.9, -2.5, -1.4, -0.5, -0.2, -0.2, -0.1, 0.0, -0.2, -1.3 (cumulative)
  - Primary (noninterest) revenue and grants (percent of GDP): 23.6, 24.7, 23.9, 24.1, 24.3, 24.3, 24.3, 24.3, 24.2 (cumulative 145.5)
  - Primary (noninterest) expenditure (percent of GDP): 22.7, 22.2, 22.5, 23.7, 24.1, 24.1, 24.1, 24.2, 24.0 (cumulative 144.2)
  - Automatic debt dynamics (cumulative): -0.5, -1.0, -1.2, -0.8, -0.8, -0.8, -0.7, -0.8, -0.8, -4.7
  - Other identified debt-creating flows (cumulative): 1.5, 2.5, 2.3, 1.0, 1.0, 1.0, 1.0, 1.0, 1.0, 6.1
- Alternative scenarios and assumptions:
  - Baseline real GDP growth (2018–2023): 3.8, 3.9, 3.7, 3.6, 3.6, 3.6, 3.5
  - Historical scenario real GDP growth (2018–2023): 3.8, 3.1, 3.1, 3.1, 3.1, 3.1
  - Constant Primary Balance scenario assumes Primary Balance = 0.50 for 2018–2023.

### Fund relations, data, and surveillance highlights
- Exchange rate arrangement: de jure and de facto floating; under inflation-targeting monetary policy framework the baht is allowed to be determined by market forces; FX intervention can be undertaken if movements are deemed excessive and unjustified by fundamentals.
- During 2017:
  - REER real appreciation: 3.4 percent.
  - Nominal appreciation versus the dollar: 9.6 percent.
  - Drivers: large current account surplus and sizable portfolio inflows, only partially offset by net outflows in FDI and other investment.
- Data adequacy:
  - General: Data provision broadly adequate for surveillance; authorities have continued to improve quality and coverage.
  - External sector statistics: Quarterly BOP and IIP available for 2017Q4; historical BPM6-based series back to 2005.
  - Financial Soundness Indicators: authorities report 11 of the 12 core FSIs and 7 of the 13 encouraged FSIs quarterly with about one quarter lag.
- Membership and quota (as of reporting):
  - Quota: 3,211.90 SDR Million (100.00 percent).
  - Fund holdings of currency: 2,772.39 SDR Million (86.32 percent).
  - Reserve position in Fund: 439.52 SDR Million (14.33 percent).
  - Net cumulative SDR allocation: 970.27 SDR Million (100.00 percent); holdings 977.95 SDR Million (100.79 percent).
- Recent technical assistance (selected):
  - FAD mission (January 2018): reviewed Government Welfare Program and Low-Income Earners Registry.
  - STA mission (February 2018): technical assistance on national residential property price index.
  - MCM mission (March 2018): reviewed Financial Stability Unit and macroprudential stress-testing framework.

*Source: cr18143 - 3.4 percent relative to 2016 4/.*

### 1. The Thai authorities would like to express their sincere appreciation to the IMF mission

### cr18143 - 1. The Thai authorities would like to express their sincere appreciation to the IMF mission

### Recent Developments and Near-Term Outlook
- The economy grew by 3.9 percent in 2017, higher than staff’s projection of 3.2 percent in the Article IV Staff Report last year.
- Growth momentum is expected to continue, driven by exports of goods and services, with domestic demand improving gradually.
- Public investment, especially in infrastructure projects, is expected to continue to support growth.
- Economic growth is projected to grow by 4.1 percent in 2018.
- Risks to growth:
  - Balanced overall in the near-term but with downside risks particularly on the external front.
  - Upside risk from stronger-than-expected external demand.
  - Downside risks from uncertainties in economic and foreign trade policies of major economies and geopolitical risks.
- Structural challenges that hinder domestic demand need to be addressed; authorities are committed to structural reforms for more broad-based, balanced, sustained growth.

### Monetary Policy
- Authorities differ from staff on need for further monetary policy easing.
- The Monetary Policy Committee (MPC) maintains that the policy rate of 1.5 percent is appropriately accommodative.
- Short-term government bond yields have moved below the policy rate, implying sufficiently accommodative liquidity and credit conditions.
- Concerns cited:
  - In EMEs, abnormally low policy rates or near zero lower bound are not warranted because downside risks on saving incentives and financial stability may outweigh benefits.
  - Weak monetary policy transmission mechanism reduces benefits of a policy rate cut; such a cut must be calibrated against risks to financial stability.
  - Further easing might exacerbate already-high household debt and search-for-yield behaviors that could lead to underpricing of risk.
- MPC communicates policy intention under flexible inflation targeting, balancing achieving the inflation target and limiting financial vulnerabilities.
- Inflation developments:
  - Inflation in April edged up to 1.07 percent, reaching the lower bound of the target range.
  - Authorities expect headline inflation to continue to pick up gradually due to stronger domestic demand and higher oil prices.
  - Business Sentiment Index survey confirms an inflation expectation of around 2 percent, falling within the target range of 2.5±1.5 percent.
- On macroprudential policy:
  - Authorities view addressing financial stability concerns through counter-cyclical macroprudential policy as somewhat challenging in practice due to limited institutional capacity.
  - Targeting macroprudential measures in specific sectors may push activities outside regulatory umbrella.
  - Macroprudential tools should complement rather than offset broad stance of monetary policy.

