## THAILAND: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION ## Source details **Canonical URL:** [THAILAND: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION](https://www.imf.org/-/media/files/publications/cr/2019/1thaea2019002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1thaea2019002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1thaea2019002.pdf.json) --- ### Recent developments and domestic conditions - Real GDP growth: 2.8 percent and 2.3 percent in 2019:Q1 and 2019:Q2 respectively. - Private consumption held up; Thai exports—particularly electronics—were hit by global value-chain effects from U.S.-China trade tensions. - Headline inflation: - averaged 1.1 percent in 2018; - declined to 0.5 percent in August 2019 on the back of food and energy prices. - Core inflation: 0.5 percent. - Output gap: some measures indicate closing, but low inflation and a large current account surplus suggest a still negative gap. - Credit and housing: - Total credit growth moderated to 4.8 percent y-o-y in 2019:Q1 from 5.8 percent in 2018, led by declines in corporate borrowing. - Loans to households picked up in 2018 and remained buoyant through 2019:Q1 (auto loans and new mortgages). - LTV tightening in April 2019 softened housing loan demand; condo prices declined by 1¾ percent (y/y). - Housing market adjustment consistent with broad-based cooling. ### External sector and exchange rate developments - Current account: - Narrowed to 6.4 percent of GDP in 2018 from 9.7 percent in 2017. - Trade flows (end-June 2019): - Exports: contracted by 2.2 percent y-o-y (electronics and computer parts). - China-bound goods: -14.9 percent. - U.S.-bound goods: -2.2 percent. - Imports: declined by 9.4 percent y-o-y (lower capital goods, raw materials, intermediate goods). - Tourism receipts softened, led by slowdown in Chinese tourists. - Exchange rate and reserves: - Since December 2018, the baht appreciated by about 5.5 percent against the U.S. dollar (4.7 percent in nominal effective terms through June). - Reserves increased by nearly US$11 billion by end-June 2019 to US$250.3 billion (end-July 2019 reported US$251.1 billion in tables). - Since May 2019, accelerated capital inflows contributed to sharper appreciation. - Bank of Thailand measures (July 12, 2019): reduction in the limit of the outstanding balance for non-resident baht accounts; tightened reporting requirements for nonresident holdings of Thai debt securities. ### Outlook and risks - Growth projection: projected to slow to about 3 percent in 2019–20. - External headwinds: slowdown in global demand and trade tensions weigh on exports. - Domestic headwinds: weakening consumption from household debt overhang and drought depressing farm incomes. - Medium-term: private consumption and investment expected to strengthen as political uncertainty dissipates and public investment scales up; this would contribute to external rebalancing via higher imports. - Risks: tilted to the downside; key risk is escalation of protectionism threatening the global trading system. ### Executive Board assessment and policy guidance (directors’ summary) - Assessment: - Thailand’s robust policy framework and ample buffers underpin resilience. - Progress in financial supervision and macroprudential policies welcomed. - Near-term growth challenged by external and domestic headwinds; risks tilted to the downside. - Policy recommendations (high-level): - Adopt an expansionary policy mix to support domestic demand and implement structural reforms for inclusive, sustainable growth. - Undertake an investment-led expansion using available fiscal space while preserving buffers and ensuring fiscal sustainability. - Use monetary easing, calibrated to financial stability risks, and complementary macroprudential policy. - Emphasize exchange rate flexibility; limit intervention to avoid disorderly conditions. - Strengthen financial sector crisis management, close macroprudential leakages, and enhance non-bank oversight. - Advance labor-productivity, pension, anti-corruption, procurement, and AML/CFT reforms. ### Staff policy recommendations (concise) - Fiscal: - Front-load fiscal impulse in FY 2020 focused on macro-critical public infrastructure projects. - Staff recommends increasing public investment beyond baseline 5-year scaleup (from 5.4 percent to about 6.4 percent of GDP assumed in baseline). - Additional 5 percentage points of GDP in public investment over next three years recommended; financed with public debt to maximize short-term impact. - These projects would add about 1½ p.p. in fiscal stimulus and about 1 p.p. in annual real GDP growth during 2020–21. - Long-run real GDP increase estimated at about ¼–½ percentage points. - Impact on public debt: additional 2 percentage points of GDP would leave public debt at 47 percent by 2024. - Improve procurement, project appraisal, SOE restructuring, ex-post audits, and PPP risk monitoring. - Monetary and macroprudential: - Welcome BOT’s August 7, 2019 policy rate cut by 25 basis points to 1.5 percent; see scope for further easing to steer inflation back to target, while using macroprudential tools to address financial stability concerns. - Recommend publication of FX intervention data with appropriate lag. - Exchange rate and capital flows: - Flexible exchange rate as first line of defense; FX intervention limited to avoiding disorderly market conditions. - Phase out tightened CFMs (e.g., NRBS/NRBA limit reductions) over time, replacing with macroeconomic, financial, and structural policies; sequence liberalization of capital outflows. - Financial sector: - Strengthen crisis management, resolution toolkit, deposit insurance, emergency liquidity assistance, and non-bank supervision (SFIs, cooperatives). - Address AML/CFT deficiencies (expand coverage, beneficial owner verification, improve STR quality). - Structural and governance: - Use new government start to advance reforms: labor productivity across regions, pension reform, human capital investments, anti-corruption, procurement law operational improvements. ### Key statistics and selected indicators (excerpt; preserve numeric values) - Real GDP growth (y/y percent change): 2015: 3.1; 2016: 3.4; 2017: 4.0; 2018: 4.1; 2019: 2.9 (Prel.); 2020: 3.0 (Proj.). - Consumption growth: 2015: 2.4; 2016: 2.7; 2017: 2.3; 2018: 4.0; 2019: 3.6; 2020: 3.8. - Gross fixed investment: 2015: 4.4; 2016: 2.9; 2017: 1.8; 2018: 3.8; 2019: 5.2; 2020: 8.5. - Headline CPI (period average): 2015: -0.9; 2016: 0.2; 2017: 0.7; 2018: 1.1; 2019: 0.9; 2020: 0.9. - Core CPI (period average): 2015: 1.1; 2016: 0.7; 2017: 0.6; 2018: 0.7; 2019: 0.5; 2020: 0.6. - Current account (percent of GDP): 2015: 6.9; 2016: 10.5; 2017: 9.7; 2018: 6.4; 2019: 6.0; 2020: 5.4. - Gross official reserves (end of period, billions of U.S. dollars): 2015: 168.2; 2016: 197.6; 2017: 239.3; 2018: 239.4; 2019: 251.1; 2020: 251.1. - Household debt: nearly 80 percent of GDP (key financial soundness indicator, 2018:Q4). - NPL ratio (all depository corporations): 3.1. - NIIP (2018): -1.1 percent of GDP; improved from -9.1 percent in 2017 and -23.9 percent in 2014. - Nominal GDP (billions of baht): 2019: 16,922; 2020: 17,536. - GDP per capita (2017): US$6,732. - Unemployment rate (2017): 1.2 percent. - Poverty headcount ratio at national poverty line (2014): 10.5 percent. - Population (2016): 65.9 million. ### External position assessment and recommendations - Staff CA gap (2018): staff-adjusted CA gap midpoint 4.8 percent of GDP; staff adjusted CA gap range (midpoint ± standard error): 3.2–6.4 percent of GDP. - EBA CA Norm (2018): 0.1 percent of GDP; EBA CA Gap: 6.3 percent of GDP (actual CA 6.4 percent of GDP). - REER: 2018 REER appreciation 3.0 percent; as of June 2019 REER appreciated further 5.5 percent relative to 2018 average. - Staff recommendation: substantial policy effort to support domestic demand to narrow savings-investment imbalance—investment-led fiscal expansion plus structural reforms to boost domestic demand and generate growth-driven real appreciation. ### Fiscal policy strategy and scenarios - Staff recommends a frontloaded increase in public investment in FY 2020: - Scaleup from 5.4 percent to about 6.4 percent of GDP in baseline assumption. - Additional 5 percentage points of GDP in public investment over next three years recommended for macro-critical projects (e.g., EEC). - Scenario analysis: a debt-financed public investment push totaling 5 percent of GDP combined with a 50 bps temporary cut in the policy rate would: - Crowd in private investment. - Support growth up to 1.1 p.p. higher in the short and medium term. - Push inflation up about 0.7 p.p. towards the target range. - Cut the current account surplus by 1 ¾ p.p. of GDP in the short run. - Public debt: - Public debt ratio projected to increase by 2.5 to 3 percentage points over the projection period to 45 percent, and to reach about 47 percent by 2024 under the additional investment scenario (table projections show public sector debt end-2024: 45.0 or 45). - Revenue mobilization: - Medium-term goal: raise revenue-to-GDP ratio by about 3 percent of GDP on a permanent basis. - Short-term: continue implementing Medium-Term Revenue Strategy and revenue administration reforms. ### Monetary policy, macroprudential stance, and capital flows - Monetary: - BOT policy rate cut by 25 basis points to 1.5 percent on August 7, 2019. - Staff: further easing appropriate given subdued inflation and downside risks; use macroprudential tools to preserve financial stability. - Avoid "leaning-against-the-wind" with monetary policy when macroprudential tools are better suited to financial stability risks. - Macroprudential: - Address leakages in MPP toolkit; extend coverage to SFIs, cooperatives, and other nonbanks; introduce DSTI/DSTI-like measures and consider DSR. - Strengthen oversight of SFIs and credit cooperatives. - Capital flows and FX: - Staff: phase out NRBS/NRBA limit reductions consistent with Institutional View; complement with macro and structural policies. - FX intervention: disclose FXI data with lag; intervention limited to avoiding disorderly market conditions. ### Financial stability, FSAP findings, and recommended reforms - FSAP stress tests: largest banks can withstand an adverse scenario similar to the Asian Crisis. - Financial soundness indicators: banks' regulatory capital to RWA ~17.7–18.0 in recent years; NPLs around 3.1 percent. - Pockets of vulnerability: - Household indebtedness near 78.6–80 percent of GDP. - Weakness in some corporates and SMEs; rising NPLs among young cohorts and SMEs. - FSAP recommendations (selected): - Strengthen macroprudential framework; narrow FIPC membership; define FIPC vs MPC roles. - Expand MPP coverage to SFIs, cooperatives, and nonbanks; extend LTV/DTI/DSTI constraints. - Enhance operational independence and accountability of supervisors; consider an overarching body with "comply or explain". - Harmonize SFI regulation; prepare roadmap to bring retail-deposit-taking SFIs to parity with banks. - Define a regulatory/supervisory regime for financial cooperatives; mandate reporting to National Credit Bureau. - Strengthen crisis management, resolution toolkits, deposit insurance, and ELA. - Address AML/CFT deficiencies (risk-based supervision, sanctions, beneficial owner verification). ### Private debt, Growth-at-Risk (GaR), and debt-overhang policy lessons - Private debt: - Household debt: 78.6 percent of GDP at end-2018 (THB12.6 trillion / US$406 billion). - Nonfinancial corporate debt: about 50 percent of GDP (US$250 billion). - GaR findings: - Conditional distribution of 4-quarters ahead GDP growth (near term): mode 4.39 percent; GaR 5 percent: -0.8 percent; probability growth < 0: 11.1 percent. - Medium-term mode: 2.8 percent (left tail GAR 5 percent reported as a negative value in source). - Leverage increases downside risks to growth; household debt shocks shift growth distribution left more than corporate debt shocks (mode declines from 2.8 percent to 0.6 percent for a one standard deviation household debt shock; to 1.7 percent for corporate debt shock). - Policy implications: - Combine ex-ante (macroprudential, credit information, underwriting standards) and ex-post (debt restructuring, personal insolvency frameworks, Debt Clinic) tools. - Introduce DSR-based measures and expand credit reporting coverage. - Strengthen informal restructuring mechanisms (Debt Clinic, composition prior to bankruptcy) and consider more accessible personal bankruptcy/repayment-plan tools. - Macroeconomic stimulus targeted at incomes and inflation can reduce real debt burdens. - Deleveraging pace should account for the international financial cycle. ### Demographics, pensions, and healthcare fiscal pressures - Demographic projections: - Working-age population decline: expected -11 percent by 2035 and -30 percent by 2060. - Old-age dependency ratio: 14.8 percent in 2018 → 36 percent in 2035 → 54 percent in 2060. - Pensions: - Public expenditure in pensions funded by the budget: 2017: 1; 2035: 1.4; 2060: 2.7 (percent of GDP; source table entries). - Old-age allowance and civil servant regimes significant per-beneficiary differences (civil servants average benefits 135 percent of GDP per capita; informal sector old-age allowance ~4 percent of GDP per capita). - SSF projected to run out of reserves shortly after 2053; absence of reform implies SSF funding from budget could reach 1.9 percent of GDP by 2060. - Policy need: pension reform and additional medium-term revenue mobilization. - Healthcare: - Total public health expenditure: 2017: 2.9 percent of GDP (text states 2.9 in 2017), projected to 4 and 4.9 percent of GDP in 2035 and 2060 respectively. - A large proportion of increases likely financed from the budget. ### Risk Assessment Matrix — major risks and mitigation - External risks (Likelihood / Impact): - Rising protectionism and retreat from multilateralism: Likelihood H; Impact H. - Sharp rise in risk premia: Likelihood H; Impact M. - Further build-up of financial vulnerabilities: Likelihood H; Impact M. - Weaker-than-expected global growth: Likelihood varies by region (U.S.: M; Europe: H; China: H; Large stressed EMs: M); Impact H. - Intensification of geopolitical tensions: Likelihood H; Impact H. - Large swings in energy prices: Likelihood M; Impact M. - Cyber-attacks: Likelihood L; Impact M. - Natural disasters frequency/severity: Likelihood M/L; Impact M. - Domestic risks (Thailand-specific): - 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 boiling over: Likelihood M; Impact M. - Policy actions to minimize impacts include: fiscal/monetary stimulus where appropriate, structural reforms, exchange rate flexibility, strengthened macroprudential framework, and targeted social safety nets. ### Institutional and procedural recommendations - Strengthen procurement law operational aspects and public investment management (simplify procurement, transparency in land expropriation, ex-post audits). - Strengthen anti-corruption institutions and AML/CFT frameworks. - Consider establishing an overarching coordination body for financial supervision with a "comply or explain" mechanism. - Next Article IV consultation recommended on a standard 12-month cycle. *Source: IMF staff report for the 2019 Article IV Consultation with Thailand (discussions in Bangkok during July 4–19, 2019; report dated September 11, 2019).