## 1thaea2021001 ## Source details **Canonical URL:** [1thaea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1thaea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1thaea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1thaea2021001.pdf.json) --- ### Context and structural challenges - Thailand showing incipient signs of recovery from the COVID-19 downturn amid long-standing weaknesses: - Low productivity growth, lackluster human and physical capital accumulation, high household debt, weak social safety nets, high inequality and informality, savings-investment imbalance. - High dependence on tourism increases vulnerability; informal and migrant workers, particularly women and youth, were disproportionately affected. - Tourism accounts for about a fifth of GDP and 20 percent of employment. ### Recent economic developments and sectoral impacts - Real activity: - Economy contracted by 9.4 percent q/q in 2020Q2; overall GDP decline for 2020 was 6.1 percent. - Real GDP rebounded by 6.2 percent q/q in 2020Q3 and 1.3 percent q/q in 2020Q4. - Contact-intensive sectors (tourism, transportation, retail) were more affected than construction, utilities, and medical services. - Labor market: - Employment contracted by 1.9 percent y/y in 2020Q2, rebounded by 1.2 percent in 2020Q3 and 2.2 percent in 2020Q4, surpassing pre-COVID-19 levels. - Sharp increase in underemployment; unemployment rate doubled in 2020Q2 and remained elevated. - Prices and output gap: - Weak headline and core inflation throughout 2020. - Staff estimates show a large output gap; estimates are highly uncertain in the pandemic setting. - Banking and credit: - NPLs contained at around 3.1 percent as of 2020Q4. - Stage 2 (doubtful) loans at 6.6 percent year end (abstracting from ongoing loan classification changes). - Commercial loan growth strengthened to 5.1 percent y/y in 2020 (from 2 percent in 2019); lending to SMEs declined. - Household debt reached an all-time high of 86.6 percent of GDP in 2020Q3. - External sector and reserves: - Current account surplus narrowed from 7 percent of GDP in 2019 to 3.2 percent of GDP in 2020. - FX reserves (excluding net forward position) strengthened by US$34 billion to US$258 billion. - Staff assess the cyclically adjusted current account gap to be around 0.8–3.8 percent of GDP. ### Policy response: fiscal, monetary, and financial measures - Fiscal measures and outcomes: - Government approved a strong fiscal package including health-related spending and assistance to households, financed partly by reprioritization and new debt. - Deficit widened to about 4.8 percent of GDP in 2020 from 0.3 percent of GDP in 2019, generating a 3.2 percent of GDP fiscal impulse. - Public debt to GDP ratio estimated to have risen from 41.1 percent in 2019 to 49.6 percent in 2020. - Table of announced COVID-19 fiscal measures (format preserved in source): Total Fiscal Measures: 12.21832.0; On-budget, above the line: 8.0 1277.0; o/w debt financed: 6.31000.0; Phases I and II - assumed to be financed within the original FY2020 budget 1.7 277.0; Phase III - health spending, cash handouts, and spending on projects to support economic recovery - financed with additional debt issuance) 6.31000.0; Below the line 4.1555.0; Equity injections, loans, asset purchase or debt assumptions 0.5 80.0; Contingent liabilities 3.6 475.0; Guarantees (correspond to guarantees on BOT soft loans) 2.0325.0; Quasifiscal 1.6 150.0. - Monetary policy: - Bank of Thailand (BOT) cut the policy rate by 75 basis points between February and May 2020 to an all-time low rate of 0.50 percent. - Financial policies and FSIs: - BOT introduced soft loans and credit guarantees; most measures due to expire in either mid- or end-2021. - Selected Financial Soundness Indicators (2020Q4): NPL ratio: 3.1; Leverage ratio (commercial banks): 13.2; ROA: 0.8; ROE: 5.9. ### Outlook and staff projections - Growth and inflation: - Staff projects growth of 2.6 percent in 2021 and 5.6 percent in 2022 as tourism accelerates. - Medium-term average growth expected at about 3.5 percent. - Headline inflation forecast to recover somewhat in 2021; core inflation likely to remain low given sizeable output gap. - Output gap expected to close in 2025, supporting return of inflation around the middle of BOT’s inflation target range. - External balances: - CA surplus projected to decline to about 0.5 percent of GDP in 2021 and slowly recover to around 3-3½ percent of GDP through the medium term. ### Risks and scenarios (Appendices II–III highlights) - Key risks: - High near-term uncertainty from pandemic path, new virus mutations, and vaccination bottlenecks. - Prolonged pandemic could amplify corporate and household vulnerabilities and raise scarring risk. - Sharp rise in global risk premia could generate financing difficulties for leveraged firms and constrain banks. - Medium-term risks from de-globalization affecting supply-chain-based export sector. - Scarring analysis (EM-focused): - Five years after recessions, potential output in EMs is usually lower by more than 4 percent (compared to less than 2 percent in advanced economies). - When recessions coincide with pandemics, loss after five years reaches about 14 percent for EMs. - Structural reforms and public investment upscaling can limit scarring. ### Distributional risks and inequality - Past pandemics often gave rise to considerable widening of income inequality. - Thailand-specific exposure: - Large contact-intensive sectors, high informality, and a high share of low-skilled workers with reduced telework propensity increase likelihood of a larger rise in inequality. - Challenges for online learning in poor households could lead to some loss of human capital. - Projected distributional impact: - In the absence of redistributive policies, the pandemic-induced recession could worsen Thailand’s Gini coefficient by about 2 percentage points, reversing gains made since the 1990s. - These impacts could linger well into 2022. ### Fiscal policy: recommended near-term support and medium-term strategy - Near-term: - Staff recommends an ambitious fiscal expansion focused on scaling up public investment and protecting the vulnerable. - Recommends an additional 7 percentage points of GDP spending over the medium term in macro-critical and climate resilient projects, relative to baseline projections. - Recommends an additional 1½ percentage points of GDP in transfers and infrastructure spending above what is envisaged in the FY2021 fiscal plan (implying about 2 percentage points increase in the structural deficit). - Priorities for public spending: - Scale up public investment (particularly digital infrastructure), improve training and education, promote innovation, invest in human capital across regions, and increase and better target transfers to vulnerable households. - Fiscal governance: - All COVID-19-related spending should follow strict guidelines for fiscal transparency and accountability, including publication of procurement contracts with beneficial ownership information. - Address execution bottlenecks, strengthen procurement law operations, improve project appraisal capacity, conduct systemic audits of investment projects and fiscal risk monitoring (including for PPPs). - Medium-term consolidation: - With staff’s recommended fiscal expansion, debt is expected to approach the 60 percent of GDP ceiling under the Fiscal Responsibility Law (FRL). - Staff recommends gradual medium-term consolidation once recovery is firm (staff’s baseline corresponds to 2022), supported by revenue-enhancing measures and expenditure prioritization guided by the 2019 MTRS. - Embed ex ante well-defined escape clauses in the FRL to allow temporary breaches after large shocks. ### Monetary and financial policy recommendations - Monetary stance: - Monetary policy should prioritize targeted measures to channel existing systemic liquidity to credit-constrained firms, combined with further monetary policy easing. - Staff recommends another 25-basis point policy rate cut to enhance impact of financial measures and fiscal stimulus. - Unconventional monetary policy (UMP) preparedness: - If downside risks materialize and further fiscal support is needed, BOT should be prepared to engage in an asset purchase program focused on high-quality government and corporate paper (start with QE to probe market responsiveness, followed by yield-curve management). - Support with forward guidance on state-dependent conditions for adding or withdrawing policy support. - Exchange rate and FX intervention: - Exchange rate should act as shock absorber; FX intervention should be limited to disorderly market conditions. - FX liabilities comprised only 0.6 percent of total banking system liabilities as of 2020Q3. - Staff recommends BOT publish data on FX intervention (with appropriate lag) to enhance communication and commitment to the inflation target. - Financial sector measures: - Target support to SMEs; limit moral hazard; articulate clear eligibility and exit strategies. - Options: soft loans or expenditure deferrals for solvent firms with liquidity difficulties; equity injections (public-private) with safeguards; debt restructuring and simplified out-of-court frameworks for insolvent firms. - Encourage banks and non-banks to prudently provision; roll back regulatory forbearance when appropriate with calibrated exit; address household debt overhang by avoiding formal bankruptcy where possible and facilitating recovery mechanisms. - Expand eligibility criteria for BOT Debt Clinic and continue financial literacy programs. ### Structural, climate, and pension reforms - Structural reforms: - Facilitate resource reallocation, encourage broad-based productivity drivers, promote inclusive growth, and address domestic and external rebalancing. - Further scale up digital infrastructure and reforms to catalyze digital transformation. - Improve insolvency frameworks and promote reallocation away from low-productivity or informal activities. - Pension and demographic pressures: - Pension reform critical to manage expected increase in fiscal spending due to demographic headwinds. - Address sustainability risks by raising retirement age and/or contribution rate. - Climate policy and green recovery: - Move to efficient carbon pricing over time to reduce emissions, meet 2030 mitigation commitments, and raise revenues under a medium-term revenue strategy. - IMF modeling: meeting Thailand’s Paris pledge implies reducing CO2 emissions by 20 percent below baseline levels in 2030; model suggests a US$50 carbon tax to achieve the unconditional NDC and US$90 to achieve the conditional NDC; carbon tax would raise 2 percent of GDP in revenues by 2030 (excludes LULUCF). - Design elements: ramp up progressively, use revenues productively and equitably (e.g., lower taxes on labor and capital, targeted compensations). ### GIMF illustrative fiscal scenarios and macro-fiscal interactions - Illustrative fiscal expansion (six-year program, deficit-financed): - Targeted transfers: increased by 0.5 percent of GDP in FY2021–FY2022, tapered to 0.25 percent of GDP in FY2023. - Infrastructure