### Foreign Exchange Policy
- Authorities commit to a flexible exchange rate as the primary shock absorber; market intervention is not intended to resist trend appreciation.
- Intervention is used to avoid disorderly market adjustment during episodes of intense capital inflows from excessive global liquidity.
- Thai Baht performance in 2017:
  - Appreciated by 4.4 percent in REER terms.
  - Appreciated around 10 percent against the U.S. dollars.
  - Noted as one of the best performing currencies in East Asia.
- Policy normalization in advanced economies has presented opportunities to downsize the central bank’s balance sheet in recent months.
- Concerns about transparency:
  - Publication of FX intervention data might induce self-fulfilling speculative activities on Thai Baht and complicate FX operations.
  - Authorities consider their publication of international reserves on a weekly basis already exceeds international standard on data transparency.
  - They call for careful interpretation by staff of changes in reserves, noting part of it was valuation change.
- External balance assessment:
  - Authorities welcome staff’s acknowledgement that the large current account surplus in recent years is attributed to Thailand’s structural factors not fully explained by the EBA model (e.g., structural rigidities related to tourism).
  - Structural adjustment will take time; external rebalancing should not rely solely on exchange rate adjustment.
  - An appropriate mix of policies and measures must be pursued flexibly to achieve external rebalancing and economic and financial stability.
- The current account surplus has been adjusting in the right direction and will continue to decline over the medium term.
- Ongoing public investment, including the Eastern Economic Corridor (EEC) and structural reform projects, should strengthen domestic demand and moderate the current account surplus going forward.

### Financial Sector Developments
- Authorities concur with staff that the Thai financial system remains sound.
- Banking sector:
  - Profitable with adequate capital buffers and provisions as reflected by core financial soundness indicators.
  - Five largest banks have been defined as Domestically Systemically Important Banks (D-SIBs) requiring them to hold additional capital.
- Macroprudential actions:
  - Introduced measures to tighten limits on credit card debt and personal loans in September 2017 to contain risks from high household debt.
  - Greater coordination and cooperation among key financial regulators has improved responses to volatility.
- Forward-looking concerns:
  - Vigilance on changing financial landscape from Financial Technology developments and potential cybersecurity challenges.
- Non-banking sector vulnerabilities:
  - If not properly contained, could adversely impact economic and financial stability.
  - While household debt data on banks’ balance sheets are benign, real debt obligation-to-income remains high and deleveraging is slow.
  - Search-for-yield behavior may lead to underpricing of risk, evidenced by expanded size of saving cooperatives.
- Authorities have developed a macro-stress testing exercise to improve overall soundness and will monitor pockets of risk; they look forward to the upcoming FSAP to further identify risks.

### Fiscal Policy and Structural Reforms
- Fiscal policy:
  - Authorities will use fiscal space to uplift potential growth through infrastructure improvement.
  - Large scale public investment through EEC and other logistic projects is expected to crowd-in private investment and promote external rebalancing.
  - Existing fiscal space must be utilized efficiently and in a well-targeted manner.
- Revenues and long-term spending:
  - Authorities are aware of need to address rising age-related spending over medium to long term.
  - While VAT rate increase could strengthen revenue, it might dampen nascent domestic demand at this juncture.
  - Authorities consider alternative revenue sources, such as revision to property and inheritance tax, to prepare for demographic shift.
  - Progress toward a comprehensive review of the pension system with establishment of the National Pension Committee to enhance adequacy, coverage and sustainability.
- Structural reform agenda:
  - Determined to enhance growth and productivity to help Thailand become a high-income country within two decades.
  - Guided by National Strategy and National Reform Plans to improve competitiveness, human resources quality, and promote sustainable and inclusive growth.
  - Actions taken:
    - New Trade Competition Act effective since October 2017 to promote fairer trade and investment including less privilege for state-owned enterprises.
    - Noted significant improvement in ease of doing business; continued efforts to reduce regulatory red tape.
    - Progress in education reform by reducing inequity and promoting teaching quality.
    - Strengthened welfare program through a low-income earners registration program with occupational training to upgrade labor skills.
- Childcare and female labor force participation:
  - In principle childcare could facilitate female labor force participation, but may be less critical in Thailand.
  - According to the ILO, Thailand’s estimated female labor force participation rate is standing at 68 percent compared to the OECD average of 63 percent.

### Final Remarks
- The Thai authorities express sincere appreciation to the IMF mission for constructive and candid discussions centered on policies towards more balanced-growth.
- They welcome staff’s assessment of Thailand’s positive economic outlook with sustained growth momentum in the near term and broadly share staff’s view on risks to growth, though they differ with staff on a few points.
- Authorities appreciate the Fund’s continuing support through policy dialogue and technical assistance to accelerate structural reforms and fortify macroeconomic and financial stability.
- They look forward to continued support from the Fund and thank the Fund for facilitating preparation for the upcoming FSAP.

*Excerpt from the authorities’ statement in cr18143.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18143.pdf_