* ### 2.8 percent and 2.3 percent in 2019:Q1 and 2019:Q2 respectively. Although private ### THAILAND: STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION ### Recent developments and domestic conditions - Real GDP growth: 2.8 percent and 2.3 percent in 2019:Q1 and 2019:Q2 respectively. - Private consumption held up, but global trade tensions impacted Thai exports—particularly electronics—through global value chains. - Headline inflation: - averaged 1.1 percent in 2018; - declined to 0.5 percent in August 2019 on the back of food and energy prices. - Core inflation remains subdued at 0.5 percent. - Output gap: some measures indicate closing, but the combination of low inflation and a large current account surplus suggests a still negative gap. - Credit and housing markets: - Total credit growth moderated in 2019:Q1, led by declines in corporate borrowing. - Loans to households picked up in 2018 and remained buoyant through 2019:Q1, driven by auto loans and new mortgages. - Following the tightening of LTVs in April 2019, housing loan demand softened; condo prices declined by 1¾ percent (y/y), also reflecting weaker foreign demand. - The housing market is undergoing an adjustment consistent with broad-based cooling of the Thai economy. ### External sector and exchange rate developments - Current account surplus: - Narrowed to 6.4 percent of GDP in 2018 from 9.7 percent in 2017. - Drivers: partly the U.S.-China trade tensions weighing on exports. - Trade flows as of end-June 2019: - Exports contracted by 2.2 percent y-o-y, driven by electronics and computer parts. - China-bound goods: a 14.9 percent decline. - U.S.-bound goods: a 2.2 percent decline. - Imports declined by 9.4 percent y-o-y, with lower capital goods, raw materials, and intermediate goods imports. - Tourism receipts softened, led by a slowdown in Chinese tourists. - Exchange rate and reserves: - Since December 2018, the baht appreciated by about 5.5 percent against the U.S. dollar. - Reserves increased by nearly US$11 billion by end-June 2019 to US$250.3 billion. - Since May 2019, capital inflows accelerated, contributing to sharper baht appreciation. - Bank of Thailand measures (July 12, 2019): reduction in the limit of the outstanding balance for non-resident baht accounts; tightening reporting requirements for non-resident holdings of debt securities issued in Thailand. ### Outlook and risks - Growth projection: projected to slow to about 3 percent in 2019–20 reflecting external and domestic headwinds. - External: slowdown in global demand and uncertainty about trade tensions expected to weigh on exports. - Domestic: weakening consumption growth as the debt overhang weighs on credit growth and drought depresses farm incomes. - Medium-term: private consumption and investment expected to strengthen as political uncertainty dissipates and public investment scales up, contributing to external rebalancing via higher imports. - Risks: tilted to the downside, most notably from ongoing escalation of protectionism threatening the global trading system. ### Executive Board assessment and policy guidance - Directors’ appraisal: - Thailand’s robust policy framework and ample buffers underpin resilience to shocks. - Progress welcomed on improving coverage and effectiveness of financial supervision and macroprudential policies. - Near-term growth is challenged by external and domestic headwinds; risks are tilted to the downside from global slowdown, trade tensions, and weak domestic demand. - Policy recommendations summarized by Directors: - Encourage an expansionary policy mix to support domestic demand and implement structural reforms to promote inclusive and sustainable growth. - Undertake an investment-led expansion using existing fiscal space while preserving buffers and ensuring fiscal sustainability. - Strong implementation of macro-critical public infrastructure projects to crowd in private investment and stimulate domestic demand in the short run and lift potential growth in the long run. - Better targeting of social assistance to protect vulnerable households while minimizing distortions. - Strengthen revenue mobilization over the medium to long run to prepare for aging-related expenditure pressures. - Monetary policy and macroprudential stance: - Welcome the Bank of Thailand’s August decision to cut the policy rate. - Several Directors saw scope for further monetary easing to help steer inflation back to target; many considered current stance sufficiently accommodative and emphasized calibration based on financial stability risks. - Complementary use of macroprudential policy to address financial stability concerns. - External and exchange rate policy: - Many Directors considered Thailand’s external position substantially stronger than warranted by medium-term fundamentals; others urged cautious interpretation citing Thailand-specific factors. - Emphasized exchange rate flexibility, with intervention limited to avoiding disorderly market conditions. - Some Directors supported phasing out capital flow management measures (CFMs) and replacing them with appropriate macroeconomic, financial, and structural policies; others noted tighter CFMs play a role in mitigating short-term volatility. - Financial sector recommendations: - Financial stability risks appear contained, though household indebtedness is relatively high and there are pockets of corporate vulnerability. - Encourage strengthening crisis management and resolution framework, closing leakages in the macroprudential toolkit, and establishing an overarching body to enhance coordination among supervisors (in line with FSAP recommendations). - Tailor recommendations on institutional arrangements to country-specific context. - Strengthen supervision and regulation of Specialized Financial Institutions and Credit Cooperatives to enhance non-bank sector oversight. - Structural and governance priorities: - The start of the new government is an opportunity to advance a concerted reform agenda. - Targeted policies to enhance labor productivity across regions to boost competitiveness, raise potential growth, and enhance inclusiveness. - Address population aging via pension reform and investment in human capital (education, health, equalizing opportunities). - Strengthen anti-corruption institutions, improve operational aspects of procurement law, and address AML/CFT deficiencies. ### Key statistics and selected indicators (excerpt) - Real GDP growth (y/y percent change): 2015: 3.1; 2016: 3.4; 2017: 4.0; 2018: 4.1; 2019: 2.9 (Prel.); 2020: 3.0 (Proj.). - Consumption growth: 2015: 2.4; 2016: 2.7; 2017: 2.3; 2018: 4.0; 2019: 3.6; 2020: 3.8. - Gross fixed investment: 2015: 4.4; 2016: 2.9; 2017: 1.8; 2018: 3.8; 2019: 5.2; 2020: 8.5. - Headline CPI (period average): 2015: -0.9; 2016: 0.2; 2017: 0.7; 2018: 1.1; 2019: 0.9; 2020: 0.9. - Core CPI (period average): 2015: 1.1; 2016: 0.7; 2017: 0.6; 2018: 0.7; 2019: 0.5; 2020: 0.6. - Gross domestic investment (percent of GDP): 2015: 22.4; 2016: 20.9; 2017: 22.8; 2018: 25.0; 2019: 24.9; 2020: 25.3. - Gross national saving (percent of GDP): 2015: 29.3; 2016: 31.5; 2017: 32.5; 2018: 31.4; 2019: 31.0; 2020: 30.7. - Current account balance (billions of U.S. dollars): 2015: 27.8; 2016: 43.4; 2017: 44.1; 2018: 32.4; 2019: 31.8; 2020: 30.1. - Current account (percent of GDP): 2015: 6.9; 2016: 10.5; 2017: 9.7; 2018: 6.4; 2019: 6.0; 2020: 5.4. - Exports, f.o.b. (billions of U.S. dollars): 2015: 213.4; 2016: 213.5; 2017: 233.7; 2018: 251.1; 2019: 245.2; 2020: 263.0. - Imports, f.o.b. (billions of U.S. dollars): 2015: 187.2; 2016: 177.7; 2017: 201.1; 2018: 228.7; 2019: 223.0; 2020: 243.1. - Gross official reserves (end of period, billions of U.S. dollars): 2015: 168.2; 2016: 197.6; 2017: 239.3; 2018: 239.4; 2019: 251.1; 2020: 251.1. - Nominal GDP (billions of baht): 2015: 13,743; 2016: 14,555; 2017: 15,452; 2018: 16,318; 2019: 16,922; 2020: 17,536. - GDP per capita (2017): US$6,732. - Unemployment rate (2017): 1.2 percent. - Poverty headcount ratio at national poverty line (2014): 10.5 percent. - Main exports (percent of total 2015): machinery (44), food (12). - Net FDI (2017): US$-10.59 billion. - Population (2016): 65.9 million. ### Staff policy recommendations (concise) - Use available fiscal space judiciously with a front-loaded fiscal impulse in FY 2020 to spur domestic demand and support potential output; prioritize strong implementation of macro-critical public infrastructure projects. - Further monetary easing is appropriate to respond to escalation in U.S.-China trade tensions, slowdown in global demand, delays in the FY2019/20 budget enactment, subdued inflation, and moderation of domestic financial cycle; easing would also help dampen portfolio inflows and appreciation pressures. - Strengthen financial oversight, crisis management and resolution, and macroprudential policy by closing existing leakages to contain systemic risks and give monetary policy space to target inflation. - Advance structural reforms to improve public investment implementation, strengthen social safety nets, raise productivity in a digitalizing economy, and address macro-relevant governance and corruption vulnerabilities. *Source: IMF staff report for the 2019 Article IV Consultation with Thailand (discussions in Bangkok during July 4–19, 2019; report dated September 11, 2019).* ### 2. At the same time, the economy continues to be challenged by domestic and external ### 2. At the same time, the economy continues to be challenged by domestic and external ### Macro imbalances and performance versus peers - GDP growth has trailed behind regional peers for a better part of the last decade; inflation, investment, and employment rates have steadily declined since 2012. - Weak domestic demand contributed to below-target inflation and a large current account surplus for several years, reinforcing exchange rate appreciation pressures, raising long-term competitiveness concerns, and leading to excessive reserve accumulation. - Thailand’s investment has generally lagged behind regional peers; weak domestic demand has contributed to relatively low growth, low inflation, and a high current account surplus over the last few years. - Data and series referenced: Real GDP Growth (Y/y percent change), Gross Investment (In percent of GDP), Inflation (Y/y percent change), Current Account Balance (In percent of GDP). ### Structural drivers of imbalances - High household debt constrains private consumption growth. - Insufficient social safety net coverage, including the pension system, encourages precautionary savings especially at the lower income deciles. - Competitiveness has deteriorated due to low productivity growth and high wages relative to the region, prompting multinational Thai firms to increase investment abroad (notably CLMV: Cambodia, Lao, Myanmar and Vietnam) to take advantage of lower labor costs and access to global supply chains. - Profitability and domestic investment: - Profitability of listed firms in Thailand has been on a secular decline, led by relatively smaller companies (sample includes 459 listed firms with assets of at least US$25 million). - Change in inward DI (2011-17), change in outward DI (2011-17), change in domestic investment (2011-17), and domestic investment in 2017 are presented (series by country). - Thailand's outward DI destinations (percent, change in 2011-2017): Singapore 22.2, Vietnam 18.3, Myanmar 15.5, Lao, PDR 12.9, Indonesia 11.5, Malaysia 8.3, Cambodia 4.3, Other 7.0, Total 100.0. - Thailand's outward DI major destinations (percent): Hong Kong SAR 86.6, Japan 9.6, China 2.9, Other 0.9, Total 100.0. ### Recent developments, outlook, and risks - Growth slowdown and monetary policy: - Real GDP growth: 4.8 percent y/y in 2018:H1; 3.4 percent in 2018:H2; 2.8 percent in 2019:Q1; 2.3 percent in 2019:Q2. - Bank of Thailand policy rate cut by 25 basis points to 1.5 percent on August 7, 2019. - Inflation: - Headline inflation averaged 1.1 percent in 2018 and declined to 0.5 percent in August 2019; core inflation remained subdued at 0.5 percent. - Output gap: some measures suggest it is closing, but low inflation and a large current account surplus suggest a still negative gap. - Credit and housing: - Total credit growth moderated from 5.8 percent in 2018 to 4.8 percent y/y in 2019:Q1, led by declines in corporate borrowing. - Housing loan demand softened after tightening of loan-to-value (LTVs) in April 2019; condo prices declined by 1¾ percent (y/y). - Current account and external sector: - Current account surplus declined to 6.4 percent of GDP in 2018 from 9.7 percent in 2017. - As of end-June 2019: exports contracted by 2.2 percent y-o-y; China-bound goods declined by 14.9 percent; U.S.-bound goods declined by 2.2 percent. - Imports declined by 9.4 percent y-o-y, with lower capital goods, raw materials, and intermediate goods imports. - Tourism receipts softened, led by a slowdown in Chinese tourists. - Capital flows, exchange rate, and reserves: - Since December 2018, the baht appreciated by about 5.5 percent against the U.S. dollar (4.7 percent in nominal effective terms through June). - Level of reserves increased by nearly US$11 billion by end-June 2019 to US$250.3 billion. - FX intervention: evidence of FX sales during the 2018 sell-off; largely one-sided purchases since November 2018. - Since May 2019, capital inflows accelerated; on July 12, 2019 the Bank of Thailand announced measures to curtail short-term speculative capital inflows (reduction in the limit of the outstanding balance for nonresident baht accounts) and tightened reporting requirements for nonresident holdings of Thai debt securities. - External position assessment: - Staff assess the cyclically adjusted current account (CA) gap to be around 3.2 percent to 6.4 percent of GDP (Appendix IV). - Recommendation: substantive policy effort to support domestic demand to help narrow the underlying savings-investment balance over time; medium-term mutually reinforcing macro policy stimulus, led by a fiscal expansion, and structural reforms should support domestic demand and gradually lower the current account surplus with a growth-driven real appreciation. - Growth and fiscal outlook: - Staff forecast growth to average about 3 percent in 2019–20. - Public investment is assumed to pick up in 2020:H2 as contracts for main Eastern Economic Corridor (EEC) projects are signed; modest loosening in fiscal stance in 2020 after two years of negative stimulus. - Slight narrowing of the current account surplus to 6 percent of GDP in 2019 is projected. - Public debt is expected to reach 45 percent of GDP by 2024 and to stabilize thereafter. - Risks (tilted to the downside): - External risks: further escalation of protectionism and restrictions to investment and trade in technology; intensification of geo-political tensions and security risks; potential slowdown in China, Europe, and the United States; lower-than-expected tourist arrivals (mainly from China). - Domestic risks: a split lower house could slow legislative reform and infrastructure support; private domestic demand could fail to pick up due to a prolonged household debt overhang and low productivity growth. - Upside risks: faster-than-expected implementation of reforms; reallocation of some of China’s production to Thailand and other countries in the region in response to U.S.