spending: increased by 1 percent of GDP in FY2021, 2 percent of GDP in FY2022 and FY2023, and 1 percent of GDP in FY2024 and FY2025. - Post-program maintenance: permanently higher spending of 0.3 percent of GDP from FY2026. - Two policy coordination scenarios: - Scenario 1 (normal monetary response): BOT raises rates in response to demand and inflation. - Scenario 2 (accommodative): BOT leaves interest rates unchanged during the six-year fiscal program. - Key illustrative outcomes: - Fiscal expansion alone raises real GDP growth by about 0.6 percentage points in the first year. - Combined with accommodative monetary policy, real GDP growth is 1.4 percentage points higher in FY2021 and remains above baseline until FY2026. - Debt dynamics: without additional growth, the fiscal package would increase debt-to-GDP by 9.5 percent of GDP; with growth effects, peak addition is 8 percentage points; under accommodative monetary policy, peak addition is 4.4 percentage points and debt-to-GDP would not breach the FRL 60 percent ceiling. ### Macro-fiscal stress tests and debt dynamics - Stress-test outcomes (selected): - Under a Real GDP Growth Shock (1 standard deviation lower for 2 years) combined with a 200 basis points rise in interest rates, debt breaches the authorities’ 60 percent ceiling in 2023 and remains above in 2024–2025 before gradual decline. - Under the Combined Shock, public debt breaches 60 percent in 2022, increases to 64 percent in 2023, and remains above 60 percent throughout the projection period. - A contingent liabilities shock (one-time increase in non-interest expenditures equivalent to 10 percent of banking sector assets) pushes debt above 70 percent of GDP in that scenario. - Policy implication: comprehensive medium-term consolidation strategy needed to rebuild buffers and preserve fiscal sustainability; prioritize revenue mobilization and expenditure prioritization. ### External sector assessment (Appendix I highlights) - 2020 external position: - CA surplus declined from 7.0 percent of GDP in 2019 to 3.2 percent of GDP in 2020. - NIIP strengthened to 11 percent of GDP (from 0.3 percent in 2019). - Gross assets around 120 percent of GDP; reserve assets 51 percent of GDP; gross liabilities 109 percent of GDP; external debt rose to 38 percent of GDP; short-term debt (remaining maturity basis) 15 percent of GDP. - Staff assessment: CA gap in the 0.8-3.8 percent of GDP range with midpoint 2.3 percent of GDP. - REER assessed to be undervalued in the 1.4-6.4 percent range, midpoint 3.9 percent (staff REER elasticity 0.56 and CA gap used). - Policy recommendations: - Allow exchange rate flexibility to be the first line of defense; limit FX intervention to disorderly market conditions. - Encourage prudent liberalization of the financial account; phase out 2019 reduction in limits on nonresident baht accounts. ### Risk Assessment Matrix (selected entries and policy responses) - Conjunctural risks: - Unexpected shifts in the COVID-19 pandemic (Likelihood: M; Impact: H). Policies: targeted support to vulnerable groups and viable firms; ramp up vaccine distribution; frontload public investments. - Sharp rise in global risk premia (Likelihood: M; Impact: M). Policies: allow exchange rate flexibility; targeted support to viable firms; strengthen macroprudential framework. - Widespread social discontent and political instability (Likelihood: H; Impact: H). Policies: allow automatic stabilizers; provide adequate liquidity; use FX intervention for disorderly conditions. - Structural risks: - Accelerating de-globalization (Likelihood: M; Impact: H). Policies: structural reforms and infrastructure development; deepen regional trade integration. - Cyber-attacks (Likelihood: M; Impact: M). Policies: BOT strengthen capacity to deal with cyber-attacks and fintech challenges. - Climate-related natural disasters (Likelihood: M/L; Impact: M). Policies: efficient carbon pricing; scale up climate-resilient infrastructure; incorporate climate risks into prudential frameworks. ### Corporate sector diagnosis and MSME focus - MSME statistics (2019, OSMEP): - 3.2 million firms (99 percent of total); 12.1 million jobs (about 30 percent of total employment); 35.3 percent of GDP; 13 percent of exports. - Two-thirds of MSMEs are in trade and services. - Corporate position and policy measures: - Corporate debt to GDP around 51.4 percent. - Gross NPLs rose marginally from 3 percent in December 2019 to 3.1 percent in December 2020; MSME NPLs higher at about 8 percent. - 2020Q2 measures included a 500-billion-baht soft loan scheme, debt moratoria, and loan guarantees; many schemes extended to end-June 2021. - Policy priorities to limit scarring: - Continue liquidity support where needed; help viable firms restructure; allow unviable firms to exit efficiently. - Targeted support preferred; limit moral hazard via clear eligibility and exit rules. - Use government equity with private participation for co-investment to preserve firm health while limiting fiscal risk. ### Institutional, legal, and operational reforms - Upgrade resolution system and develop simplified out-of-court procedures for smaller and informal firms to expedite restructuring. - Improve monitoring and data collection to guide exit of emergency measures; use performance markers for phased support expansion. - Prepare supervisors and banks to provision prudently; monitor savings cooperatives and nonbank financial institutions outside BOT perimeter. ### Selected macroeconomic and projection snapshots (2017–26, selected figures) - Real GDP growth (y/y percent change): 2017: 4.2; 2018: 4.2; 2019: 2.3; 2020: -6.1; 2021: 2.6; 2022: 5.6. - Headline CPI (period average): 2020: -0.8; 2021: 1.3; 2022: 1.0. - Public sector debt (end of period, percent of GDP): 2019: 41.0; 2020: 49.6; 2021: 55.9; 2022: 54.7. - Household debt: 86.6 percent of GDP in 2020Q3. - Gross official reserves (including net forward position): 2020: 287.4 (billions of U.S. dollars); projected to remain at 287.4 through 2026. *Source: IMF staff report excerpt (Thailand Article IV consultation, chapter and appendices extracted from the source PDF).* ### 1. Alternati ve Scenarios Under Fiscal and Monetary Stimulus ______________________________________ 15 ### 1. Alternati ve Scenarios Under Fiscal and Monetary Stimulus ### Context: green shoots amid long-standing challenges - Thailand’s economy showing incipient signs of recovery from the COVID-19 downturn. - Pre-COVID weaknesses exacerbated: low productivity growth, lackluster human and physical capital accumulation, high household debt, weak social safety nets, high inequality and informality, and a savings-investment imbalance. - High dependence on tourism increases vulnerability; informal and migrant workers, particularly women and youth, were disproportionately affected. ### Recent economic developments and pandemic-related headwinds - GDP and sector impacts: - Economy contracted by 9.4 percent q/q in 2020Q2; overall GDP decline for 2020 was 6.1 percent. - Real GDP rebounded by 6.2 percent q/q in 2020Q3 and 1.3 percent q/q in 2020Q4. - Tourism sector accounts for about a fifth of GDP and 20 percent of employment; it was especially affected by cessation of tourist travel. - Contact-intensive sectors (tourism, transportation, retail) were more affected than construction, utilities, and medical services. - Labor market: - Employment contracted by 1.9 percent y/y in 2020Q2, rebounded by 1.2 percent in 2020Q3 and 2.2 percent in 2020Q4, surpassing pre-COVID-19 levels. - Sharp increase in underemployment; low-skilled workers bore the majority of layoffs; unemployment rate doubled in 2020Q2 and remained elevated. - Prices and output gap: - Weak headline and core inflation throughout 2020. - Staff estimates show a large output gap; estimates are highly uncertain in the pandemic setting. - Banking and credit: - Banking system remained well provisioned and capitalized under stress tests by the Bank of Thailand (BOT). - Non-performing loans (NPLs) contained at around 3.1 percent as of 2020Q4. - Stage 2 (doubtful) loans at 6.6 percent year end (abstracting from ongoing loan classification changes). - NPLs higher in selected SMEs and tourism. - Commercial loan growth strengthened to 5.1 percent y/y in 2020 (from 2 percent in 2019); lending to SMEs declined. - Household debt reached an all-time high of 86.6 percent of GDP in 2020Q3. ### Policy response: fiscal, monetary, and financial measures - Fiscal policy: - Government approved a strong fiscal package of pandemic response measures including health-related spending and assistance to households, financed partly by reprioritization and new debt. - Deficit widened to about 4.8 percent of GDP in 2020 from 0.3 percent of GDP in 2019, generating a 3.2 percent of GDP fiscal impulse. - Public debt to GDP ratio estimated to have risen from 41.1 percent in 2019 to 49.6 percent in 2020. - Table of announced COVID-19 fiscal measures (format preserved in source): Total Fiscal Measures: 12.21832.0; On-budget, above the line: 8.0 1277.0; o/w debt financed: 6.31000.0; Phases I and II - assumed to be financed within the original FY2020 budget 1.7 277.0; Phase III - health spending, cash handouts, and spending on projects to support economic recovery - financed with additional debt issuance) 6.31000.0; Below the line 4.1555.0; Equity injections, loans, asset purchase or debt assumptions 0.5 80.0; Contingent liabilities 3.6 475.0; Guarantees (correspond to guarantees on BOT soft loans) 2.0325.0; Quasifiscal 1.6 150.0. - Monetary policy: - BOT cut the policy rate by 75 basis points between February and May 2020 to an all-time low rate of 0.50 percent. - Financial policies: - BOT introduced soft loans and credit guarantees and measures to support financial market functioning; most measures due to expire in either mid- or end-2021. - Financial Soundness Indicator (FSI) highlights (selected numbers from source): - NPL ratio: 3.1 (2020Q4) - Leverage ratio (commercial banks): 13.2 (2020Q4) - ROA: 0.8 (2020Q4) - ROE: 5.9 (2020Q4) ### External sector and reserves - Current account (CA) and reserves: - CA surplus narrowed from 7 percent of GDP in 2019 to 3.2 percent of GDP in 2020. - Staff assess the cyclically adjusted current account gap to be around 0.8–3.8 percent of GDP (Appendix I). - FX reserves (excluding net forward position) strengthened by US$34 billion to US$258 billion. - Structural external factors: - Persistent savings-investment gap partly driven by structural factors; need to address high precautionary savings and subdued investment. - Boosting domestic demand and medium-term real appreciation recommended to reduce external imbalances. ### Outlook and risks - Growth projections and inflation: - Staff projects growth of 2.6 percent in 2021. - Projected rebound by 5.6 percent in 2022 as tourism accelerates and global recovery continues. - Medium-term average growth expected at about 3.5 percent. - Headline inflation forecast to recover somewhat in 2021; core inflation likely to remain low given sizeable output gap. - Output gap expected to close in 2025, supporting return of inflation around the middle of BOT’s inflation target range. - External balance outlook: - CA surplus projected to decline to about 0.5 percent of GDP in 2021 and slowly recover to around 3-3½ percent of GDP through the medium term as tourism strengthens. - Key risks (Appendix II and III): - High near-term uncertainty from pandemic path, new virus mutations, and vaccination bottlenecks. - Prolonged pandemic could amplify corporate and household sector vulnerabilities and raise scarring risk. - A sharp rise in global risk premia could generate financing difficulties for leveraged firms and constrain banks via higher wholesale funding costs. - Medium-term risks from de-globalization affecting supply-chain-based export sector. - Staff analysis suggests 5 years after recessions, potential output in emerging markets such as Thailand is usually lower by more than 4 percent (compared to less than 2 percent in advanced economies) — signaling significant scarring risk. - Upside: faster vaccine distribution or stronger-than-expected trading partner recoveries could accelerate growth. *Source: IMF staff chapter "1. Alternati ve Scenarios Under Fiscal and Monetary Stimulus" (extracted content).* ### 10. Distributional risks of the pandemic loom large. Past pandemics often gave rise to a ### 1thaea2021001 - 10. Distributional risks of the pandemic loom large. Past pandemics often gave rise to a ### Distributional risks and inequality - Past pandemics often gave rise to a considerable widening of income inequality. - Thailand-specific exposure: - Large contact intensive sectors, considerable informality, and high share of low skilled workers with a reduced propensity for teleworking increase the likelihood of a larger rise in inequality. - Labor-intensive firms in affected sectors are more likely to lay off or reduce hours or wages for low-income workers or to close entirely. - Challenges for online learning in poor households could lead to some loss of human capital. - Projected distributional impact: - In the absence of redistributive policies, the pandemic-induced recession could worsen Thailand’s Gini coefficient by about 2 percentage points, reversing gains made since the 1990s (Appendix III). - Persistence: - These impacts have the potential to linger well into 2022 reflecting the lagged effects of the pandemic on inequality. ### Economic outlook and risks - Authorities and staff expectations: - Modest and uneven recovery in 2021 as tourism likely remains weak until 2021H2. - Growth in 2022 expected to be notably stronger as tourism begins multi-year recovery. - Risks tilted to the downside related to vaccination roll-out domestically and abroad, and pandemic uncertainty more generally. ### Vaccination as economic policy - Targets and plans: - Authorities aim to inoculate 45 percent of the population by year end (Appendix IV). - With increased vaccine supply and investments, authorities plan to vaccinate around half of the population by the end of 2021 and reach herd immunity within 2022. - Policy priority: - Diversify vaccine access, strengthen efficient distribution, and support with adequate budgetary resources and public-awareness campaigns to limit vaccine hesitancy. ### Fiscal policy: near-term support and medium-term strategy - Near-term recommendations: - Staff recommends an ambitious fiscal expansion focused on scaling up public investment and protecting the vulnerable. - Recommends an additional 7 percentage points of GDP spending over the medium term in macro-critical and climate resilient projects, relative to baseline projections. - This will increase the cyclically adjusted deficit by , on average, 1 percent of GDP annually during 2022–26 (Figure 1). - To accelerate recovery, staff recommends an additional 1½ percentage points of GDP in transfers and infrastructure spending above what is envisaged in the FY2021 fiscal plan (implying about 2 percentage points increase in the structural deficit, see Appendix V). - Priorities for public spending: - Scale up public investment, particularly digital infrastructure. - Improve training and education outcomes and promote innovation. - Invest in human capital across regions to equalize opportunities. - Increase and better target transfers to vulnerable households, temporarily expand coverage using beneficiary registries, geographic or categorical targeting, and expand coverage in affected remote areas. - Fiscal governance and transparency: - All COVID-19-related spending should follow strict guidelines for fiscal transparency and accountability, including publication of procurement contracts with beneficial ownership information. - Address bottlenecks in executing infrastructure spending, strengthen procurement law operations, improve project appraisal capacity, conduct systemic audits of investment projects and fiscal risk monitoring (including for PPPs). - Climate and revenue considerations: - Move to efficient carbon pricing over time to reduce emissions, meet 2030 mitigation commitments, and raise revenues under a medium-term revenue strategy (MTRS). - Compensate households, workers, and firms vulnerable to higher energy prices through social transfers. - Medium-term consolidation and fiscal rules: - With staff’s recommended fiscal expansion, debt is expected to approach the 60 percent of GDP ceiling under the Fiscal Responsibility Law (FRL) over the medium term. - Staff recommends a gradual medium-term consolidation once the recovery is firm (staff’s baseline corresponds to 2022). - Consolidation should be supported by revenue-enhancing measures and expenditure prioritization, pursuing tax administration and policy reforms guided by the 2019 MTRS. - Embed ex ante well-defined escape clauses in the FRL to allow temporary breaches after large shocks; clauses should define nature and magnitude of shocks, length of deviation allowed, maximum magnitude, path of return, and authority to activate/monitor. ### Authorities’ position on fiscal policy - Authorities concurred with need for additional near-term fiscal support. - Unspent amount of the one trillion baht loan decree will be completely disbursed in 2021 on top of FY 2021 Budget. - Policy commitments: - Publish all COVID-19 projects on a dedicated website and have spending audited by the Auditor General. - Commitment to medium-term prudent fiscal management and fiscal-structural reforms. - Progress in digitalization to enhance tax compliance and ease tax payment; considering tax law revisions, rationalization of exemptions, and broader tax reforms. - Continued infrastructure investments in macro-critical and climate resilient projects per the Infrastructure Master Plan. - Noted that FRL includes provisions for fiscal flexibility to adjust the public debt ceiling ex post after a large shock. ### Monetary and financial policies - Monetary policy stance: - Monetary policy should prioritize targeted measures to channel existing systemic liquidity to credit-constrained firms, combined with further monetary policy easing. - Staff recommends another 25-basis point policy rate cut to enhance impact of financial measures and fiscal stimulus. - Unconventional monetary policy (UMP) preparedness: - If downside risks materialize and further fiscal support is needed, the BOT should be prepared to engage in an asset purchase program focused on high-quality government and corporate paper. - Start with quantitative easing (QE) to probe market responsiveness, followed by yield-curve management to prevent excess volatility in long-term rates. - Support with forward guidance on state-dependent conditions for adding or withdrawing policy support (Appendix VIII). - Exchange rate and FX intervention: - Exchange rate should act as shock absorber; FXI should be limited to disorderly market conditions (DMC). - FX liabilities comprised only 0.6 percent of total banking system liabilities as of 2020Q3. - Staff recommends BOT publish data on FXI (with appropriate lag) to enhance communication and commitment to the inflation target. - Macroprudential policies, after addressing leakages in toolkit per 2019 FSAP recommendations, are preferred over “Leaning-against-the-wind” for financial stability. - Facilitate FX outflows by relaxing limits on foreign securities investments by Thai retail investors and phase out remaining capital-flow management measures on non-resident baht accounts. - BOT recently removed limits on non-resident baht accounts for qualifying nonresident firms to facilitate baht liquidity management. ### Structural, climate, and pension reforms - Structural measures to support recovery and inclusiveness: - Facilitate resource reallocation, encourage broad-based productivity drivers, promote inclusive growth, and address domestic and external rebalancing. - Further scale up digital infrastructure and reforms to catalyze digital transformation. - Pension and demographic pressures: - Pension reform critical to manage expected increase in fiscal spending due to demographic headwinds (health care and pensions expenditure). - Address sustainability risks of current schemes by raising retirement age and/or contribution rate. - Climate policy: - Gradual carbon pricing recommended to support decarbonization, meet 2030 commitments, and raise revenues. - Legislation under preparation for broader carbon footprint reporting as a step toward broad-based carbon pricing. - Authorities highlighted incentives for renewable energy investments and environmental considerations in automobile and motorcycle excise taxes. *Source: IMF staff report excerpt (Thailand Article IV consultation).