-China trade tensions. ### Authorities’ views - Authorities broadly shared staff’s assessment of the economic outlook and risks but were more optimistic over the next two years, expecting the output gap to close over the same period. - They noted domestic demand is still holding up, with continued growth in consumption and private investment, though consumption may be constrained by elevated household debt. - Authorities emphasized structural policies as key to addressing external imbalances and cautioned against overburdening the exchange rate with adjustment. - They urged caution in interpreting EBA results, arguing that the assessment relies heavily on the current account approach, omits capital flow impacts, may not fully account for Thailand-specific factors (such as rapid population aging), and may overstate the size of imbalances and currency valuation given recent real appreciation. ### Policy strategy: supporting domestic demand and external rebalancing - Overarching strategy: boost growth while promoting domestic and external rebalancing and enhancing inclusive growth through: - (i) using fiscal space and reforms to strengthen domestic demand; - (ii) monetary easing—cutting the policy rate given deterioration of domestic and global conditions—while using macroprudential tools to preserve financial stability; - (iii) lifting potential growth in a broad-based manner to enhance inclusiveness. - Timing: the start of the new government provides an opportunity to pursue the concerted policy agenda. A. Using fiscal space and fiscal reforms to spur domestic demand - Recommendation: a more front-loaded fiscal impulse in FY 2020. - Staff recommends a frontloaded increase in public investment over and above the 5-year scaleup (from 5.4 percent to about 6.4 percent of GDP) already assumed in the baseline. - Public debt ratio is projected to increase by 2.5 to 3 percentage points over the projection period to 45 percent, well below the 60 percent ceiling established in the fiscal responsibility law. - An additional 5 percentage points of GDP in public investment on macro-critical projects (e.g., EEC) is recommended over the next three years; these projects would crowd in private investment through PPPs and increase productivity. - Assuming financing with public debt to maximize short-term impact: these projects would add about 1½ p.p. in fiscal stimulus and about 1 p.p. in annual real GDP growth during 2020–21. - Long-run real GDP would increase by about ¼–½ percentage points as public and private investment add to the capital stock and productivity. - Impact on public debt: an additional 2 percentage points of GDP would leave public debt at 47 percent by 2024. - Implementation and governance recommendations: - Leverage capacity development (CD) work and strengthen operational aspects of the procurement law. - Step up efforts to implement past Fund CD recommendations to improve public investment management and maximize return to capital: simplify procurement procedures and appeal mechanisms (especially for SOEs); ensure transparency in land expropriation; publish ex-post audits of investment projects. - Strengthen operational aspects of the procurement law: limit common members across various subcommittees; strengthen complaints process to include both actual and potential bidders. - Consistent with FAD’s PIMA CD report, staff recommends: restructuring underperforming SOEs; increasing market access and strengthening regulation; bringing all capital spending on the budget; improving capacity for project appraisal; conducting systemic audits of investment projects; and strengthening risk monitoring including for PPPs. *International Monetary Fund staff summary of Chapter 2 content.* ### 17. Judicious use of fiscal space should be combined with fiscal reforms that spur ### 17. Judicious use of fiscal space should be combined with fiscal reforms that spur ### Fiscal policy, social protection, and labor market inclusion - The authorities have implemented a social assistance program over the last two years amounting to about 0.5 percent of GDP per year, directed to low-income earners; the program includes cash transfers and training to improve work opportunities. - Staff recommendation: broadly cost-neutral improvements to the social safety net should be part of the structural agenda, including: - Prioritizing broad coverage of the most vulnerable households. - Enhancing the targeting of transfers to ensure fiscal sustainability. - Consolidation of the many different programs scattered across different government agencies to improve effectiveness. - Additional measures: expand active labor market policies and other inclusive policies to improve labor force participation and attenuate the impact of aging on growth. - The new cabinet approved a social expenditure package focusing on increased welfare spending and a small relief to farmers, while considering a gradual adjustment in the minimum wage; staff notes the need to design measures to ensure incentive compatibility and minimize distortions. ### Short-term fiscal stance and public investment - Authorities agreed that expansionary fiscal policy will be key to maintaining growth momentum; they expect provisions in the FY 2019 budget and temporary delays on new projects to limit material effects from FY 2020 disbursement delays. - Authorities reaffirmed support for public investment projects, particularly in the EEC, which they expect will uplift Thailand’s competitiveness over the longer term. - Scenario analysis (staff calculations): a debt-financed public investment push totaling 5 percent of GDP combined with a 50 bps temporary cut in the policy rate would: - Crowd in private investment. - Support growth up to 1.1 p.p. higher in the short and medium term. - Push inflation up about 0.7 p.p. towards the target range. - Cut the current account surplus by 1 ¾ p.p. of GDP in the short run. ### Medium-term revenue mobilization and fiscal sustainability - To meet government development programs and long-run social protection needs, the revenue-to-GDP ratio needs to increase by about 3 percent of GDP on a permanent basis. - Short-term focus: continue implementing the Medium-Term Revenue Strategy (MTRS) recommendations, prioritizing revenue administration reforms; recent steps include revisions to the personal income tax code and a law allowing the Revenue Department to access bank information on accounts with high transaction frequency. - Medium-term tax policy options (once domestic demand has strengthened) could include broader coverage of: - Personal income taxes. - Wealth taxes. - Corporate income taxes. - Energy-related taxes. - A higher VAT rate. - Authorities are working on revenue-neutral tax policy changes to achieve a more efficient and growth-friendly tax system. ### Assessment of fiscal space — positive and negative factors - Positive factors: - The overall fiscal balance of the public sector has been close to zero in recent years, suggesting a good track record of fiscal discipline. - Public debt and gross financing needs paths are below standard vulnerability benchmarks and below the Cabinet debt ceiling of 60 percent of GDP. - The current cost of debt financing is low; staff notes now is the time for debt financing at fixed rates for new debt issuance. - Negative factors / risks: - Quasifiscal activities by some SOEs are not properly tracked or reported; contingent liability risks are hard to quantify with available information. - Age-related spending is projected to increase steadily for demographic reasons, threatening fiscal sustainability beyond the medium term. - Bottom line: Thailand has some fiscal space that should be used wisely. ### Monetary policy, inflation targeting, and external rebalancing - Staff welcomes the BOT’s recent decision to cut the policy rate and recommends further monetary easing given: - Delay in the FY 2020 Budget likely constraining domestic demand. - Subdued inflation, moderation of the domestic financial cycle, deterioration of domestic and global cyclical conditions, and escalation in trade tensions. - Monetary easing can attenuate appreciation pressures and dampen speculative portfolio inflows. - If downside risks materialize, deeper cuts to the policy rate should be considered. - Recommendation: monetary policy should focus on attaining the inflation target; macroprudential policy should address financial stability concerns. Specifically: - Avoid “leaning-against-the-wind” via tighter monetary policy when financial stability risks are better addressed by macroprudential tools. - Strengthen monetary policy transmission, including more effective communication and guidance on commitment to meet the inflation target to enhance expectations channels. - Staff recommends publication of FX intervention (FXI) data with an appropriate lag to enhance communication and reinforce that FX intervention is used to address disorderly market conditions (DMC). ### Exchange rate policy, capital flows, and capital account measures - Staff view: a flexible exchange rate should be the first line of defense against external shocks; FX intervention should be limited to avoiding DMC to allow the exchange rate to contribute to domestic demand support and external rebalancing. - Authorities’ view: the recent nearly 6 percent nominal appreciation in 2019 was not warranted by fundamentals and was driven by investor sentiment and the baht’s perceived safe-haven status; they consider FXI a useful short-term tool to cope with rapid appreciation and market herding. - The Fund assessed the BOT’s reduction in the limit on nonresident baht accounts (NRBS and NRBA) as a tightening of an existing residency-based capital flow management measure (CFM); staff recommendation: - Phase out the reduction in NRBS/NRBA limits consistent with the Institutional View, replacing them with a comprehensive package of macroeconomic, financial and structural policies. - Complement this with gradual liberalization of capital outflows in an appropriately paced and sequenced manner. - BOT ongoing reforms since 2007 and continuing in 2019: gradual liberalization of capital outflows, removal of limits on outward direct investment, relaxation of repatriation requirements for exporters, streamlining rules on outflows and foreign currency deposit accounts, and allowing retail investors to invest in securities abroad within limits—aimed at facilitating diversification and better private FX risk management. ### Financial stability and macroprudential policy - Monetary easing should be pursued together with continued application of macroprudential policies to preserve financial stability. - Staff: address leakages in the macroprudential policy (MPP) toolkit to make it effective (consistent with FSAP recommendations). - BOT: remains concerned that further monetary easing could increase financial stability risks and emphasizes data-dependent policymaking and the need to balance output, inflation, and financial stability objectives. *IMF staff summary from the chapter "17. Judicious use of fiscal space should be combined with fiscal reforms that spur" (Thailand country report).* ### 31. Financial stability risks appear contained although pockets of vulnerability remain. The ### 1thaea2019002 - 31. Financial stability risks appear contained although pockets of vulnerability remain. The ### Financial stability assessment - The Financial Stability Map ranks Thailand’s banking sector risks well within that of comparable EMs. - The Financial Soundness Indicator map (banking sector) shows low risks to banking system health. - The financial system is well positioned to cope with most shocks: - Recently concluded FSAP stress tests and sensitivity analysis on solvency and liquidity indicate that the largest banks can withstand an adverse scenario similar to the experience during the Asian Crisis. - Systemic risk analysis and monitoring has improved, leading to better identification of vulnerabilities by the BOT. - The BOT designated five Domestic Systemically Important Banks, which are required to maintain higher capital and are subject to more rigorous supervisory measures. - Pockets of vulnerability remain: - High household indebtedness (including members of financial cooperatives). - Signs of weakness in some corporates and SMEs. - Non-performing loans (NPLs) have been rising among the young cohort groups and SMEs. Key financial soundness indicators (latest data based on 2018:Q4, as presented) - Household debt: nearly 80 percent of GDP. - NPL ratio (all depository corporations): 3.1 - NPL ratio (commercial banks): 2.9–3.1 (periods shown) - Leverage ratio (%): 11.7, 12.3, 12.8, 12.8, 12.5, 12.6, 13.0, 12.8 (series presented) - ROA: 1.7, 1.4, 1.4, 1.2, 1.3, 1.4, 1.3, 1.3 (series presented) - ROE: 14.7, 11.1, 10.7, 9.1, 9.5, 9.9, 9.7, 9.4 (series presented) ### FSAP recommendations (staff encourages implementation) - a. Strengthening the macroprudential framework and policies - Narrow the membership of the Financial Institutions Policy Committee (FIPC) and clearly define roles of FIPC and the Monetary Policy Committee. - Address leakages in BOT’s macroprudential toolkit; expand MPP coverage beyond current limits to SFIs, cooperatives, and other nonbank financial institutions. - Extend existing LTV and debt-to -income (DTI) limits to a broader set of institutions including financial cooperatives and other nonbanks (and to SFIs in the case of DTI on personal loans). - Introduce comprehensive debt-service-to-income (DSTI) limits covering all loans to consumers. - BOT consideration of debt service ratio (DSR)-related measures is welcomed. - b. Enhancing operational independence and accountability of supervisory agencies and improving inter-agency coordination - Reduce Ministry of Finance (MOF) involvement in prudential issues and eliminate cross directorships across supervisory agencies to diminish potential