* ### 25. The BOT agreed with staff on the need to ensure existing systemic liquidity is equally ### 1thaea2021001 - 25. The BOT agreed with staff on the need to ensure existing systemic liquidity is equally ### Monetary policy, liquidity, and unconventional measures - The BOT and staff agreed on the need to ensure existing systemic liquidity is equally accessible to SMEs and large firms. - The BOT stressed that the current monetary policy stance is "appropriately accommodative." - There was agreement on ensuring "ample liquidity" to SMEs, to whom banks have reduced lending. - The BOT viewed a further interest rate cut at this time as unnecessary and potentially ineffective given that the policy rate is approaching its effective lower bound (ELB). - The BOT deems inflation expectations "well anchored in the medium term," obviating the need for further easing. - The authorities noted the risk of "search for yield behavior" due to prolonged accommodative financial conditions. - The BOT confirmed openness to deploy UMP if downside risks materialize, but viewed asset purchase programs as unlikely to have much effect because "the Thai financial system is still heavily bank-based." - The BOT welcomed collaboration with the Fund on the use of UMPs in EMs to "contribute to the intellectual and policy debate in this area." ### Exchange rate policy and Integrated Policy Framework (IPF) - The authorities reiterated commitment to a flexible exchange rate regime and support for the Fund’s work on the IPF. - The IPF is "particularly relevant" to respond to the COVID-19 shock without overburdening any single instrument and to emphasize the complementary role of monetary and fiscal policies. - Country-specific characteristics affecting policy choice in Thailand include: - high costs of FX hedging, particularly for smaller firms; - longstanding frictions to capital outflows; - the role of offshore markets in driving excessive exchange rate volatility not in line with macroeconomic fundamentals. - Authorities aim to promote an FX ecosystem more resilient to volatile exchange rates and capital flows. - The BOT reiterated that public disclosure of FX intervention data, even with a lag, might compromise FX operations and could induce speculative activities leading to disorderly exchange rate movements. ### Financial policies to shore up viable firms - Staff supports a targeted approach focused on SMEs, which constitute the majority of Thai firms and employment and have been disproportionately affected by the pandemic. - Key principles for support: - limit potential moral hazard; - articulate clear eligibility requirements and exit strategies; - facilitate efficient reallocation of resources in the economy. - Recommended differentiated support linked to the pandemic-induced nature of problems: - Soft loans or expenditure deferrals for solvent firms with pandemic-related liquidity difficulties. - Equity injections, particularly via public-private partnerships (PPP), to contain leverage and encourage risk sharing, with safeguards to mitigate contingent liability and governance risks; support could be phased and contingent on preset performance markers. - Debt restructuring, including informal and simplified out-of-court resolution frameworks, for firms that have become insolvent. - In contracting sectors (e.g., tourism), focus support on adapting business models and retraining staff while disincentivizing "zombie firms." - Develop an exit strategy for the public sector from any “bailed-out” companies and monitor fiscal risk to ensure effectiveness of public funding. - Measures to shield the financial system and household sector: - Encourage banks and non-banks to cautiously provision for downside scenarios and improve timely information gathering to assess credit risk, particularly in SMEs. - Roll back regulatory forbearance when appropriate with clearly calibrated and communicated exit. - Address household debt overhang by avoiding formal bankruptcy where possible, facilitating recovery after bankruptcy, preventing excessive debt accumulation, and enhancing restructuring and resolution options. - Expand eligibility criteria for the BOT Debt Clinic (noted as a welcome step). - As recovery takes hold, consider encouraging early consolidation of household debt; strengthen lending standards given prolonged low interest rates; enhance information gathering to facilitate credit risk assessment; continue financial literacy programs, particularly among those in the informal sector. - AML/CFT: - Staff welcomes steps to strengthen the AML/CFT framework in line with the 2019 FSAP recommendations. - Continue addressing issues raised in the latest Asia/Pacific Group (APG) assessment, including transparency and availability of beneficial ownership information and AML/CFT risk-based supervision. - Recent authority measures: - Special loan facility for business with credit guarantee scheme and debt restructuring via asset warehousing with buy-back options. - Measures to address elevated household debt: proactive debt restructuring, debt service deferment, enhanced eligibility for the Debt Clinic. - BOT signed an MOU with the Office of the Court of Justice to mediate legal financial disputes out of court for financially distressed borrowers and SMEs. - Thai Financial Reporting Standard 9 (TFRS9) effective since January 2020; all financial institution accounting and reports prepared in compliance with the standard. - Regulatory relaxation in response to the pandemic are temporary and in line with practices of other regulators. ### Structural policies to limit scarring - Concerted efforts are needed to address long-standing structural challenges and limit long-term economic damage from the pandemic. - Labor market and human capital: - Enhance active labor market policies coordinated with information sharing across government agencies to upskill dislocated workers and streamline labor and business regulations to facilitate resource reallocation toward expanding and more viable sectors. - Incentivize movement from informal to formal employment to raise aggregate productivity and potential growth and facilitate external rebalancing. - Authorities have established online training and job-matching platforms and organized Job Expo in collaboration with universities and the private sector. - Government and EEC infrastructure projects offer demand-driven human resource development programs. - Authorities prioritize upskilling and note the need for "smart regulation" in immigration policy for high-skilled workers. - Tourism sector: - Coordinated multi-pronged policies needed to heal pandemic-induced scars. - Move to lower-density tourism with higher unit revenue to reduce health risks and foster a greener recovery. - Measures could include tapping luxury markets, adopting digital infrastructure, upskilling workers for higher value-added services, and clear health policies for visitors to reduce uncertainty. - Policies should address high concentration of tourism activities in selected cities and incentivize private investment; PPPs or government guarantees can address informational asymmetry in this informal sector. ### Fund capacity development, surveillance, and staff appraisal - Fund CD work supports surveillance advice and authorities’ policy agenda: - 2018 CD work on public investment management assessment (PIMA) provided a road map for improving public investment implementation and remains relevant. - CD on targeting welfare programs is useful; CD on pension reform should guide managing fiscal pressures from aging. - Ongoing technical support for the BOT’s macro-modelling work supports operationalization of the IPF. - Staff appraisal and recommendations: - Staff commends the authorities’ timely and multipronged policy support that helped cushion the pandemic’s impact. - Economic recovery expected to be "slow, uneven, and clouded by multiple risks"; drag on contact-intensive sectors, particularly tourism, expected to continue for most of 2021. - Staff welcomes measures aimed at inoculating "almost half of the population by the end-2021." - Core inflation dynamics to remain subdued given continued slack. - The external position in 2020 was "stronger than warranted by medium-term fundamentals and desirable policies"; structural factors behind persistent savings-investment gap imply need for policies to boost domestic demand and medium-term real appreciation. - Fiscal policy should be the major buttress to support recovery: more ambitious fiscal expansion focused on scaling up public investment and protecting vulnerable through better targeted social transfers; avoid premature tapering of pandemic-related policy support. - All COVID-19-related spending should follow strict guidelines for fiscal transparency and accountability; address bottlenecks in executing infrastructure spending. - Ambitious fiscal expansion should be accompanied by a comprehensive medium-term consolidation strategy to rebuild buffers and preserve fiscal sustainability. - Staff welcomes authorities’ commitment to adopt well designed green policies to create jobs, lift growth and enhance resilience. - Staff supports authorities’ targeted measures to enhance intermediation efficiency and shore up viable firms and recommends "another 25-basis point policy rate cut." - BOT should consider interactions of FXI with other policies, reserve FXI for addressing disorderly market conditions, and phase out remaining CFM measures on non-resident baht accounts. - If downside risks materialize, temporarily upgrade fiscal support with emphasis on targeted intervention, complemented with unconventional monetary policy to enhance additional fiscal stimulus. - Financial stability risks appear contained but "pockets of vulnerability are building up"; household and nonfinancial corporate debt overhang should be addressed via multipronged measures to facilitate recovery after bankruptcy or avoid formal bankruptcy. - Coordinated and multipronged policies needed to heal pandemic-induced scars and address structural challenges; government-supported initiatives needed to incentivize private investment toward lower-density, higher unit revenue tourism. - Fund CD priorities include enhancing targeting of social safety nets and pension reform; ongoing Fund technical support to BOT on macroeconomic modelling supports operationalization of the IPF. *Source: Extract from STAFF APPRAISAL and sections 25–43 of the Thailand IMF report.* ### 44. It is recommended that the next Article IV consultation with Thailand take place on a ### 1thaea2021001 - 44. It is recommended that the next Article IV consultation with Thailand take place on a ### Recommendation - It is recommended that the next Article IV consultation with Thailand take place on a standard 12-month cycle. ### Real sector and price dynamics - Real GDP growth collapsed the most in ASEAN during the COVID-19 pandemic, with a strong negative contribution from exports, especially services led by tourism. - The downturn exacerbated the downward trend in gross investment and pushed up unemployment. - In 2020, inflation weakened, with headline pulled down by the global oil price collapse. - Interest rates were cut to record lows. - Key data points and observations: - Output gap widened significantly in 2020. - Private fixed investment has remained relatively strong. - Public investment increased reflecting policy efforts to revive the crisis-hit economy, and public debt increased in 2020. ### Macro-fiscal developments - GDP was particularly impacted in 2020Q2, with a strong rebound in Q3. - Manufacturing and services sectors took the hardest hit. - Public policy response increased public investment to support recovery. - Fiscal developments: - Fiscal balance deteriorated in FY2020 compared with previous years. - Public debt increased in FY2020. ### Inflation and inflation expectations - Inflation remains below the BOT’s target range. - Energy prices collapsed during the pandemic and core inflation stayed weak. - The BOT cut the policy rate by 0.75 percent, reaching 0.50 percent. - Inflation expectations remain fragile in a pandemic environment. ### Financial sector developments - Credit growth held up, driven by households and large corporates. - Household debt relative to GDP reached the highest level since 2003. - Corporate sector debt remained largely unchanged. - Housing market: - Demand for housing loans picked up in 2020H1. - Housing prices started moderating in recent months. - House price indices (quarterly averages) for Thailand start in 2008:Q1. ### Financial soundness of commercial banks - Commercial banks have ample capital. - Banks rely more on short-term liabilities than commercial banks in other countries; Thailand’s loan to deposit ratio remains high. - Nonperforming loans (NPLs) are well contained. - Profitability remains sound, shown by return on equity and return on assets. - Financial soundness indicators referenced are as of 2020Q3 or latest available. ### External sector developments - The current account surplus declined sharply in 2020, while reserves increased. - Tourist arrivals collapsed through the year. - Exports were dragged down in 2020H1 due to weak external demand, but began to recover toward year end. - The fall in inward investment more than offset the decline in outward investment. - Capital flows: - The first half of 2020 saw a significant outflow of capital, leading to depreciation of the real effective exchange rate, which mostly reversed through the second half of the year. - Share of tourist arrivals by origin (indices and shares noted): - China (share 28%) - Malaysia (share 11%) - Asia excl. China, Indonesia, Malaysia (share 35%) - Europe excl. Russia (share 13%) - Russia (share 4%) ### Structural challenges and competitiveness - Thailand is one of the fastest aging populations in Asia. - Relative to peers, Thailand has room to improve infrastructure and overall global competitiveness. - Employment is dominated by services; agriculture lags other sectors in productivity. - Thailand lags competitors in educational attainment (PISA scores referenced). - Key areas to improve competitiveness include ICT adoption and innovation capacity. *International Monetary Fund — Thailand staff report content (figures and observations as provided).