for interference. - Establish an overarching body outside the BOT with power to make recommendations to member agencies with a “comply or explain” mechanism; membership to include supervisory agencies, the Ministry of Agriculture and Cooperatives (MoAC), the Deposit Protection Agency, the Financial Institutions Development Fund and the MOF. - c. Harmonizing the regulatory framework for commercial banks and SFIs - Allow the BOT to issue regulations related to SFIs or take corrective actions (without MOF approval) at par with commercial banks. - Prepare a roadmap with milestones to bring regulation and supervision of the three largest retail-deposit-taking SFIs at par with commercial banks. - d. Defining and initiating a regulatory and supervisory regime for financial cooperatives - Create a regime proportionally equivalent to that applied in the banking system. - Address potential over-indebtedness of members by defining maximum DTI ratios and requiring thrift and credit cooperatives (TCCs) and credit unions (CUs) to report to the National Credit Bureau. - e. Enhancing the crisis management framework - Develop resolution toolkits, strengthen deposit insurance and emergency liquidity assistance (ELA), and align resolution powers with the key attributes through legislative amendments. - f. Addressing AML/CFT deficiencies leveraging recent CD work - Strengthen implementation of a risk-based approach to supervising banks and other financial institutions for AML/CFT compliance, including enforcement of dissuasive and proportionate sanctions. - Pass near-term legislation being prepared to address Asia Pacific Group 2017 deficiencies, including expanding AML/CFT coverage to lawyers and accountants, verification of beneficial owners, improving suspicious transaction report quality, and identification of sources of wealth of politically exposed persons. ### Private sector debt and household indebtedness - High household debt (at nearly 80 percent of GDP) is driven by subsidized credit programs and accommodative global financial conditions. - Risks: - Could further weigh upon private consumption and pose risks to growth. - Could undermine inclusive growth as debt distress disproportionately impacts lower-income and younger households. - Staff welcomes recent initiatives: consideration of introducing DSR, formation of a Debt Clinic, efforts to increase financial literacy, and strengthening underwriting standards. - Recommended ex ante policies to facilitate deleveraging: - Implementation of DSR based on borrowers’ capacity to service their overall debt (backed by expanded credit information systems). - Provision of legal and financial advice to indebted consumers. - Encouraging responsible lending. - Recommended ex post measures: - Out of court restructuring mechanisms and repayment plans that allow for rehabilitation of debtors. ### Authorities’ response to FSAP recommendations - Authorities generally agreed with FSAP recommendations but challenged advice on enhancing financial oversight architecture. - Actions underway: - Beginning to expand the MPP toolkit. - Addressing some gaps in the crisis management framework. - BOT arguments: - Current structure of financial oversight has merits; focus should be on outcomes rather than form. - MOF representative on FIPC does not compromise operational independence (one out of eleven FIPC members). - Cross directorships are useful for synergies and harmonizing regulations, especially given largest capital market players are subsidiaries of commercial banks. ### Staff appraisal and macro-policy recommendations - Overall assessment - Thailand’s robust policy framework and ample buffers underpin its resilience to external headwinds. - Progress in financial supervision and macroprudential policy has enhanced financial stability. - Domestic and external imbalances persist; policy space and buffers should be used to spur domestic demand, support broader growth, and steer inflation back to target. - Near-term headwinds - Ongoing U.S.-China trade tensions and lower growth among main trade partners have impacted exports, particularly electronics via global value chains. - Domestic factors: weakening consumption growth (debt overhang) and drought depressing farm incomes. - Inflation dynamics subdued; external current account surplus remains high though narrowed significantly in 2018. - External position - External position remains substantially stronger than warranted by medium-term fundamentals and desirable policies. - Recommendation: address external imbalances through multipronged policy stimulus comprising an investment-led fiscal expansion and structural reforms to boost domestic demand and raise inflation. - Fiscal policy - Use available fiscal space judiciously to spur domestic demand, reduce external imbalances, and support potential output growth. - Prioritize strong implementation of macro-critical public infrastructure projects (including EEC projects) to crowd in private investment and stimulate demand while supporting potential output growth. - Better targeting of welfare programs to protect poor and vulnerable households while minimizing distortions through incentive-compatible design. - In medium to long run, additional domestic revenue mobilization will be needed to finance aging-related expenditure pressures. - Monetary and macroprudential policy - Staff welcomes BOT’s recent decision to ease monetary policy and recommends further easing. - Rationale for further easing: escalation in U.S.-China trade tensions, delays in enactment of FY 2019/20 budget, subdued inflation below target, moderation of domestic financial cycle, and deterioration in outlook. - Policy rate cut will help attenuate appreciation pressures and potentially dampen cycle of portfolio inflows. - Complementary use of macroprudential policy can address financial stability concerns while balancing output, inflation, and financial stability objectives and keeping exchange rate as a shock absorber. - FX intervention should be limited to avoiding disorderly market conditions; allow flexible exchange rate to contribute to external rebalancing. - Recent tightening of existing CFMs to address speculative flows should be phased out and replaced with appropriate macroeconomic, financial and structural policies. - Staff recommends publication of FXI data (with an appropriate lag) to enhance communication and strengthen commitment to the inflation target. *Source: IMF staff calculations and chapter content.* ### 44. The financial system is well positioned to cope with shocks although pockets of ### 1thaea2019002 - 44. The financial system is well positioned to cope with shocks although pockets of ### Financial system stability: key findings - The recently concluded FSAP did not identify major risks to the financial sector. - Risks to Thailand’s banking sector are well within that of comparable EMs. - The largest banks can withstand an adverse scenario similar to the experience during the Asian Crisis, validated by FSAP stress tests and sensitivity analysis. - Pockets of vulnerability remain: - High household indebtedness (including members of financial cooperatives). - Signs of weakness in some corporates and SMEs. - Staff commends authorities for measures to strengthen financial system stability, including systemic risk analysis and monitoring that improved identification of vulnerabilities. ### Policy recommendations on financial stability and supervision - Continue efforts to address pockets of vulnerability associated with: - High household indebtedness. - Weakness in some corporates and SMEs. - Strengthen institutional frameworks and tools: - Enhance the operational independence of supervisory agencies. - Improve the crisis management and resolution framework. - Broaden and deepen the macroprudential toolkits. - Enhance SFI regulations. ### Growth, demographics, and structural reform priorities - The start of the new government is a timely opportunity to advance a concerted reform agenda. - Targeted policies to enhance labor productivity across regions can: - Boost competitiveness. - Raise potential growth. - Enhance inclusiveness. - Key priority areas to address the demographic challenge from population aging: - Pension reform. - Domestic revenue mobilization. - Investment in human capital across regions (education, health, equalizing opportunities). - The forthcoming IMF TA should assist in designing a broader pension system reform strategy. - Structural reforms to address macroeconomic imbalances, including: - Growing regional income disparities. - Large current account surplus. - Weak wage and inflation dynamics. - Other institutional reforms highlighted: - Modernization of the procurement law to maximize return to capital from the envisaged fiscal push. - Ongoing efforts to address AML/CFT deficiencies and strengthen anti-corruption institutions. ### Institutional recommendation for surveillance - It is recommended that the next Article IV consultation with Thailand take place on a standard 12-month cycle. *Source: IMF staff assessment and accompanying figures as presented in the document.* ### 4.0 is based on the official data and opinion survey of business executives and assesses the ### 1thaea2019002 - 4.0 is based on the official data and opinion survey of business executives and assesses the ### Competitiveness framing - The assessment "is based on the official data and opinion survey of business executives and assesses the microeconomic and macroeconomic foundations of national competitiveness, which is defined as the set of institutions, policies, and factors that determine the level of productivity of a country." ### Key economic indicators (selected) - Main exports (percent of total 2015): machinery (44), food (12) - GDP per capita (2017): US$6,732 - Unemployment rate (2017): 1.2 percent - Poverty headcount ratio at national poverty line (2014): 10.5 percent - Net FDI (2017): US$-10.59 billion - Population (2016): 65.9 million ### Recent growth and demand composition (2015–20 series) - Real GDP growth (y/y percent change): 2015: 3.1, 2016: 3.4, 2017: 4.0, 2018: 4.1, 2019: 2.9, 2020: 3.0 - Consumption: 2015: 2.4, 2016: 2.7, 2017: 2.3, 2018: 4.0, 2019: 3.6, 2020: 3.8 - Gross fixed investment: 2015: 4.4, 2016: 2.9, 2017: 1.8, 2018: 3.8, 2019: 5.2, 2020: 8.5 ### Inflation measures - Headline CPI (end of period): 2015: -0.9, 2016: 1.1, 2017: 0.8, 2018: 0.4, 2019: 1.3, 2020: 1.2 - Headline CPI (period average): 2015: -0.9, 2016: 0.2, 2017: 0.7, 2018: 1.1, 2019: 0.9, 2020: 0.9 - Core CPI (end of period): 2015: 0.7, 2016: 0.7, 2017: 0.6, 2018: 0.7, 2019: 0.5, 2020: 0.6 - Core CPI (period average): 2015: 1.1, 2016: 0.7, 2017: 0.6, 2018: 0.7, 2019: 0.5, 2020: 0.6 ### Saving and investment (percent of GDP) - Gross domestic investment: 2015: 22.4, 2016: 20.9, 2017: 22.8, 2018: 25.0, 2019: 24.9, 2020: 25.3 - Gross national saving: 2015: 29.3, 2016: 31.5, 2017: 32.5, 2018: 31.4, 2019: 31.0, 2020: 30.7 - Foreign saving (current account deficit, percent of GDP): 2015: -6.9, 2016: -10.5, 2017: -9.7, 2018: -6.4, 2019: -6.0, 2020: -5.4 ### Fiscal and public sector indicators - General government balance (percent of GDP): 2015: 0.1, 2016: 0.6, 2017: -0.9, 2018: -0.3, 2019: -0.2, 2020: -0.2 - SOEs balance (percent of GDP): 2015: 0.7, 2016: 0.8, 2017: 0.7, 2018: 0.5, 2019: 0.4, 2020: 0.4 - Public sector debt (end of period, percent of GDP): 2015: 42.6, 2016: 41.8, 2017: 41.9, 2018: 42.1, 2019: 42.4, 2020: 43.0 ### External sector and reserves - Current account balance (billions of U.S. dollars): 2015: 27.8, 2016: 43.4, 2017: 44.1, 2018: 32.4, 2019: 31.8, 2020: 30.1 - Current account (percent of GDP): 2015: 6.9, 2016: 10.5, 2017: 9.7, 2018: 6.4, 2019: 6.0, 2020: 5.4 - Exports, f.o.b. (billions of U.S. dollars): 2015: 213.4, 2016: 213.5, 2017: 233.7, 2018: 251.1, 2019: 245.2, 2020: 263.0 - Imports, f.o.b. (billions of U.S. dollars): 2015: 187.2, 2016: 177.7, 2017: 201.1, 2018: 228.7, 2019: 223.0, 2020: 243.1 - Gross official reserves (including net forward position, end of period, billions of U.S. dollars): 2015: 168.2, 2016: 197.6, 2017: 239.3, 2018: 239.4, 2019: 251.1, 2020: 251.1 - Reserves (Months of following year's imports): 2015: 11.4, 2016: 11.8, 2017: 12.6, 2018: 12.9, 2019: 12.4, 2020: 11.5 - External debt (billions of U.S. dollars): 2015: 131.1, 2016: 132.2, 2017: 155.2, 2018: 160.9, 2019: 169.3, 2020: 180.4 - External debt (percent of GDP): 2015: 32.7, 2016: 32.0, 2017: 34.1, 2018: 31.9, 2019: 32.0, 2020: 32.4 ### Medium-term macroeconomic framework (2014–24 highlights) - Real GDP growth (y/y percent change) projections: 2021: 3.5, 2022: 3.6, 2023: 3.6, 2024: 3.6 - Gross domestic investment (percent of GDP) projected: 2021: 25.7, 2022: 26.6, 2023: 27.1, 2024: 27.9 - Current account balance (percent of GDP) projected: 2021: 4.9, 2022: 4.4, 2023: 3.9, 2024: 3.7 - Gross official reserves (including net forward position, billions of U.S. dollars) projected to remain at: 251.1 for 2020–24 - External debt (billions of U.S. dollars) projected: 2021: 190.2, 2022: 202.7, 2023: 217.0, 2024: 231.2 - External debt (percent of GDP) projected: 2021: 32.0, 2022: 32.4, 2023: 32.6, 2024: 33.0 ### Balance of payments specifics (2014–24 series) - Trade balance (billions of U.S. dollars): 2014: 17.2, 2015: 26.1, 2016: 35.8, 2017: 32.6, 2018: 22.4, 2019: 22.2, 2020: 20.0, 2021: 19.6, 2022: 18.6, 2023: 16.7, 2024: 15.7 - Tourism receipts (billions of U.S. dollars): 2014: 34.8, 2015: 41.2, 2016: 44.8, 2017: 52.4, 2018: 60.2, 2019: 63.1, 2020: 67.9, 2021: 70.6, 2022: 73.4, 2023: 76.4, 2024: 79.5 - Foreign direct investment (percent of GDP): 2014: -0.2, 2015: 1.0, 2016: -2.6, 2017: -2.3, 2018: -1.4, 2019: -1.2, 2020: -1.1, 2021: -0.9, 2022: -0.8, 2023: -0.6, 2024: -0.5 ### Monetary aggregates and banks (highlights) - Broad money growth (periods reported): 2015: 4.4 percent, 2016: 4.2 percent, 2017: 5.0 percent, 2018: 4.7 percent, Jun-19: 4.0 percent, (other series as reported) - Credit to private sector by depository corporations (y/y percent change): 2015: 5.6, 2016: 4.2, 2017: 4.6, 2018: 5.8, 2019: 3.1, Jun-19: 3.8 - Banks' regulatory capital to risk-weighted assets (2010–2019): 2010: 16.1, 2011: 14.8, 2012: 16.2, 2013: 15.5, 2014: 16.5, 2015: 17.1, 2016: 17.8, 2017: 18.0, 2018: 17.9, 2019 (March): 17.7 - Nonperforming loans to total gross loans (percent): 2010: 3.9, 2011: 2.9, 2012: 2.4, 2013: 2.3, 2014: 2.3, 2015: 2.7, 2016: 3.0, 2017: 3.1, 2018: 3.1, 2019 (March): 3.1 ### Medium-term fiscal scenario (FY2014–FY2024, percent of fiscal year GDP) - General Government revenue: FY2014: 21.4, FY2015: 22.3, FY2016: 21.9, FY2017: 21.0, FY2018: 21.4, FY2019: 21.4, FY2020: 21.4, FY2021: 21.5, FY2022: 21.5, FY2023: 21.5, FY2024: 21.5 - General Government total expenditure: FY2014: 22.2, FY2015: 22.2, FY2016: 21.4, FY2017: 22.0, FY2018: 21.6, FY2019: 21.6, FY2020: 21.6, FY2021: 22.2, FY2022: 22.4, FY2023: 