* ### 4.0 is based on the official data and opinion survey of business executives and assesses the ### 1thaea2021001 - 4.0 is based on the official data and opinion survey of business executives and assesses the ### Thailand: Selected Economic Indicators, 2017–22 — Key statistics and projections - Main exports (percent of total 2019): machinery (43), food (13) - GDP per capita (2019): US$7,815 - Unemployment rate (2019): 1 percent - Poverty headcount ratio at national poverty line (2016A1): 8.6 percent - Net FDI (2019): US$-5.33 billion - Population (2019): 66.6 million - Real GDP growth (y/y percent change): 2017: 4.2; 2018: 4.2; 2019: 2.3; 2020: -6.1; 2021: 2.6; 2022: 5.6 - Consumption: 2017: 2.4; 2018: 4.2; 2019: 3.4; 2020: -0.6; 2021: 3.7; 2022: 2.7 - Gross fixed investment: 2017: 1.8; 2018: 3.8; 2019: 2.0; 2020: -4.8; 2021: 5.3; 2022: 3.3 - Headline CPI (end of period): 2017: 0.8; 2018: 0.4; 2019: 0.9; 2020: -0.3; 2021: 1.0; 2022: 1.1 - Headline CPI (period average): 2017: 0.7; 2018: 1.1; 2019: 0.7; 2020: -0.8; 2021: 1.3; 2022: 1.0 - Core CPI (end of period): 2017: 0.6; 2018: 0.7; 2019: 0.5; 2020: 0.2; 2021: 0.7; 2022: 1.0 - Core CPI (period average): 2017: 0.6; 2018: 0.7; 2019: 0.5; 2020: 0.3; 2021: 0.5; 2022: 0.9 - Gross domestic investment (percent of GDP): 2017: 22.9; 2018: 25.2; 2019: 23.7; 2020: 23.9; 2021: 24.4; 2022: 23.8 - Gross national saving (percent of GDP): 2017: 32.6; 2018: 30.8; 2019: 30.8; 2020: 27.1; 2021: 24.9; 2022: 26.5 - Foreign saving: 2017: -9.6; 2018: -5.6; 2019: -7.0; 2020: -3.2; 2021: -0.5; 2022: -2.6 - General government balance (percent of GDP, fiscal year basis) 2017: -0.4; 2018: 0.1; 2019: -0.8; 2020: -4.7; 2021: -4.9; 2022: -1.5 - Public sector debt (end of period, percent of GDP) 2017: 41.8; 2018: 42.0; 2019: 41.0; 2020: 49.6; 2021: 55.9; 2022: 54.7 - Broad money growth (end of period, y/y percent change): 2017: 5.0; 2018: 4.7; 2019: 3.6; 2020: 10.1; 2021: 1.2; 2022: 3.2 - Credit to the private sector by depository corporations (end of period, y/y percent change): 2017: 4.6; 2018: 5.8; 2019: 2.4; 2020: 4.5; 2021: 3.5; 2022: 6.1 - Current account balance (billions of U.S. dollars): 2017: 28.4; 2018: 38.2; 2019: 16.3; 2020: 2.4; 2021: 15.3 - Current account (percent of GDP): 2017: 9.6; 2018: 5.6; 2019: 7.0; 2020: 3.2; 2021: 0.5; 2022: 2.6 - Exports, f.o.b. (billions of U.S. dollars): 2017: 233.7; 2018: 251.1; 2019: 242.7; 2020: 226.7; 2021: 250.2; 2022: 261.9 - Imports, f.o.b. (billions of U.S. dollars): 2017: 201.1; 2018: 228.7; 2019: 216.0; 2020: 186.9; 2021: 215.3; 2022: 226.2 - Gross official reserves (including net forward position, end of period, billions of U.S. dollars): 2017: 239.3; 2018: 239.4; 2019: 258.7; 2020: 287.4; 2021: 287.4; 2022: 287.4 - Gross official reserves (months of following year's imports): 2017: 12.6; 2018: 13.3; 2019: 16.6; 2020: 16.0; 2021: 15.2; 2022: 14.2 - External debt (percent of GDP): 2017: 34.2; 2018: 32.2; 2019: 31.6; 2020: 37.9; 2021: 36.2; 2022: 36.0 - External debt (billions of U.S. dollars): 2017: 155.9; 2018: 163.1; 2019: 171.9; 2020: 190.0; 2021: 195.1; 2022: 208.1 - Nominal GDP (billions of baht): 2017: 15,488.7; 2018: 16,368.7; 2019: 16,896.3; 2020: 15,703.0; 2021: 16,245.2; 2022: 17,244.0 ### Macroeconomic Framework, 2016–26 — projections and medium-term outlook - Real GDP growth (y/y percent change) projections: 2022: 5.6; 2023: 3.8; 2024: 3.5; 2025: 3.6; 2026: 3.6 - Consumption projections: 2022: 2.7; 2023: 3.3; 2024: 3.3; 2025: 3.7; 2026: 3.6 - Gross fixed investment projections: 2022: 3.3; 2023: 3.8; 2024: 3.4; 2025: 3.8; 2026: 4.0 - Headline CPI inflation (period average): 2022: 1.2; 2023: 1.6; 2024: 1.8; 2025: 1.9; 2026: 1.9 - Core CPI inflation (period average): 2022: 0.9; 2023: 1.9; 2024: 2.1; 2025: 1.7; 2026: 1.9 - Gross domestic investment (percent of GDP) projections: 2022: 23.8; 2023: 23.9; 2024: 24.1; 2025: 24.3; 2026: 24.6 - Gross national saving (percent of GDP) projections: 2022: 26.5; 2023: 27.1; 2024: 27.8; 2025: 27.9; 2026: 27.8 - Foreign saving (- = current account surplus) projections: 2022: -2.6; 2023: -3.2; 2024: -3.7; 2025: -3.5; 2026: -3.2 - General government balance (percent of GDP, fiscal year basis) projections: 2022: -1.5; 2023: -1.4; 2024: -1.2; 2025: -1.2; 2026: -1.1 - Public sector balance projections: 2022: -1.2; 2023: -1.1; 2024: -0.8; 2025: -0.6; 2026: -0.5 - Public sector debt (end of period, percent of GDP) projections: 2022: 54.7; 2023: 54.2; 2024: 53.8; 2025: 52.7; 2026: 51.4 - Exports, f.o.b. (billions of U.S. dollars) projections: 2022: 261.9; 2023: 276.2; 2024: 293.9; 2025: 312.7; 2026: 331.2 - Imports, f.o.b. (billions of U.S. dollars) projections: 2022: 226.2; 2023: 242.4; 2024: 260.6; 2025: 279.0; 2026: 299.4 - Trade balance (billions of U.S. dollars) projections: 2022: 35.7; 2023: 33.8; 2024: 33.3; 2025: 33.7; 2026: 31.8 - Current account balance (billions of U.S. dollars) projections: 2022: 15.3; 2023: 19.3; 2024: 23.3; 2025: 23.7; 2026: 22.8 - Current account (percent of GDP) projections: 2022: 2.6; 2023: 3.2; 2024: 3.7; 2025: 3.5; 2026: 3.2 - Financial account balance projections (percent of GDP): 2022: -15.3; 2023: -19.3; 2024: -23.3; 2025: -23.7; 2026: -22.8 - Gross official reserves (including net forward position, billions of U.S. dollars) projected to remain at 287.4 through 2026 - External debt (billions of U.S. dollars) projection path: 2022: 208.1; 2023: 222.9; 2024: 239.5; 2025: 257.8; 2026: 277.9 - External debt (percent of GDP) projection path: 2022: 36.0; 2023: 36.7; 2024: 37.6; 2025: 38.5; 2026: 39.5 ### Balance of Payments (2015–26) — components and dynamics - Current account balance (billions of U.S. dollars): 2015: 27.8; 2016: 43.4; 2017: 44.0; 2018: 28.4; 2019: 38.2; 2020: 16.3; 2021: 2.4; 2022: 15.3; 2023: 19.3; 2024: 23.3; 2025: 23.7; 2026: 22.8 - Trade balance (billions of U.S. dollars): 2015: 26.1; 2016: 35.8; 2017: 32.6; 2018: 22.4; 2019: 26.7; 2020: 39.8; 2021: 34.9; 2022: 35.7; 2023: 33.8; 2024: 33.3; 2025: 33.7; 2026: 31.8 - Services balance: 2015: 15.6; 2016: 20.3; 2017: 24.3; 2018: 22.5; 2019: 24.3; 2020: -15.2; 2021: -25.4; 2022: -10.8; 2023: -4.2; 2024: 2.3; 2025: 3.4; 2026: 4.7 - Tourism receipts (billions of U.S. dollars): 2015: 41.2; 2016: 44.8; 2017: 52.4; 2018: 56.4; 2019: 59.8; 2020: 12.4; 2021: 6.0; 2022: 26.2; 2023: 38.7; 2024: 48.5; 2025: 52.8; 2026: 57.0 - Primary income balance (billions of U.S. dollars): 2015: -20.6; 2016: -19.4; 2017: -20.5; 2018: -24.5; 2019: -20.0; 2020: -14.2; 2021: -17.4; 2022: -19.0; 2023: -19.9; 2024: -22.1; 2025: -23.6; 2026: -23.9 - Capital and financial account balance (billions of U.S. dollars): 2015: -16.8; 2016: -20.2; 2017: -10.6; 2018: -13.8; 2019: -15.7; 2020: -3.5; 2021: -2.4; 2022: -15.3; 2023: -19.3; 2024: -23.3; 2025: -23.7; 2026: -22.8 - Foreign direct investment (billions of U.S. dollars): 2015: 3.9; 2016: -9.9; 2017: -5.9; 2018: -4.2; 2019: -5.3; 2020: -22.8; 2021: -24.5; 2022: -25.5; 2023: -28.2; 2024: -31.3; 2025: -34.8; 2026: -38.8 - Portfolio investment (billions of U.S. dollars): 2015: -16.5; 2016: -2.8; 2017: -2.2; 2018: -5.9; 2019: -8.6; 2020: -11.6; 2021: -7.6; 2022: -9.1; 2023: -10.2; 2024: -10.0; 2025: -11.0; 2026: -12.0 - Errors and omissions (billions of U.S. dollars): 2015: -5.1; 2016: -10.4; 2017: -7.3; 2018: -7.3; 2019: -9.0; 2020: 5.6; 2021: 0.0; 2022: 0.0 - Changes in official reserves (increase -) (billions of U.S. dollars): 2015: -5.9; 2016: -12.8; 2017: -26.0; 2018: -7.3; 2019: -13.6; 2020: -18.4; 2021: 0.0; 2022: 0.0 - Gross official reserves (including net forward position, billions of U.S. dollars) selected years: 2015: 168; 2016: 198; 2017: 239; 2018: 239; 2019: 259; 2020: 287; 2021: 287; 2022: 287 - Export growth (y/y percent change): 2015: -5.9; 2016: 0.1; 2017: 9.5; 2018: 7.5; 2019: -3.3; 2020: -6.6; 2021: 10.4; 2022: 4.6 ### Medium-Term Fiscal Scenario, FY2016–FY2026 — fiscal structure and projections - General government revenue (percent of fiscal year GDP): FY2016: 21.9; FY2017: 21.1; FY2018: 21.4; FY2019: 21.0; FY2020: 20.6; FY2021: 21.1; FY2022: 21.6; FY2023: 21.8; FY2024: 21.9; FY2025: 21.9; FY2026: 21.9 - Tax revenue (percent of GDP): FY2016: 17.2; FY2017: 16.5; FY2018: 16.7; FY2019: 16.2; FY2020: 15.6; FY2021: 15.6; FY2022: 16.1; FY2023: 16.4; FY2024: 16.5; FY2025: 16.5; FY2026: 16.5 - Taxes on income (percent of GDP): FY2016: 6.2; FY2017: 5.9; FY2018: 6.0; FY2019: 5.9; FY2020: 5.7; FY2021: 5.7; FY2022: 5.7; FY2023: 5.7; FY2024: 5.7; FY2025: 5.7; FY2026: 5.7 - Taxes on goods and services (percent of GDP): FY2016: 9.8; FY2017: 9.7; FY2018: 9.7; FY2019: 9.4; FY2020: 9.1; FY2021: 9.1; FY2022: 9.1; FY2023: 9.1; FY2024: 9.1; FY2025: 9.1; FY2026: 9.1 - Total expenditure (percent of GDP): FY2016: 21.3; FY2017: 21.5; FY2018: 21.4; FY2019: 21.8; FY2020: 25.3; FY2021: 25.9; FY2022: 23.1; FY2023: 23.3; FY2024: 23.2; FY2025: 23.1; FY2026: 23.1 - Expense (percent of GDP): FY2016: 19.1; FY2017: 19.0; FY2018: 18.9; FY2019: 19.4; FY2020: 22.1; FY2021: 23.3; FY2022: 20.1; FY2023: 20.3; FY2024: 20.2; FY2025: 20.2; FY2026: 20.3 - Compensation of employees (percent of GDP): FY2016: 6.6; FY2017: 6.3; FY2018: 6.1; FY2019: 5.9; FY2020: 6.0; FY2021: 6.0; FY2022: 5.9; FY2023: 5.9; FY2024: 5.9; FY2025: 5.9; FY2026: 5.8 - Interest (percent of GDP): FY2016: 0.9; FY2017: 0.9; FY2018: 1.0; FY2019: 1.0; FY2020: 1.0; FY2021: 1.2; FY2022: 1.3; FY2023: 1.3; FY2024: 1.3; FY2025: 1.3; FY2026: 1.3 - Net acquisition of nonfinancial assets (percent of GDP): FY2016: 2.3; FY2017: 2.5; FY2018: 2.5; FY2019: 2.4; FY2020: 3.2; FY2021: 2.7; FY2022: 