22.6, FY2024: 22.6 - Public sector overall fiscal balance (percent of GDP): FY2014: -1.3, FY2015: 0.9, FY2016: 1.3, FY2017: -0.2, FY2018: 0.2, FY2019: 0.2, FY2020: 0.2, FY2021: -0.3, FY2022: -0.6, FY2023: -0.8, FY2024: -0.8 - Public sector debt (end of period, percent of GDP): FY2014: 43.3, FY2015: 42.6, FY2016: 41.8, FY2017: 41.9, FY2018: 42.1, FY2019: 42.4, FY2020: 43.0, FY2021: 43.8, FY2022: 44.3, FY2023: 44.6, FY2024: 45.0 ### Staff policy advice and authorities' actions (from 2018 Article IV Consultation) - Use fiscal space to boost public investment. - Observation: Public investment contracted in 2018 in percent of GDP, partly reflecting delays in auctions and contracts for large EEC projects. Contracts for two large projects have now been signed with other three expected to be signed by year-end. - Better targeting of social expenditure to address poverty and inequality. - Action: Authorities implemented a social assistance program amounting to about 0.5 percent of GDP per year and covering about 12 million low-income earners. - Action: Procedures for better targeting to be implemented in FY 2019/20 with a new registration process, data cross-checking against land registries, and programs focused on mothers and children. The new cabinet approved a social expenditure package focusing on increased welfare spending and a small relief to farmers. - Prepare for expenditure pressures associated with aging: Reforms to the pension and health systems. - Action: Ministry of Finance prepared a draft bill to strengthen pension coverage of the formal private sector through mandatory contributions into the National Pension Fund, a defined-contribution pension scheme. Forthcoming IMF TA should help with the design of a pension system reform. - Monetary policy: Monetary easing to steer inflation towards its target. - Observation: Policy rate was increased in December 2018. Headline (at the lower limit of the target band) and core inflation remain subdued. - Action: Policy rate was cut by 25 basis points to 1.5 percent on August 7 on the basis of weaker economic outlook. - Exchange rate policy: Maintain exchange rate flexibility as first line of defense, with FX intervention limited to avoiding disorderly market conditions. - Observation: Evidence points to FX sales during the 2018 sell-off period; FX intervention has been largely one-sided (purchases) since November 2018. Reserves increased by nearly US$11 billion in 2019. In July 2019, a CFM was introduced in response to a capital inflow surge. - Financial stability and macroprudential policy: Strengthen financial stability and further develop macroprudential tools. - Observation/Action: Stability of the financial system strengthened including systemic risk analysis and monitoring. Broadening application of Loan-to-Values (LTVs) to Specialized Financial Institutions (SFIs) and tightening of LTVs on bank mortgage loans are addressing pockets of vulnerability, but leakages in the Macroprudential Policy (MPP) toolkit remain. - Pension reform and national strategy: - Action: A National Pension Committee formed to propose a national strategy addressing system fragmentation and design shortcomings. Forthcoming IMF TA will assist with this strategy. - Growth and structural policies: Comprehensive package to boost all drivers of potential growth. - Observation/Action: Work on infrastructure projects, including motorways, railway, and ports continues. Stronger and more effective investment in human capital, especially in the regions, is still needed to strengthen educational outcomes and equality in access to opportunities. *Source: 1thaea2019002 - 4.0 is based on the official data and opinion survey of business executives and assesses the microeconomic and macroeconomic foundations of national competitiveness.* ### Appendix II. Risk Assessment Matrix ### Appendix II. Risk Assessment Matrix ### Overview - The Risk Assessment Matrix (RAM) lists events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - Likelihood coding: “L”=Low; “M”=Medium; “H”=High. The staff’s subjective assessment: low = probability below 10 percent, medium = probability between 10 and 30 percent, and high = probability between 30 and 50 percent. - Non-mutually exclusive risks may interact and materialize jointly. ### External Risks - Rising protectionism and retreat from multilateralism - Likelihood: H - Impact: H - Key points: - In the near term, escalating and unpredictable trade actions and a WTO dispute settlement system under threat imperil the global trade system and international cooperation. - Additional barriers, including investment and trade restrictions in technology sectors, and the threat of new actions reduce growth both directly, and through adverse confidence effects and financial market volatility. - In the medium term, geopolitical competition, protracted tensions, and fraying consensus about the benefits of globalization lead to economic fragmentation and undermine the global rules-based order, with adverse effects on investment, growth, and stability. - 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. - Sharp rise in risk premia - Likelihood: H - Impact: M - Key points: - An abrupt deterioration in market sentiment (e.g., prompted by policy surprises, renewed stresses in emerging markets, or a disorderly Brexit) could trigger risk-off events such as recognition of underpriced risk. - Higher risk premia cause higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns; disruptive corrections to stretched asset valuations; and capital account pressures—all depressing growth. - Policies to minimize impact: - Allow exchange rate flexibility to be the first line of defense, with judicious intervention to avoid disorderly markets. - If financial volatility and capital outflows affect the real economy and constrain monetary stimulus, redouble efforts to accelerate public investment execution to bolster domestic demand. - Further build-up of financial vulnerabilities - Likelihood: H - Impact: M - Key points: - A turn in the monetary policy cycle toward easing encourages risk taking through underpricing of risk and reduces financial resilience to shocks and risk-off events. - Policies to minimize impact: - Strengthen the macroprudential framework and policies. - Address current leakages in the macroprudential toolkit by covering cooperatives and nonbanks, by broadening the set of macroprudential tools used, and by clearly defining the roles of the FIPC and MPC to help ensure that systemic risks are primarily dealt with macroprudential tools. - Weaker-than-expected global growth (by region) - Likelihood: Multiple — U.S.: M; Europe: H; China: H; Large stressed EMs: M - Impact: H - Key points by region: - U.S.: Confidence wanes against a backdrop of a long expansion with stretched asset valuations, rising leverage, and policy uncertainty, leading to weaker investment and a more abrupt closure of the output gap. - Europe: Weak foreign demand, Brexit, or concerns about some high-debt countries make some euro area businesses delay investment; faltering confidence reduces private consumption; inflation expectations drift lower. - China: Further escalation in trade tensions reduces external demand, disrupts supply chains, depresses confidence and investment; could trigger tighter financial conditions, a sharp downturn in the property market, renewed PPI deflation, and a drop in commodity prices. Over the medium term, weaker external demand, the potential reversal of globalization, and the increasing role of the state could weigh on growth prospects. Excessive policy easing could reverse progress in deleveraging and rebalancing, increasing risks of disruptive adjustment or marked growth slowdown. - Large stressed emerging economies: Policy missteps, idiosyncratic shocks and/or contagion prevent expected stabilization or recovery, generating negative spillovers and reducing global growth. - Policies to minimize impact: - Structural reforms and infrastructure development to raise returns to private investment and strengthen domestic-demand-led growth. - Greater orientation toward CLMV could buttress exports. - Allow exchange rate flexibility to be the first line of defense. - Intensification of geopolitical tensions and security risks - Likelihood: H - Impact: H - Key points: - Example (e.g., in the Middle East): socio-economic and political disruption, disorderly migration, volatile commodity prices, and lower confidence. - Policies to minimize impact: - Structural reforms and infrastructure development to raise returns to private investment and strengthen domestic-demand-led growth. - Allow exchange rate flexibility to be the first line of defense. - Large swings in energy prices - Likelihood: M - Impact: M - Key points: - Risks to prices are broadly balanced, reflecting offsetting—but large and uncertain—supply and demand shocks. - Near-term uncertainty translates to elevated price volatility, complicating economic management and adversely affecting investment in the energy sector. As shocks materialize, they may cause large and persistent price swings. - On aggregate, higher oil prices would harm global growth but benefit oil exporters. - Policies to minimize impact: - Allow exchange rate flexibility to be the first line of defense. - Structural reforms and infrastructure development to raise returns to private investment and strengthen domestic-demand-led growth. - Cyber-attacks - Likelihood: L - Impact: M - Key points: - Attacks on critical global financial systems, infrastructure and institutions could trigger systemic financial instability or widespread disruptions in socio-economic activities. - Policies to minimize impact: - BOT should sustain current efforts to strengthen its capacity to deal with cyber attacks and fintech-related challenges. - Higher frequency and severity of natural disasters - Likelihood: M/L - Impact: M - Key points: - Cause severe economic damage to smaller economies susceptible to disruptions (medium probability). - A sequence of severe events in large economies reduces global GDP and prompts recalculation of risk and growth prospects. - Disasters hitting key infrastructure or disrupting trade raise commodity price levels and volatility (low probability). - Policies to minimize impact: - Improve social safety net programs to better target most vulnerable populations. - Note: Rural areas have been particularly hit by drought this year. ### Domestic Risks (Thailand-specific) - Heightened political uncertainty - Likelihood: M - Impact: H - Key points: - Consumer and business confidence would be damaged, dampening private investment and FDI inflows. - Public investment execution would slow down. - Capital outflows would put pressure on credit and asset markets. - Tourism could also be affected. - Policies to minimize impact: - Allow automatic stabilizers to work. - Provide adequate liquidity to banks to minimize disruptions in the financial system. - Let the exchange rate be the first line of defense in case of capital outflows, but use intervention to avoid disorderly market conditions. - Weaker crowding-in of private investment - Likelihood: M - Impact: M - Key points: - Lower-than-projected private investment would reduce domestic demand in the cyclically weak economy and undermine Thailand’s potential in the longer term. - It may weaken confidence in the government’s ability to improve the business environment, denting private sentiment and FDI. - Policies to minimize impact: - Use available room for additional fiscal and monetary stimulus. - Strengthen efforts to implement structural reforms and improve the business and investment environment. - Accelerate the execution of large infrastructure projects and PPPs with capacity to crowd-in private sector interest. - Entrenched low inflation - Likelihood: M - Impact: H - Key points: - Entrenched low inflation would worsen the macroeconomic environment, increasing real interest rates and the real debt burden, and posing risks to corporate, household, and financial sector balance sheets. - Policies to minimize impact: - Lower the policy rate and strengthen communication to anchor inflation expectations. - Consider additional fiscal stimulus, consistent with long-term goals and fiscal sustainability, within a credible medium-term fiscal framework. - Household debt overhang boiling over - Likelihood: M - Impact: M - Key points: - Highly leveraged households may hold back spending or banks may tighten credit supply, damping consumption. - The debt-servicing capacity of households could be constrained in a vicious cycle of deleveraging and low growth. - Policies to minimize impact: - Use available room for additional fiscal and monetary stimulus. - Explore options for household debt restructuring and insolvency. *Source: Appendix II. Risk Assessment Matrix.