3.0; FY2023: 3.0; FY2024: 3.0; FY2025: 2.9; FY2026: 2.9 - Overall fiscal balance (general government, percent of GDP): FY2016: 0.6; FY2017: -0.4; FY2018: 0.1; FY2019: -0.8; FY2020: -4.7; FY2021: -4.9; FY2022: -1.5; FY2023: -1.4; FY2024: -1.2; FY2025: -1.2; FY2026: -1.1 - Public sector overall fiscal balance (percent of GDP): FY2016: 1.3; FY2017: 0.3; FY2018: 0.6; FY2019: -0.3; FY2020: -4.8; FY2021: -5.2; FY2022: -1.2; FY2023: -1.1; FY2024: -0.9; FY2025: -0.6; FY2026: -0.5 - Public sector debt (percent of GDP): FY2016: 41.7; FY2017: 41.8; FY2018: 42.0; FY2019: 41.0; FY2020: 49.6; FY2021: 55.9; FY2022: 54.7; FY2023: 54.2; FY2024: 53.8; FY2025: 52.7; FY2026: 51.4 ### Appendix I — 2020 External Sector Assessment: findings and policy recommendations - Overall assessment: The external position in 2020 was stronger than the level implied by medium-term fundamentals and desirable policies. - Key drivers in 2020: - Current account surplus declined from 7.0 in 2019 to 3.2 percent of GDP in 2020 due to COVID-19. - Services balance collapsed as international tourist arrivals fell to zero between April and September 2020. - Trade balance strengthened as imports contracted more than exports; a surge in net gold exports occurred as households used gold sales to meet liquidity needs. - Foreign asset and liability position: - NIIP strengthened in 2020 to 11 percent of GDP (from 0.3 percent in 2019). - Gross assets around 120 percent of GDP; reserve assets increased to 51 percent of GDP. - Gross liabilities 109 percent of GDP (direct about half; portfolio about a third). - External debt rose to 38 percent of GDP; short-term debt (remaining maturity basis) 15 percent of GDP. - Assessment: NIIP projected to remain a small creditor over the medium-term; risks to external debt sustainability and liquidity are limited. - 2020 (% GDP) summary: NIIP: 11; Gross Assets: 120; Res. Assets: 51; Gross Liab.: 109; Debt Liab.: 38 - Current account assessment: - EBA CA model estimates: cyclically-adjusted CA of 1.0 percent of GDP and CA norm of 1.1 percent of GDP for 2020. - CA gap: -0.1 percent of GDP, composed of an identified policy gap of 1.5 percent of GDP (mainly due to fiscal policy and FXI) and an unexplained residual of -1.6 percent of GDP. - Adjustors applied: tourism shock 3.7 percent of GDP; oil sector -0.6 percent of GDP; shift in private spending composition -0.3 percent of GDP; net exports of medical supplies -0.2 percent of GDP; surge in gold exports -0.3 percent of GDP. - Overall staff assessment: CA gap in the 0.8-3.8 percent of GDP range with a midpoint of 2.3 percent of GDP. - 2020 (% GDP) summary: CA: 3.2; Cycl. Adj. CA: 1.0; EBA Norm: 1.1; EBA Gap: −0.1; COVID-19 Adj.: 2.4; Other Adj.: 0.0; Staff Gap: 2.3 - Real exchange rate (REER): - Background: REER depreciated 6.9 percent by April 2020 relative to end-December 2019; ended the year about 2.6 percent lower relative to its 2019 average. - Assessment: Using elasticity 0.56 and staff CA gap, REER assessed to be undervalued in the 1.4-6.4 range, midpoint 3.9 percent. - EBA estimates: EBA index REER gap in 2020 estimated at 10.6 percent; EBA level REER gap estimated at –5.3 percent. - Capital and financial accounts: - 2020 capital and financial account balance strengthened to -0.7 percent of GDP from -2.9 percent in 2019, driven by other investment flows. - Nonresident holdings of Thai bonds and equities declined in March/April but recovered by year end. - Authorities accelerated plans to liberalize FX outflows, including easing restrictions on resident holdings of foreign currency securities and deposits. - Assessment and recommendation: Encourage prudent liberalization of the financial account; recommend phasing out the 2019 reduction in limits on nonresident baht accounts; pursue a comprehensive package of macroeconomic, financial, and structural policies complemented by continued efforts to liberalize capital outflows. - FX intervention and reserves: - Exchange rate regime classified as (de jure and de facto) floating. - International reserves (including net forward position) increased to 57.3 percent of GDP in 2020, over three times short-term debt and 12 months of imports, and over 200 percent of the IMF’s standard reserve adequacy metric. - Gross international reserves (including net forward position) increased by over US$28.7 billion in 2020. - Assessment and recommendation: Reserves are higher than IMF adequacy metrics; no need to build up reserves for precautionary purposes. The exchange rate should move flexibly as the key shock absorber, with intervention limited to avoiding disorderly market conditions. - Policy recommendation (overall): - Accelerated, mutually reinforcing macro policy stimulus, led by a fiscal expansion given available fiscal space, to revitalize domestic demand. - Deploy fiscal support toward targeted social transfers to mitigate pandemic effects on the most vulnerable, and infrastructure investment to support recovery and sectoral reorientation. - Allow the exchange rate to move flexibly with intervention limited to disorderly market conditions. - Continue reforms to social safety nets and steps to address widespread informality to reduce precautionary saving and support consumption. *Source: IMF staff estimates and projections, Thailand country chapter content provided in the source PDF.* ### Appendix II. Risk Assessment Matrix ### Appendix II. Risk Assessment Matrix ### Conjunctural risks: events, likelihood, impact, and policies - Unexpected shifts in the COVID-19 pandemic - Likelihood: M - Impact: H - Findings: - Longer-than-expected deployment of vaccine could undermine the recovery and further exacerbate social disparities. - If the disease proves harder to eradicate (e.g., due to new virus strains, short effectiveness of vaccines, or widespread unwillingness to take them), costly containment efforts will be required prompting persistent behavioral changes, displacing many workers, rendering a notable part of the physical capital obsolete, and many activities unviable with scarring effect on economic potential. - The pandemic imposes considerable risks to vulnerable groups and SMEs, particularly those in contact-intensive sectors. Labor-intensive firms in contact-intensive sectors are more likely to shutter, lay off, or reduce hours or wages for already low-income workers further exacerbating negative social outcomes. - Faster-than-expected containment of the pandemic due to the rapid production and distribution of vaccines will boost confidence and accelerate economic recovery. - Policies to minimize impact: - Continue more targeted support to vulnerable groups and viable firms. - Build-in incentives in policy support measures to facilitate reallocation of resources and encourage modification of firms’ business models. - Frontloading and scaling up public investments, combined with acceleration in structural reforms, could mitigate the scarring impact of the pandemic. - Optimal calibration of the timing of the authorities plans to taper liquidity/ policy support, based on both supply and demand indicators, would be important to supporting the recovery. - Additional measures to ramp up the effective distribution of vaccines to help attain “herd immunity” would be critical to securing the recovery. - Sharp rise in global risk premia, which exposes financial and fiscal vulnerabilities - Likelihood: M - Impact: M - Findings: - A reassessment of market fundamentals (e.g., in response to adverse COVID-19 developments) could trigger a widespread risk-off event, with risk asset prices falling sharply and volatility spiking, leading to significant losses in major non-bank financial institutions. - Higher risk premia could generate financing difficulties for leveraged firms and households, and a wave of bankruptcies could erode banks’ capital buffers. - Policies to minimize impact: - Allow exchange rate flexibility to be the first line of defense, with judicious intervention to address disorderly market conditions. - Continue targeted support to viable firms, while facilitating the exit of unviable ones to allow efficient reallocation of resources. - Strengthen the macroprudential framework and policies by addressing current leakages in the macroprudential toolkit by covering cooperatives and nonbanks and broadening the set of macroprudential tools used. - Widespread social discontent and political instability - Likelihood: H - Impact: H - Findings: - Social tensions could intensify as the pandemic gets more protracted and inadequate policy response cause socio-economic hardship (unemployment, poverty, and shortages and higher prices of essentials—often exacerbating pre-existing inequities and political polarization), or due to unequal access to vaccines. - Growing political polarization and instability weaken policymaking and confidence, dampening private investment and FDI inflows, weighing on broader economic recovery. Public investment execution would also slow down. - In extreme bound scenarios, capital outflows would put pressure on credit and asset markets. - 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 FX intervention to address disorderly market conditions. - Intensified geopolitical tensions and security risks - Likelihood: H - Impact: H - Findings: - (Geo)political tensions in selected countries/regions (e.g., Middle East) could cause economic/political disruption, disorderly migration, higher volatility in commodity prices (if supply is disrupted), and lower confidence. - Policies to minimize impact: - Structural reforms and infrastructure development would raise returns to private investment and strengthen domestic-demand-led growth. - Allow exchange rate flexibility to be the first line of defense. - Oversupply and volatility in the oil market - Likelihood: M - Impact: M - Findings: - Higher supply (due to, e.g., OPEC+ disagreements) and lower demand (including due to a slower global recovery from COVID) could lead to renewed weakness in energy prices. Uncertainty about production cuts, prospects for the shale gas industry, and the pace of demand recovery could lead to bouts of volatility. - Being a net oil importer, Thailand stands to gain with lower oil prices. - Policies to minimize impact: - Carefully monitor possible spillovers from oil prices to core inflation and adjust monetary policy stance to limit spillovers. - Structural reforms and infrastructure development would raise returns to private investment and strengthen domestic-demand-led growth. ### Structural risks: events, likelihood, impact, and policies - Accelerating de-globalization - Likelihood: M - Impact: H - Findings: - Geopolitical competition could lead to further fragmentation. Reshoring and less trade reduce potential growth. - Policies to minimize impact: - Structural reforms and infrastructure development would raise returns to private investment and strengthen domestic-demand-led growth. - Continue strong engagement in multilateral forums and deepen regional trade integration and seek new opportunities to enhance position in global value chains. - Cyber-attacks - Likelihood: M - Impact: M - Findings: - Cyber-attacks on critical infrastructure, institutions, and financial systems could trigger systemic financial instability or widespread disruptions in socio-economic activities and remote work arrangements. - Bank of Thailand has been a leading voice in the region on work on both fintech and digital economy, which also saw the setting up of a new Ministry of digital economy. - 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 related to climate change - Likelihood: M/L - Impact: M - Findings: - Realization of this risk could cause severe economic damage to smaller economies susceptible to disruptions and accelerate emigration from these economies (medium probability). - A sequence of severe events in large economies reduces global GDP and prompts a recalculation of risk and growth prospects. Disasters hitting key infrastructure or disrupting trade raise commodity price levels and volatility (low probability). - Thailand’s extreme weather—droughts and flooding—highlights the country’s vulnerability to climate change. - Policies to minimize impact: - Improve social safety net programs to better target most vulnerable populations. - Use efficient carbon pricing and scale up investments in climate resilient infrastructure and in research and development. - Incorporate climate risks in prudential policies and in stress and financial sector assessments. - Encourage a shift toward a more sustainable and higher value-added tourism mode, which may help reduce the health risks and foster a greener recovery. ### Risk Assessment Matrix metadata and interpretation - “L” = Low; “M” = Medium; “H” = High. - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline: - “low” is meant to indicate a probability below 10 percent, - “medium” a probability between 10 and 30 percent, - “high” a probability between 30 and 50 percent. - The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. ### Appendix III — Analysis of Broader Economic Scarring for Emerging Markets (summary) - Scope and motivation - Looking beyond the short-term impact of the COVID-19 crisis is important given the massive economic recession and potential structural changes, especially for emerging markets (EMs) that faced the crisis with slowing potential growth, heightened vulnerabilities, and limited policy space. - The annex attempts to quantify the potential scarring effect of the COVID-19 pandemic for EMs, analyze nonlinearities, and explore the role of policy responses to mitigate scarring. - Key preliminary findings - Five years after recessions potential output in EMs is estimated to be lower by more than 4 percent, which is about 2½ times larger than the estimated potential loss for AEs. - The loss in potential output for EMs is much more severe when recessions coincide with pandemics. - Structural reforms and public investment upscaling have potential to limit economic scarring. - Methodology and data - The local projection method (Jorda, 2005) is used to estimate scarring (impulse response of variables to events) and robustness is checked with an autoregressive Distributed Lag model. - Sample covers 1980-2019 and includes 35 AEs, 33 EMs, and 8 developing economies. - Data sources include Emergency Disasters Database, World Bank Global Economic Prospects, Economic Freedom of the World, WDI, OECD, FAD’s Global Debt and Fiscal Monitor. Multivariate filtering approach from Blagrave and others (2015) used to estimate potential output and NAIRU. - Quantitative results - Potential output: - Five years after recessions potential output is more than 3.5 percent lower for the entire sample compared with a no recession outcome. - For EMs the estimate suggests more than 4 percent loss five years after recessions. - When recessions coincide with pandemics, loss of potential output after five years is almost 10 percent for the entire sample. - For EMs in the combined recession-plus-pandemic case the loss reaches about 14 percent. - Labor productivity and investment: - Five years after recessions, labor productivity is 3.5 percent lower for the entire sample, with EMs experiencing a 5.3 percent loss. - In recessions accompanied with pandemics, estimated loss in labor productivity for the entire sample balloons to 13 percent, largely driven by EMs. - Impulse response estimates for the investment rate suggest about a 2 percent loss five years after recessions. - For EMs, loss in the investment rate is about 2.5 percent; for AEs it is around 1.4 percent. - In the case of recessions accompanied with pandemics, the estimated impact on investment rate is not statistically significant for the entire sample nor for EMs; it is statistically significant for AEs. - Unemployment: - The analysis did not identify a statistically significant increase in structural unemployment following recessions, including those accompanied with pandemics. - Heterogeneity and drivers of scarring - Countries with higher public debt accumulation five years prior to recessions tend to have larger economic scarring; this result is driven by EMs. - Household debt accumulation prior to recessions is associated with larger long-term losses in potential output; the role of household debt is particularly relevant for AEs (EM-specific estimate statistically insignificant). - Household debt accumulation prior to recessions results in larger long-term loss in investment rate and labor productivity in both EMs and AEs. - Corporate debt accumulation prior to recessions does not show a significant correlation with potential output scarring overall, but countries with large corporate debt buildup tend to experience larger long-term loss in investment rate, particularly EMs. - Policy implications (from analysis) - Timely deployment of policy measures, structural reforms, and public investment scaling can mitigate pandemic-induced scarring, especially in EMs which are more vulnerable due to weaker initial conditions and limited policy space. - Given constrained conventional monetary policy space in EMs (average policy rate for EMs dropped below 2 percent by end-2020; in several EMs, including Thailand, the policy rate is under one percent), non-conventional and structural measures are critical to limit scarring. *International Monetary Fund — Appendix II. Risk Assessment Matrix (from the Thailand report).* ### 11. Structural reforms could help reduce economic scarring of recessions substantially. ### 11. Structural reforms could help reduce economic scarring of recessions substantially. ### Impact of structural reforms on potential output scarring - Countries with more flexible labor and business regulations tend to have smaller potential output loss (Figure 5). - A one standard deviation improvement in business regulations could reduce potential output loss five years after a recession by about 3.5 percentage points. - A one standard deviation improvement in labor market regulations could mitigate 1.5 percentage points of potential output loss. - A one standard deviation improvement in the insolvency framework could reduce potential output loss by about 1.7 percentage points. - One standard deviation improvement in human capital could reduce economic scarring by one percentage points. - Countries with more educated labor force benefit from smaller losses in the investment rate and labor productivity five years after recessions; these results are largely driven by the AEs. - Larger shadow economy size is associated with deeper economic scarring. - Structural factors are relevant for mitigating the long-term negative implications of recessions on labor productivity. ### Role of fiscal policy and public investment - Countries that have increased public investments relative to the size of their economy in the year of recession tend to have smaller scarring impact on potential output (Figure 6). - One percent of GDP increase in public investments is associated with about 3.5 percentage points lower potential output loss five years after recessions. - Scaling up public investment could crowd in technology-embedded private investment, thus mitigate economic scarring. - A one standard deviation increase in R&D spending to GDP ratio could reduce potential output loss by about 0.8 percentage points (mostly relevant for EMs). - Analysis does not show statistically significant association of spending on active labor market policies (ALMPs) with the magnitude of potential output loss after recessions, but countries with higher spending on ALMPs tend to have smaller long-term loss in labor productivity. - Enhancing ALMPs could facilitate reallocation of resources by helping dislocated labor return to employment faster. ### Conclusions on COVID-19 and emerging markets (EMs) - COVID-19 crisis is expected to inflict sizable long-term scars on the economic potential of EMs. - EMs stand to suffer a significant economic loss from COVID-19 pandemic, likely to exceed the magnitude of the expected long-term loss in AEs by several fold. - The impact could be larger if countries face the pandemic with weak initial conditions and heightening vulnerabilities. ### Policy options and priorities - Near-term: EMs with available policy space could upscale public investments and pursue active labor market policies to provide demand boost and limit skills mismatch. - Strengthen insolvency frameworks to address debt overhang through measures that avoid formal bankruptcy or facilitate recovery after bankruptcy. - Medium-term: Structural reforms centered on reducing regulatory burden in the labor and product markets should be a key priority to reduce the size of the informal sector. - Judiciously calibrated R&D incentives could help boost countries’ innovative capacity in the medium-term. ### Thailand: fiscal context, macro impact, and fiscal response (selected figures) - Pre-pandemic public debt projected to average about 40–43 percent of GDP over the medium term (below the 60 percent ceiling in the Fiscal Responsibility Law). - Tourism accounts for a fifth of GDP. - Real GDP contracted by 6.1 percent in 2020. - Current account remained sizable—at about 3.2 percent of GDP. - Partial GDP growth rebound is expected in 2021 of around 2.6 percent. - Headline inflation was -0.8 percent on average for 2020; core inflation was 0.3 percent. - Public sector balance deteriorated to -4.8 percent of GDP in 2020 from -0.3 percent in 2019. - Debt to GDP ratio increased to 49.6 percent of GDP from 41 percent in 2019. - FY2021 development spending increases to about 20.5 percent of spending (20.1 percent in FY2020). - The cyclically adjusted deficit is projected to increase moderately by about 0.5 percent of GDP relative to the FY2020 and public debt would reach about 56 percent of GDP. *Prepared from the IMF chapter: "11. Structural reforms could help reduce economic scarring of recessions substantially."