* ### 7. Wage differentials have grown over time and have contributed to per-capita income ### 7. Wage differentials have grown over time and have contributed to per-capita income ### Labor reallocation and wage differentials - Agriculture offered nearly 40 percent of total employment in the economy in 2011 but shed its labor by 21 percent through 2017. - The non-agricultural sector accounted for 68½ percent of total employment in 2017. - A wage differential, comparing average real monthly wages in non-agriculture to agriculture, has grown over time. - Wage differentials within non-agriculture and across the regions have also increased. - These wage developments have been conducive to growth in per-capita household income. - When changes are compared across quintiles and regions, regional disparities within each quintile have grown over time. - In the central region, the disparity between the top and the bottom quintile has also grown. ### Impact on investment, firm profitability, and consumption - Multinational Thai firms increased investment abroad, particularly in CLMV, to take advantage of lower labor costs and access to global supply chains. - Profitability of small firms (and opportunities for additional domestic investment) declined in the face of increasing global competition, most notably from China, and imported producer price deflation followed. - The rise of corporate debt and zombie firms further constrained both firms' tangible and intangible investment. - At the household level: - Moderation of wage growth, combined with increased accumulation of debt and resulting debt overhang, is constraining private consumption growth. - Amidst population aging and insufficient coverage of social safety nets, including the pension system, there may be excessive precautionary savings especially at the lower income deciles, thereby dampening the average marginal propensity to consume. - Sluggish domestic demand helps explain persistently weak inflation dynamics. ### Weak domestic demand and external imbalances - Since 2015, macroeconomic imbalances (e.g. large current account surplus) have grown despite sizable appreciation in nominal EER (13¾ percent) and real EER (6¾ percent). - Thailand’s prolonged disinflation has partly cushioned further loss in competitiveness. ### Inflation dynamics — broad patterns and drivers - Headline inflation in Thailand is among the lowest in the region. - Many economies in the region experienced sharp declines in inflation during 2012-15, broad-based across sectors and inflation measures. - Global factors, such as the slowdown in global economic growth and commodity price shocks in 2015, influenced inflation dynamics. - Since 2016, inflation picked up in several economies, driven by goods and services inflation, recoveries in manufacturing PPI and commodity prices, but the average inflation during 2016-18 remains low. - The inflation process in Asia has become more backward looking, with temporary factors driving disinflationary pressures, including imported price dynamics and declines in the sensitivity of inflation to the unemployment gap (i.e. flattening of the Philipps curve). ### Trend inflation decomposition and recent evolution - Trend inflation in Thailand peaked in 2006 and continued to decline through 2018, driven by supply side factors. - Deceleration concentrated in non-core CPI (raw food and energy); energy has been under deflationary pressures since the onset of global commodity price shocks in 2014. - Trend inflation declined by 2 percentage points during 2012-18, with three quarters of the decline explained by declines in non-core CPI inflation. - Core CPI trend inflation has declined since 2012, contributing about 0.5 percentage point to the decline in headline CPI trend inflation. ### Prepared food prices and regional contributions - Disinflation in prepared food prices was the key driving factor behind the decline in core CPI inflation. - Global factors, such as energy and food prices, explain nearly 85 percent of the year-to-year variation in headline inflation; country-specific factors influence core inflation dynamics in Thailand. - Regression analysis indicates disinflation during 2015–18 was mainly driven by declines in inflation of prepared food prices; other components (non-alcoholic beverages, apparel and footwear) contributed to a lesser extent. - Regions outside Bangkok account for nearly two thirds of the disinflation in core CPI and prepared food prices during 2015–18. - Three regions (North, Northeast and South) experienced substantial declines in inflation during 2015–18 while disinflation in Bangkok was marginal. - Core inflation picked up in Bangkok and the central region, while the three regions continued to experience slower inflation. - Disinflation in prepared food prices was more pronounced in the three regions, which together with the central region—accounting for only one third of the total weight of the basket—contributed nearly two thirds of the aggregate disinflation in prepared food prices. ### Supply- and demand-side determinants of prepared food inflation - Regression results suggest two sources of supply-side drivers: - Local attributes: cost of electricity, fuel, and water in a respective region. - National attributes: foreign exchange rates (THB/USD) and import prices of raw materials. - Demand-side drivers include labor market developments (employment and average monthly wage growth) in a respective region and political and economic situations at the national level. - Public sector wage dynamics in the regions (Bangkok, North, Northeast, South) broadly reflect local economic situations. - Prepared food is a normal good; its demand rises with households’ earnings. - In the Central region, employment growth is important to explain prepared food price inflation dynamics. ### Structural influences and regional impacts - The linkage between output gap and inflation has recently strengthened, but underlying structural factors have weighed more on declines in headline inflation since 2015, and on the South. - The sharp slowdown in trend inflation of global oil and food prices narrowed the wedge between average inflation and the output gap. - Two consecutive years (2017–18) of economic expansion above potential growth contributed to recent reflation albeit from a low base. - Structural factors are evidenced through continued declines in producer prices (PPI) on final goods since 2015, which have disproportionately impacted households in the South (high concentration of natural rubber farmers). ### External sector assessment — brief points on external balance sheets - Thailand’s net international investment position (NIIP) strengthened to -1.1 percent of GDP in 2018 from -9.1 percent of GDP in 2017 and -23.9 percent of GDP in 2014. - Changes in the financial account contributed to nearly three-fourths of the change in NIIP in 2018, as valuation effects declined. - Gross assets fell slightly to around 96 percent of GDP (41 percent being reserve assets). - Gross liabilities declined 13 percentage points to 97 percent of GDP (dominated by declines in net direct (about half) and portfolio (a third) investment). - Net FDI continued to fall as outward investment (particularly by Thai corporates to CLMV) strengthened, offsetting still robust inward FDI. - Portfolio (equities) and other investment also declined (by about 1-2 percentage points of GDP). - External debt was 32 percent of GDP in 2018; it remains low and stable with limited risks. *Source: IMF staff chapter content.* ### 2. Given prospects of still sizeable though narrowing current account surpluses and ### 1thaea2019002 - 2. Given prospects of still sizeable though narrowing current account surpluses and ### Current Account — Background and Assessment - 2018 actual current account (CA) surplus: 6.4 percent of GDP (down from 9.7 percent in 2017). - Drivers of past CA surpluses (average 5.6 percent of GDP in 2013–2017): positive terms of trade shocks, a boom in tourism receipts, and strong value-added exports leading to sizeable savings rates. - Constraints muting domestic demand and investment: high relative labor costs, slowing productivity and incomes, an aging population, and prolonged political uncertainty. - Near-term external risks: ongoing U.S.-China trade tensions and concerns around global growth likely to continue weighing on exports. - Medium-term outlook: as trade tensions dissipate, new export markets are tapped, and domestic demand is lifted by policy stimulus, the CA surplus is expected to narrow to around 4 percent of GDP. - EBA (External Balance Assessment) results for 2018: - Actual CA: 6.4 percent of GDP - Cyclically-adjusted CA: 6.4 percent of GDP - EBA CA Norm: 0.1 percent of GDP - EBA CA Gap: 6.3 percent of GDP - Of which: Policy gap: 1.5 percent of GDP - Residual: 4.8 percent of GDP - Staff adjustments (to account for Thailand-specific features): 0.5-2.5 percent of GDP - Political uncertainty adjustment: 0-1.5 percent of GDP - Terms of trade adjustment: 0.5-1 percent of GDP - Staff CA Gap (midpoint): 4.8 percent of GDP (EBA CA gap minus midpoint of staff adjustments) - Standard error: 1.6 - Staff adjusted CA gap, range (midpoint ± standard error): 3.2-6.4 percent of GDP - Overall staff assessment: Thailand’s 2018 current account was around 3.2 percent to 6.4 percent of GDP higher than warranted by fundamentals and desired policies. The CA gap is expected to narrow over the medium term as policy stimulus is deployed, political uncertainty dissipates, domestic demand recovers, and structural reforms take root. ### Real Exchange Rate (REER) - 2018 REER appreciation: 3.0 percent (overall relative to 2017), with marked depreciations in Q2 and Q3. - As of June 2019, REER had appreciated a further 5.5 percent relative to the 2018 average. - Using an elasticity of 0.64, the 2018 REER would be assessed as around 5 percent to 10 percent below levels consistent with medium-term fundamentals and desirable policies. - Medium-term expectation: REER gap should narrow with a growth-driven appreciation as macro stimulus is deployed and structural rigidities are addressed. ### Capital and Financial Flows - Capital and financial account balance: weakened to -4.2 percent of GDP in 2018 from -2.8 percent in 2017. - Net portfolio outflows increased to 1.1 percent of GDP (reversal in non-resident portfolio flows away from equity). - Nonresident investment in long-term government and corporate debt increased in 2018H2 after a decline in 2018H1. - Outward FDI: robust at 4 percent of GDP (owing to Thai firms’ overseas investment). - Net other investment outflows: about 1 percent of GDP. - The capital and financial account balance has been negative since 2013. - Assessment: Episodes of volatility since 2013 reflect changes in external financial conditions, political uncertainty, and U.S.-China trade tensions. Thailand has weathered these episodes well, supported by strong external buffers and fundamentals. ### Reserves and FX Intervention - Gross reserves (including net forward positions) at end-2018: US$239.4 billion (47.4 percent of GDP). - Gross reserves as of end-July 2019: US$251.1 billion. - Reserves relative to adequacy metrics: over 200 percent of the IMF’s Reserve Adequacy Metric for EMs and 12 months of imports; over three times short-term debt. - Staff estimates suggest FX sales during the 2018 sell-off period and largely one-sided (purchases) FX intervention since November 2018; FXI has generally offset valuation changes. - Exchange rate regime: freely floating (de jure and de facto floating). - Assessment and policy guidance: - Given FX reserves exceed all adequacy metrics, there is no need to build up reserves for precautionary purposes. - The exchange rate should move flexibly as the key shock absorber. - FX intervention should be limited to avoiding disorderly market conditions. ### Foreign Assets and Liabilities (NIIP) and External Vulnerabilities - NIIP trajectory: - NIIP in 2018: -1.1 percent of GDP (improved from -9.1 percent of GDP in 2017 and -24 percent of GDP in 2014). - Gross assets in 2018: 96.0 percent of GDP (40.7 percent of GDP being reserve assets). - Gross liabilities in 2018: 97.2 percent of GDP (dominated by direct investment ~half and portfolio ~a third). - External debt in 2018: 31.9 percent of GDP - Short-term debt (on a remaining maturity basis): 16 percent of GDP - Net FDI continued to decline as outward investment increased. - Assessment: External vulnerabilities reduced with strengthening NIIP, projected to reach a small creditor position over the medium term. With external debt steady at about 32 percent of GDP and short-term debt at 16 percent of GDP, external debt sustainability and liquidity risk are limited. ### Policy Recommendations and Overall Assessment - Overall Assessment for 2018: The external position was substantially stronger than warranted by medium-term fundamentals and desirable policy settings. The CA surplus, though narrowed since peaking in 2016, remains sizable and reflects tepid domestic demand amid political uncertainty. - Potential policy responses: - Mutually reinforcing macro policy stimulus, led by a fiscal expansion, and structural reforms to support domestic demand and lower the CA surplus over time. - Higher public infrastructure spending within available fiscal space to crowd-in private investment. - Reforms to expand and reform social safety nets, notably fragmented pension schemes, to reduce precautionary saving and informality. - Reforms to reduce barriers to investment, especially in the services sector. - Allow the exchange rate to move flexibly as the key shock absorber; limit intervention to avoid disorderly market conditions. - No need to build up reserves for precautionary purposes given reserves exceed adequacy metrics. *Source: IMF staff calculations and assessment as presented in the provided chapter.* ### Appendix V. External Debt Sustainability Analysis ### Appendix V. External Debt Sustainability Analysis ### External debt outlook and composition - External debt is projected to remain stable at about 32 percent of GDP in 2019. - Short term debt (on a remaining maturity basis) comprises 15.3 percent of GDP in 2019. - Over two-thirds of total external debt is held by the private sector. - Over the medium term, external debt is projected to remain contained, at about 32½ percent of GDP by 2024. - Debt service is expected to remain low at around 6 percent of GDP. ### Stress tests and shock scenarios - The external debt trajectory remains robust to a range of stress tests, including shocks to: - interest rates, - GDP growth, - the current account balance, - the exchange rate. - Under the most extreme stress scenario — a one-time 30 percent depreciation of the baht — the external debt to GDP ratio would rise to 48 percent. - Note: the 30 percent depreciation scenario does not account for trade flow adjustments (e.g., a sharp improvement in the current account) that could significantly reduce the debt ratio. - Rollover risks from a global funding shock could be mitigated by a well-capitalized domestic financial system despite the high share of short-term debt. ### Selected DSA baseline projections (from Table 1) - External debt (percent of GDP): - 2014: 34.8 - 2015: 32.7 - 2016: 32.0 - 2017: 34.1 - 2018: 31.9 - 2019: 32.0 - 2020: 32.4 - 2021: 32.2 - 2022: 32.4 - 2023: 32.6 - 2024: 33.0 - Change in external debt (percent of GDP): 2014: 1.0; 2015: -2.1; 2016: -0.6; 2017: 2.0; 2018: -2.2; 2019: 0.1; 2020: 0.4; 2021: -0.2; 2022: 0.1; 2023: 0.3; 2024: 0.4 - Identified external debt-creating flows (percent of GDP): 2014: -0.2; 2015: -5.1; 2016: -8.7; 2017: -10.5; 2018: -6.9; 2019: -5.1; 2020: -5.3; 2021: -5.2; 2022: -5.0; 2023: -4.4; 2024: -4.4 - Current account deficit, excluding interest payments (percent of GDP): 2014: -3.2; 2015: -8.0; 2016: -10.9; 2017: -10.2; 2018: -6.9; 2019: -7.1; 2020: -6.8; 2021: -6.3; 2022: -5.9; 2023: -5.3; 2024: -5.1 - Exports (percent of GDP): 2014: 68.4; 2015: 67.6; 2016: 67.2; 2017: 66.9; 2018: 65.8; 2019: 62.5; 2020: 64.0; 2021: 64.1; 2022: 63.9; 2023: 63.5; 2024: 63.8 - Imports (percent of GDP): 2014: -62.5; 2015: -57.3; 2016: -53.6; 2017: -54.4; 2018: -56.2; 2019: -52.9; 2020: -54.5; 2021: -55.2; 2022: -55.6; 2023: -56.0; 2024: -56.8 - Net non-debt creating capital inflows (negative, percent of GDP): 2014: 1.6; 2015: 1.3; 2016: 2.7; 2017: 2.2; 2018: 2.9; 2019: 1.9; 2020: 1.5; 2021: 1.2; 2022: 1.1; 2023: 1.1; 2024: 0.9 - Automatic debt dynamics (percent of GDP): 2014: 1.5; 2015: 1.6; 2016: -0.5; 2017: -2.5; 2018: -2.8; 2019: 0.1; 2020: 0.0; 2021: -0.1; 2022: -0.2; 2023: -0.2; 2024: -0.2 - Contribution from nominal interest rate (percent of GDP): 2014: 0.4; 2015: 1.1; 2016: 0.4; 2017: 0.5; 2018: 0.5; 2019: 1.0; 2020: 0.9; 2021: 0.9; 2022: 0.9; 2023: 0.9; 2024: 1.0 - Contribution from real GDP growth (percent of GDP): 2014: -0.3; 2015: -1.1; 2016: -1.1; 2017: -1.2; 2018: -1.3; 2019: -0.9; 2020: -0.9; 2021: -1.1; 2022: -1.1; 2023: -1.1; 2024: -1.1 - Contribution from price and exchange rate changes (percent of GDP): 2014: 1.4; 2015: 1.6; 2016: 0.2; 2017: -1.9; 2018: -2.1 (projection line includes impact of price and exchange rate changes) - Residual, including change in gross foreign assets (percent of GDP): 2014: 1.2; 2015: 3.0; 2016: 8.0; 2017: 12.5; 2018: 4.7; 2019: 5.2; 2020: 5.7; 2021: 5.1; 2022: 5.1; 2023: 4.7; 2024: 4.7 - External debt-to-exports ratio (percent): 2014: 50.9; 2015: 48.3; 2016: 47.7; 2017: 51.0; 2018: 48.4; 2019: 51.2; 2020: 50.6; 2021: 50.2; 2022: 50.7; 2023: 51.4; 2024: 51.8 - Gross external financing need (in billions of US dollars): 2014: 62.9; 2015: 45.5; 2016: 24.2; 2017: 25.9; 2018: 54.4; 2019: 47.0; 2020: 48.9; 2021: 52.5; 2022: 57.1; 2023: 62.5; 2024: 66.4 - Gross external financing need (in percent of GDP): 2014: 15.4; 2015: 11.3; 2016: 5.9; 2017: 5.7; 2018: 10.8; 2019: 10-Year10-Year8.9? (table shows a sequence: 8.9, 8.8, 8.9, 9.1, 9.4, 9.5) — preserve the table entries as shown. ### Baseline macroeconomic assumptions (key) - Real GDP growth (percent): historical 1.0; 2015: 3.1; 2016: 3.4; 2017: 4.0; 2018: 4.1; 2019: 3.3; 2020: 2.6; 2021: 2.9; 2022: 3.0; 2023: 3.5; 2024: 3.6 - GDP deflator in US dollars (change in percent): 2014: -4.0; 2015: -4.5; 2016: -0.6; 2017: 6.2; 2018: 6.5; 2019: 2.4; 2020: 5.7; 2021: 1.9; 2022: 2.2; 2023: 2.4; 2024: 2.4; long-run 2.4? (table shows 2.4 and 1.6 as last entries) - Nominal external interest rate (percent): 2014: 1.1; 2015: 3.0; 2016: 1.2; 2017: 1.7; 2018: 1.6; 2019: 1.5; 2020: 0.6; 2021: 3.1; 2022: 3.0; 2023: 3.0; 2024: 3.0; long-run 3.1 - Growth of exports (US dollar terms, percent): 2014: -1.3; 2015: -2.6; 2016: 2.1; 2017: 9.9; 2018: 9.1; 2019: 5.2; 2020: 10.4; 2021: -0.5; 2022: 7.9; 2023: 6.1; 2024: 5.7; long-run 5.5, 5.8 - Growth of imports (US dollar terms, percent): 2014: -7.3; 2015: -9.8; 2016: -3.7; 2017: 12.0; 2018: 14.6; 2019: 4.6; 2020: 17.0; 2021: -1.3; 2022: 8.5; 2023: 7.3; 2024: 6.9; long-run 6.9, 6.8 - Current account balance, excluding interest payments (percent of GDP): 2014: 3.2; 2015: 8.0; 2016: 10.9; 2017: 10.2; 2018: 6.9; 2019: 5.1; 2020: 4.4; 2021: 7.1; 2022: 6.8; 2023: 6.3; 2024: 5.9; long-run 5.3, 5.1 - Net non-debt creating capital inflows (percent of GDP): 2014: -1.6; 2015: -1.3; 2016: -2.7; 2017: -2.2; 2018: -2.9; 2019: -0.6; 2020: 2.2; 2021: -1.9; 2022: -1.5; 2023: -1.2; 2024: -1.1; long-run -1.1, -0.9 --- ### Appendix VI. Public Debt Sustainability Analysis ### Baseline public debt outlook - Nominal gross public debt (percent of GDP): - 2017: 40.9 - 2018: 41.9 - 2019: 42.1 - 2020: 42.4 - 2021: 43.0 - 2022: 43.8 - 2023: 44.3 - 2024: 44.6 - (2024 entry also shown as 45.0 in table header) - Public gross financing needs (percent of GDP): 2017: 6.2; 2018: 5.4; 2019: 4.9; 2020: 4.5; 2021: 4.9; 2022: 5.4; 2023: 5.0; 2024: 4.7; subsequent entries 4.4 and 5? (table shows sequence) - Real GDP growth (percent): 2017: 3.0; 2018: 3.8; 2019: 4.2; 2020: 3.0; 2021: 3.0; 2022: 3.4; 2023: 3.6; 2024: 3.6 - Inflation (GDP deflator, percent): 2017: 2.5; 2018: 2.3; 2019: 1.7; 2020: 1.1; 2021: 0.5; 2022: 0.9; 2023: 1.5; 2024: 1.9 - Nominal GDP growth (percent): 2017: 5.6; 2018: 6.1; 2019: 5.9; 2020: 4.1; 2021: 3.5; 2022: 4.3; 2023: 5.3; 2024: 5.6; 2024 final shown as 5.3 - Effective interest rate (percent): 2017: 4.2; 2018: 3.5; 2019: 3.3; 2020: 3.1; 2021: 3.0; 2022: 2.9; 2023: 3.0; 2024: 3.1; subsequent 3.3 - Sovereign spreads: EMBIG (bp) 14; 5Y CDS (bp) 36 - Ratings (foreign/local): Moody's Baa1 / Baa1; S&P's BBB+ / A-; Fitch BBB+ / BBB+ ### Contributions to public debt dynamics (selected) - Change in gross public sector debt (percent of GDP, cumulative projections): 2017: 0.6; 2018: 0.1; 2019: 0.2; 2020: 0.3; 2021: 0.6; 2022: 0.9; 2023: 0.4; 2024: 0.3; cumulative 4.2; overall 2.9 shown - Identified debt-creating flows (percent of GDP): 2017: 0.3; 2018: -0.3; 2019: 0.2; 2020: 0.3; 2021: 0.6; 2022: 0.9; 2023: 0.4; 2024: 0.3; cumulative 4.3; overall 3.0 - Primary deficit (percent of GDP): 2017: -0.8; 2018: -1.1; 2019: -1.6; 2020: -1.5; 2021: -1.4; 2022: -0.8; 2023: -0.7; 2024: -0.6; cumulative -5.6 - Primary (noninterest) revenue and grants (percent of GDP): 23.5; 23.9; 23.9; 24.1; 24.1; 24.2; 24.2; 24.2; cumulative 144.9 - Primary (noninterest) expenditure (percent of GDP): 22.7; 22.8; 22.3; 22.6; 22.7; 23.4; 23.5; 23.6; cumulative 139.4 - Automatic debt dynamics (percent of GDP): 2017: -0.5; 2018: -1.2; 2019: -1.2; 2020: -0.4; 2021: -0.2; 2022: -0.6; 2023: -0.9; 2024: -1.0; cumulative -0.9; overall -4.0 - Interest rate/growth differential (percent of GDP): mirrors automatic dynamics series above; real interest rate contribution listed (percent): 0.6; 0.4; 0.6; 0.8; 1.0; 0.8; 0.6; 0.5; cumulative 0.7; overall 4.4 - Real GDP growth contribution (percent): -1.2; -1.5; -1.7; -1.2; -1.2; -1.4; -1.5; -1.5; cumulative -1.5; overall -8.4 - Exchange rate depreciation contribution: 0.0; -0.1; -0.1; projections thereafter blank - Other identified debt-creating flows (percent of GDP): 1.6; 2.0; 2.9; 2.3; 2.2; 2.3; 2.0; 2.0; cumulative 1.9; overall 12.6 - Contingent liabilities: 0.0 across entries - Residual, including asset changes (percent of GDP): 0.3; 0.3; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; cumulative -0.1 ### Alternative scenarios and composition - Baseline, Historical, and Constant Primary Balance scenarios are presented with underlying assumptions: - Baseline Primary Balance (percent of GDP): 2019: 1.5; 2020: 1.4; 2021: 0.8; 2022: 0.7; 2023: 0.6; 2024: 0.6 - Historical Primary Balance: 2019: 1.5; 2020: 0.9; 2021: 0.9; 2022: 0.9; 2023: 0.9; 2024: 0.9 - Constant Primary Balance scenario assumes Primary Balance 1.5 across projection years. - Composition of public debt by maturity and currency is shown (medium and long-term vs short-term; local currency vs foreign currency), with trends implying a large share is medium and long-term and predominantly local currency-denominated in projections. --- ### Appendix VII. Practical Lessons in Addressing Private Debt Overhang ### Private debt developments and risks - Thailand’s household debt reached 78.6 percent of GDP (THB12.6 trillion / US$406 billion) at end-2018. - Increase since 2007: nearly 30 percentage points of GDP. - Nonfinancial corporate debt rose about 10 percentage points of GDP between 2007 and 2018 and is about 50 percent of GDP (US$250 billion). - Drivers of household debt rise: increasing personal and auto loans, higher living costs, consumption (particularly durables) outstripping slowing incomes, easier access to credit from formal and informal institutions. - Corporate shift: growth of FX bond markets marking a shift towards market-based financing from bank lending. - High private leverage can: - drag on consumption and growth, - slow external rebalancing, - constrain policy space, - curtail investment and distort resource allocation in corporate sector. ### Growth at Risk (GaR) analysis — approach - The GaR framework estimates the full conditional distribution of GDP growth (not just point estimates) using quartile regressions on partitions summarized by principal components. - Model regressors (for q quarters ahead growth): - Financial conditions: credit growth; sovereign and corporate bond spreads; REER change and volatility; terms of trade; VIX; equity and house price growth. - Trade partner macroeconomic conditions: US and China GDP growth. - Measures of private leverage: household and corporate debt to GDP ratios (level and change). - Data: quarterly from 1995Q1 to 2018Q4. ### GaR empirical findings for Thailand - Leverage increases downside risks to growth; estimated quartile coefficients are larger at the left tail of the growth distribution. - Tightening in financial conditions raises downside risk to growth. - Trade partner macro indicators have a more consistent (less nonlinear) contribution. - Conditional distribution of GDP growth (4-quarters ahead): - Mode: 4.39 percent of GDP (near term). - GAR 5 percent measure (growth below which 5 percent of distribution lies): -0.8 percent. - Probability that growth falls below 0: 11.1 percent. - Medium-term distribution: - Lower mode: 2.8 percent. - Left tail: GAR 5 percent at - (text truncated in source; preserves that the left tail GAR 5 percent is reported as a negative value at end of excerpt). ### Policy implications and lessons - High household debt raises downside risks to medium-term growth and poses a larger cost than corporate debt. - Addressing private debt overhang requires measures that tackle both: - the stock of debt (ex-post through debt resolution frameworks), - and the flow of new debt (ex-ante through macroprudential frameworks, institutional coordination, and preventive measures). - For emerging markets, orderly deleveraging should account for movements in the international financial cycle, including: - monetary policy stances in advanced economies, - potentially more limited policy space than prior to the global financial crisis. - Macroeconomic policy mix matters: envisioned macro stimulus could boost incomes and inflation, reducing debt burdens. *Italic line: Appendix V–VII drawn from the IMF staff report chapter content provided in the source PDF.* ### 2.4 percent). ### 1thaea2019002 - 2.4 percent) ### Differential impact of household vs. corporate debt on growth - Short-run: an increase in household debt does not result in a large leftward shift of the growth distribution; household debt may boost growth in the very short run (see Mian et al 2015, IMF GFSR 2017). - Medium-term effects: - A one standard deviation increase in the household debt/GDP ratio shifts the distribution of GDP growth to the left, with: - mode decline from 2.8 percent to 0.6 percent - thickening in the left tail - A one standard deviation shock to the corporate debt/GDP ratio shifts the distribution of GDP growth to the left, but by less: - mode decline from 2.8 percent to 1.7 percent - left tail thickens by a lesser degree - Explanation for differential impact: - Household debt levels are much higher than (nonfinancial) corporate debt levels. - Household debt fuels consumption (rather than productive investment), and consumption has been a significant driver of Thai growth in recent years. - Corporate leverage has increasingly been used to invest abroad or in equity markets, which does not affect domestic demand and growth as much. - Additional note: Household debt levels are close to or above high-risk thresholds identified by the literature (see Lombardi, Mohanty, and Shim 2017). BOT corporate debt numbers are more elevated but have limited availability and thus could not be used in the GAR estimation. ### Ex ante and ex post tools to address over-indebtedness - Strategy: - Combine ex-ante measures (prevent excessive borrowing or reduce debt informally) with ex-post debt resolution frameworks (rehabilitation and recovery; minimize costs of debt resolution). - Ex-ante measures highlighted: - Credit information systems: - Aim to widen coverage to provide ample information for risk assessment. - Coverage of credit information systems in Asia varies; essential for effectiveness of several macro-prudential tools and responsible lending policies. - Specialized legal and financial advice to debtors: - Supports and complements financial education. - Can be provided by public institutions (Malaysia) or private entities (Singapore). - In Thailand, support is provided by the Debt Clinic, created by private sector entities with Bank of Thailand support and managed by an Asset Management Company (Sukhumvit AM). - Informal debt restructuring: - Alternative dispute resolution (mediation, conciliation, arbitration) avoids courts and costs of formal insolvency procedures. - Used extensively in some ASEAN countries (Malaysia, Singapore). - Thailand supports informal restructuring through the Debt Clinic Program, expanded to cover credit card and personal loans to non-bank financial institutions. - Thai debtors can use “composition prior to bankruptcy” as a last attempt to reach agreement with creditors. - Ex-post measures (personal insolvency tools) and observations: - Personal bankruptcy — liquidation: - After liquidation, outstanding debt is discharged, providing debtor a fresh start. - Thailand provides a discharge after three years of commencement of proceedings, or when the debtor has paid 50 percent of the debts. - The bankruptcy process in Thailand can only be accessed at the creditors’ request (global trend is to make process easily accessible to debtors). - Personal bankruptcy — repayment plans: - Allows debtors to retain some or all assets and commit to a repayment plan, after which the debtor receives a discharge. - Frequent worldwide and present in some Asian countries (Japan, Korea); Thailand has not introduced them so far. - Debt enforcement: - Plays a lesser role in personal over-indebtedness where consumers are indebted to several parties; plurality of creditors requires insolvency. - Effective debt enforcement is fundamental for payment discipline and restructuring negotiations. - Functioning of debt enforcement mechanisms in Thailand tends to be effective. ### Policy recommendations and macroeconomic context - Toolkit strengthening: - Bolster coverage of tools to liabilities with other creditors (including nonbank financial institutions) and to other debtors (for instance, small and micro-enterprises). - Revise instruments that could be potentially added to the existing toolkit as a necessary first step. - Emphasis on ex-ante measures: - Develop ex-ante measures to avoid widespread debt overhang. - Ex-post measures (personal insolvency) still necessary because over-indebtedness will materialize in some cases and ex-post measures provide incentives and backdrop for ex-ante informal restructuring. - Macroeconomic policies: - Over-indebtedness is often a symptom of deeper structural problems (sluggish output and productivity growth, weak social safety nets) and may be amplified by easy credit conditions. - Given Thailand’s available fiscal space and strong external buffers, the envisioned medium-term fiscal stimulus—based on productivity enhancing infrastructure—and structural reforms package should help boost incomes and drive higher and more inclusive growth, lowering debt burdens on aggregate and for individual households. - Indebtedness could constrain monetary policy, requiring a balance between cyclical and financial stability considerations. - There is room to further use macroprudential tools to target specific pockets of vulnerability (Thailand has implemented LTVs on mortgage lending). - Enhancing quality of financial information, especially credit information systems, supports credibility of macro-prudential tools. - International financial cycle: - Optimal pace of deleveraging depends on evolution of the international financial cycle (interest rates, terms of trade shocks, investor sentiment), which affect borrowing benefits/risks, repayment ability, and policy space. ### Household debt operational measures in Thailand (examples) - Debt Clinic Program: - Created by private sector entities with Bank of Thailand support; managed by Asset Management Company (Sukhumvit AM). - Expanded to cover credit card and personal loans to non-bank financial institutions. - “Composition prior to bankruptcy” available as a last-resort negotiation tool. - Regulations enacted on debt repayment and debt servicing ability. ### Fiscal impact of aging — key demographic and fiscal projections - Demographics: - Working-age population expected to decline by 11 percent by 2035 and by about 30 percent by 2060. - Old-age dependency ratio expected to increase from 14.8 percent in 2018 to 36 percent in 2035 and 54 percent in 2060. - Health coverage: - Thailand achieved universal health care coverage in 2002 but the system remains fragmented across three schemes: - Civil Servant Medical Benefit Scheme (CSMBS): covering about 5 million people - Social Security Scheme (SSS): covering about 10 million people - Universal Coverage Scheme (UCS): covering 48 million people - Pension system fragmentation and coverage: - Non-contributive regimes: old-age allowance (qualifies all Thais 60 or older, except civil servants) and a PAYG system for civil servants. - Social Security Fund (SSF): defined benefit, pay as you go, compulsory contributions covering private employees in formal private sector. - Defined-contribution systems (second/third pillars) are fully funded and do not significantly impact fiscal expenditures. - Civil servants receive average benefits per beneficiary amounting to 135 percent of GDP per capita. - Most informal private sector is only covered by the old-age allowance with average benefits amounting to 4 percent of GDP per capita. - Projected fiscal cost of pensions funded by the budget: - Public expenditure in pensions funded by the budget expected to increase from 1.4 percent of GDP in 2017 to 2.7 percent and 5.6 percent of GDP in 2035 and 2060, respectively. - Old-age allowance and civil servant regimes are funded entirely by the Central Government budget. - Social Security Fund (SSF) projected to run out of reserves shortly after 2053 (ILO actuarial study). - In absence of reforms, by 2060 funding required by SSF from the Central Government budget would amount to 1.9 percent of GDP. - Implication: - Population aging will strain public finances through higher pension and health care spending and lower potential GDP growth (labor and productivity). - Additional domestic revenue mobilization will be needed over the medium term to finance aging-related expenditures. - Reform of the fragmented pension system and fiscal measures to smooth the demographic shock are necessary. *Source: IMF staff calculations.* ### 7. Expenditure on healthcare is also expected to increase over the coming decades. ### 7. Expenditure on healthcare is also expected to increase over the coming decades. ### Healthcare expenditure projections - Total public expenditure in health is expected to rise from 2.9 percent of GDP in 2017, to 4 and 4.9 percent of GDP in 2035 and 2060. - Although this estimate includes expenditure financed by contributions, it is likely that a large proportion of the observed increase in expenditure (1.1 percent of GDP by 2035 and 2 percent of GDP by 20160) will need to be financed from the budget. - Includes expenditures funded from employer and employee contributions to the health care scheme. ### Fiscal cost and key statistics (as presented) - Fiscal cost of publicly-funded pensions (Includes only transfers from the Central Government budget.) - 2017: 1 - 2035: 1.4 - 2060: 2.7 - 2017-2035 Change: 5.61.34.2 - Old-Age Allowance - 2017: 0.5 - 2035: 1.0 - 2060: 1.3 - 2017-2035 Change: 0.50.8 - Civil servants - 2017: 0.9 - 2035: 1.8 - 2060: 2.4 - 2017-2035 Change: 0.81.5 - Social security - 2017: 0 - 2035: 0 - 2060: 1.9 - 2017-2035 Change: 0.01.9 - Public expenditure in health - 2017: 2 - 2035: 2.9 - 2060: 4.9 - 2017-2035 Change: 1.12.0 - Memo item: - Population 60+ / Population 15-59 - 2017: 25.4 - 2035: 52.8 - 2060: 78.2 - Source: IMF staff estimates. ### The need for pension reform and risk of old-age poverty - Limited coverage of pension systems other than the old-age allowance raises the risk of old-age poverty. - Under the current pension system: - The informal sector (more than half of the work force) is only covered by the old-age allowance. - At about 660 baht per month on average, the old-age allowance is less than US$1 per day and less than one-tenth of the minimum wage. - Although old-age income is likely to be complemented by family networks in addition to old-age allowance, the increasing old-age dependency ratio is likely to strain the capacity of these networks to sustain their current transfers per elderly, thereby raising the risk of old-age poverty. - Workers that started contributing to the SSF only recently but are close to retirement may not complete the minimum number of years required for a minimum pension under the SSF. - The lump-sum that they would receive from SSF at retirement (equivalent to the total contributions accumulated for this worker) plus other sources of income, may be insufficient to adequately complement the old-age allowance. - A similar situation would apply for informal workers that may join the formal sector in the future, already late in their working years. ### Trade-offs and reform options - Addressing these risks will require a reform that takes into account the trade-offs from raising the old-age allowance and/or increasing the incentives for workers to join other pension regimes. - Increasing the old-age allowance would address the old-age poverty risks of workers in the informal sector directly, but it would be expensive and would undermine the incentives for joining the SSF or other pension schemes that are partly or fully funded through worker and employer contributions. - Technical assistance on pension reform would help address these and other issues under the current system. - Illustrative fiscal impact (to fix ideas): - Increasing the old-age allowance (660 baht per month on average) to the equivalent of 25 percent of the minimum wage (1950 baht) would add approximately1 percent of GDP in public expenditure in 2019, 2 percent by 2035, and 2.8 percent by 2060. *Source: IMF staff estimates and text from the provided chapter.* ### 12. The authorities will continue to engage with staff in the policy discussion on capital ### 12. The authorities will continue to engage with staff in the policy discussion on capital ### Capital flows and FX intervention disclosure - The authorities will continue to engage with staff in the policy discussion on capital flows and encourage the Fund to undertake studies on the spillover effect of policy implementations from advanced economies that may have impact on small open economies. - The authorities reiterate the view that the disclosure of FXI data would be counter-productive at this juncture. - Rationale: Such information, even with a lag, can undermine the effectiveness of central bank foreign exchange operations as it could be exploited for speculative purposes. - Current publication practice: Thailand’s international reserves data are published every two weeks and have "already provided sufficient information on their FX operation." ### External Balance Assessment (EBA) - The authorities welcome staff’s focus on structural factors and concur that macro- and structural policies are key to addressing the CA gap. - Assessment of recent trends: Thailand’s CA gap has narrowed from recent decline in trade surplus as well as the ongoing structural balancing efforts. - Medium-term outlook: The authorities expect the CA surplus to narrow further over the medium term as private and government investments pick up pace. - Caution on model limitations: - The EBA results must be communicated with caution given the model’s inherent limitations, particularly when drawing implications regarding currency valuation. - The model has a narrow and CA-centric focus of external imbalances and "does not account for capital account transactions which have larger impact on the exchange rates." - Example: "the baht has already appreciated significantly over the years as the model continues to suggest large REER undervaluation given that the CA gap remains positive." - Given "the large unexplained residuals in many country cases, including Thailand," model results must be interpreted carefully and take into account country specificities to draw appropriate policy implications. ### Financial sector and FSAP - Overall assessment: The authorities welcome the FSAP’s assessment that the Thai financial system remains sound, with strong and independent supervisory agencies and frameworks. - Risk posture: Financial stability risks are contained while pockets of vulnerability remain under close monitoring. - Agreement with recommendations: The authorities broadly agree with the FSAP recommendations which were consistent with their ongoing efforts to buttress financial sector resilience. - Implementations underway include: - SFI regulations, - strengthening crisis management and banking resolution, - enhancements to the macroprudential toolkits. - Governance proposal: Thai authorities are discussing the possibility of setting up a financial stability advisory body consisting of regulators of significant financial intermediaries. - Institutional arrangement views: - The authorities have a different view from staff’s recommendation regarding institutional arrangement. - They stress that "there are merits to each institutional arrangement design which must be considered within the country’s context." - Emphasis that there is no one-size-fits-all; the current institutional arrangement in Thailand was purposely designed drawing upon lessons from the 1997 financial crisis. - The Financial Institution Policy Committee (FIPC) "has proven to be practical and effective in the Thai context." - Role of MOF on FIPC: - The presence of the MOF representative on the FIPC brings broader perspective and policy recommendations that take into account potential impact on the overall economy, while not compromising the operational independence of the supervisory agencies. - The MOF representative facilitates decision-making processes involving the MOF and the Cabinet. - Cross-directorships and coordination: - The authorities underscore the merits of cross directorships of supervisory agencies given increased interconnectedness within the financial sector, noting that many of the largest players in the capital market are subsidiaries of commercial banks. - Inter-agency coordination promotes collective accountability and timely engagement in decision-making and crisis management. - The authorities welcome staff’s acknowledgement that the current arrangement of the supervisory agencies does not undermine each agency’s operational independence. ### Fiscal policy and structural reforms - FY2020 fiscal stance: Expected to remain expansionary. - Budget approval: On September 3, 2019, the Cabinet approved a budget envelope of 3.2 trillion baht for FY2020, an increase of 6.7% over last year with the same level of fiscal deficit coming in at 2.6% of GDP. - Drivers of higher spending: Mainly driven by the replenishment of the treasury balance as pension and medical expenses for government officials were underestimated in 2018. - Legislative timetable: The draft budget bill will be tabled to the Parliament in mid-October. - Disbursement outlook: - Authorities are positive that fiscal spending will largely be on track. - Disbursement for current spending and approved investment projects from FY2019 can continue despite the delay in the budget approval process. - Most investment outlays would not be materially affected since they are set to be disbursed in the latter half of 2020. - EEC projects and PPP financing: - Macro-critical infrastructure projects under the EEC are implemented through PPP with most financing to come from the private sector. - Construction of two out of the five EEC main projects should begin in 2020, while the rest are in the bidding and negotiation process. - Structural reform agenda and fiscal sustainability: - Expenditure-side reform: Plan to revise eligibility criteria for low-income earners so welfare program is better targeted; a group of subnational committees will be set up to closely monitor eligibility. - Revenue-side reforms: Enforcement of the new Land and Property Tax Law; revision of taxation of investment income from bonds through mutual funds. - E-payment Law: Effective from the beginning of 2020; designed to prevent local online vendors from avoiding income tax payment. - Pension reform and labor policies: - Continuous effort on pension reforms to enhance sustainability in light of aging demographics. - Government is discussing the National Pension Fund (NPF) draft bill to make participation of private sector employees in pension schemes mandatory. - Government is conducting a study on extending retirement age from 60 to 63 years for government and state enterprise officials. - Medium-term productivity improvements expected from new investment in EEC projects and government training schemes to re-skill and up-skill the labor force. ### Anti-corruption efforts - Public Procurement Act (2017) reforms: - Major overhauls to create a more efficient and transparent procurement process. - Shift to an electronic platform (eProcurement) with features permitting increased public scrutiny through appeal and complaint mechanisms. - Businesses more aware of the process as reflected by significant increases in the number of appeals and complaints. - Cost saving: In 2018, the public sector saved more than 7% of procurement budget in actual bidding price when compared to the budget allocation. - Private sector engagement: - Collective Action Coalition Against Corruption (CAC) launched an initiative in 2016 calling on Thai firms to support and implement the National Anti-Corruption Strategy. - So far, 953 companies are signatory to this declaration, of which 397 have been certified. ### Final remarks - Appreciation and forward engagement: - The Thai authorities express appreciation to the Fund for its long-standing support through policy dialogue and technical assistance to accelerate structural reforms and fortify macroeconomic and financial stability. - The authorities look forward to future engagement and continued support from the Fund. - They thank the Fund for facilitating the upcoming technical assistance mission on external sector statistics in November. *Source: IMF staff report excerpt (1thaea2019002).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1thaea2019002.pdf_