* ### 6. Pandemic uncertainty poses challenges for fiscal policy. Uncertainty on the course of the ### 6. Pandemic uncertainty poses challenges for fiscal policy ### Uncertainty and fiscal risks - Uncertainty on the course of the pandemic, the shape of the recovery, the extent of scarring and the required resource reallocation, the outlook for tourism and global financial conditions, and the contingent liabilities from implicit and explicit guarantees to SOEs heighten fiscal risks. - Contingent liabilities are closely monitored by the Public Debt Management Office (PDMO) and the Fiscal Policy Committee under the FRL. ### Fiscal space indicators (MAC DSA baseline) - Under the MAC DSA baseline (Annex VII), Thailand still has some fiscal space after the policy response to the pandemic in 2020. - Public debt and gross financing needs are below standard vulnerability benchmarks. - Public debt is projected to increase from 49.6 to 55.9 percent of GDP between 2020 and 2021, based on announced fiscal measures, just below the FRL ceiling of 60 percent. - The level of debt gradually declines over the medium term as growth recovers but does not revert to the pre-pandemic level. - Thailand has strong access to credit markets, with low financing cost, and is supported by ample external buffers. - A low share of foreign-currency-denominated public debt and a long average term to maturity (above 12 years) significantly mitigate the impact from exchange rate and interest rate shocks. ### Downside scenarios and sensitivity to shocks - A deterioration in real GDP growth by 1 standard deviation for 2 consecutive years combined with an increase of 200 basis points in interest rates, where the revenue to GDP ratio remains the same as in the baseline and the level of non-interest expenditures remains the same as in the baseline, would trigger a deterioration in debt indicators. - Under the real growth shock: - The level of debt breaches the authorities’ 60 percent ceiling in 2023 and remains above the ceiling in 2024-2025 before a gradual decline to 59.4 in 2026. - Under a combined shock scenario (real growth and interest rate shock): - Public debt would breach the 60 percent of GDP threshold in 2022, increase to 64 percent in 2023 and remain above the 60 percent ceiling throughout the projection period. ### Contingent liabilities shock - A one-time increase in non-interest expenditures equivalent to 10 percent of banking sector assets leads to a real GDP growth shock similar to the above scenarios. - The deterioration in the primary balance is worse as the liabilities are brought on government books, leading to higher interest rates. - Debt climbs to above 70 percent of GDP in this contingent liabilities scenario. ### Rebuilding fiscal buffers and revenue mobilization - Rebuilding fiscal buffers post pandemic will require additional effort in revenue generation. - Thailand currently collects only 46 percent of its maximum achievable tax collection (given the level of development and the structure of the economy) according to IMF Fiscal Affairs Department (FAD) estimates. - Staff advises the authorities to articulate a medium-term revenue mobilization plan in line with the Medium-Term Revenue Strategy (MTRS) suggested by FAD to: - Create space to finance priority spending. - Expand social safety net coverage. - Finance the rising costs of an aging population. - Facilitate transitioning to a low carbon economy. ### Aging and long-term spending pressures - Aging related spending is projected to increase steadily in the long run, posing further fiscal challenges. - Expenditure on health care is expected to increase from 2.9 percent of GDP in 2017 to 4 percent of GDP in 2035 and 4.9 percent of GDP in 2060. - A large proportion of the increase (1.1 percent of GDP by 2035 and 2 percent of GDP by 2060) is likely to need financing from the budget. - Public expenditure in pensions funded by the budget is also expected to increase significantly as the old-age dependency ratio increases. ### Scaling up public spending to aid the recovery (GIMF illustrative scenarios) - A pair of illustrative scenarios use the IMF’s Global Integrated Monetary and Fiscal model (GIMF) calibrated to the Thailand economy. - The illustrative fiscal expansion: a six-year program of infrastructure investment and transfers targeted to poorer households, using deficit financing. - Targeted transfers: increased by 0.5 percent of GDP in FY2021 to FY2022 and tapered off to 0.25 percent of GDP in FY2023. - Infrastructure spending: increased by 1 percent of GDP in FY2021, 2 percent of GDP in FY2022 and FY2023, and 1 percent of GDP in FY2024 and FY2025. - Post-program maintenance: permanently higher level of spending of 0.3 percent of GDP from FY2026 to maintain new infrastructure. - Rationale for infrastructure spending: - Raises level of productivity and productive capacity. - Provides positive externalities via public goods (transportation, water supply, sanitation) and facilities for health care and education. ### Policy coordination: fiscal and monetary interaction - Two scenarios illustrate varying degrees of policy coordination: - Scenario 1 (normal monetary policy): BOT raises interest rates in response to increases in aggregate demand and inflationary pressures to maintain inflation near the midpoint of its inflation target range of one to three percent. - Scenario 2 (accommodative monetary policy): BOT leaves interest rates unchanged during the six-year fiscal program, accommodating additional inflationary pressures. - Effects of accommodative monetary policy (BOT holding rates fixed): - Provides greater stimulus than fiscal actions alone. - Inflation peaks at 2.9 percent in FY2025 but remains within the BOT target range. - With unchanged nominal rates and higher inflation, real interest rates are lower, raising business investment, stimulating labor demand, increasing income and wealth, and allowing higher consumption. - Fiscal expansion alone raises real GDP growth by about 0.6 percentage points in the first year; combined with accommodative monetary policy, real GDP growth is 1.4 percentage points higher in FY2021 and remains above baseline until FY2026. ### Impact on debt, deficits, and external balances - Fiscal package impacts: - Without additional growth, the fiscal package would increase the debt-to-GDP ratio by 9.5 percent of GDP. - Because of extra growth from the package, the debt-to-GDP ratio peaks at only 8 percentage points higher. - With additional nominal growth from holding interest rates constant, the peak addition to debt is 4.4 percentage points of debt. - Under the accommodative scenario, the debt-to-GDP ratio would not breach the FRL 60 percent of GDP debt target. - Current account effects: - Short term: fiscal expansion can reduce the current account surplus. - The current account to GDP ratio is well below 2 percent until FY2024 (instead of around 3 percent of GDP), whether or not monetary policy is constant. - Long term: current account to GDP ratio is slightly lower (about 0.3 percent of GDP) because of the permanent increase in infrastructure investment along with the impact on nominal GDP. ### Policy recommendations and priorities - Use fiscal space wisely to: - Close the output gap. - Increase inflation toward target. - Lift potential growth in the medium and long term while securing fiscal sustainability. - Prioritize scaling up public investment when interest rates are near the effective lower bound (ELB) to: - Impact employment and activity. - Crowd in private investment. - Absorb excess private savings. - Prioritize new investments in: - Healthcare. - Digitalization and digital infrastructure (to support social-distancing). - Environmental protection and cleaner and more resilient public infrastructure. - Combine fiscal measures with structural reforms to: - Promote investment. - Address informality. - Undertake labor market reforms. - Revenue-raising reforms should become a macrostructural reform priority given pandemic setbacks and demographic headwinds. *Source: Thailand — IMF staff report chapter on fiscal challenges and policy scenarios.* ### 4. Debt dynamics deteriorate under some stress tests. Debt is expected to rise above the ### 4. Debt dynamics deteriorate under some stress tests. Debt is expected to rise above the ### Debt dynamics and stress-test summary - Debt is expected to rise above the authorities’ ceiling under the real growth shock and the combined real interest rate and real growth shock scenarios against the backdrop of the pandemic. - The MAC DSA threshold however is not breached (as shown in the heatmap). - Debt rises to about 60 and 64 percent of GDP in 2023 under the real GDP shock and under the combined shock respectively—as would be in a case where the shock is protracted, interest rates are 200 basis points higher than the baseline and recovery takes longer than anticipated under the baseline. - The level of debt remains high over the medium term and breaches the authorities’ 60 percent of GDP ceiling all through the projection period under the combined shock scenario. - Conclusion: over the medium term, a comprehensive consolidation strategy is called for to help rebuild fiscal buffers and preserve fiscal sustainability. ### Baseline projections and alternative scenarios (high-level) - Baseline and alternative scenario variables noted: Real GDP growth, Inflation (GDP deflator), Primary Balance, Effective interest rate. - Key scenario outcomes highlighted in figures and tables include baseline, historical, and constant primary balance scenarios, and stress tests (Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock). ### Stress-test outcomes (macro-fiscal) - Under the Real GDP Growth Shock: - Real GDP growth path shows a downward deviation (example entries: 0.2, 2.9, 1.1, 3.3, 3.7, 3.6 across 2021–2026 for the shock vs baseline). - Inflation path includes negative entries in some years in the shock scenario (examples: -0.3, -0.2). - Primary balance deteriorates relative to baseline (example: primary balance moves from -4.1 to -0.7 and -1.4 in early shock years). - Under the Combined Shock: - Effective interest rate increases (example entries: 2.2, 2.0, 2.1, 2.3, 2.4, 2.4 across 2021–2026 in combined scenario). - Debt breaches the authorities’ 60 percent of GDP ceiling throughout the projection period. ### Policy recommendations and implications - Implement a comprehensive consolidation strategy over the medium term to rebuild fiscal buffers and preserve fiscal sustainability. - Consider incorporating green investment programs in fiscal stimulus packages to mitigate COVID-19 impacts while addressing climate vulnerabilities (see climate appendix). - Build policy space to respond to more frequent weather shocks and upgrade policies and infrastructure to enhance economic resilience and enable a shift to low carbon emissions. ### Appendix highlights — Climate change issues for Thailand - Vulnerability and impacts: - Thailand is highly vulnerable to climate change and is ranked as the eighth-most impacted by extreme weather events in the last two decades. - Climate related disasters affect medium-term growth potential and have large social costs (lost lives, food insecurity, deterioration in human capital). - The relatively poor north and north-eastern parts of Thailand are highly vulnerable; climate change can exacerbate inequality. - A one degree of warming would destroy the rice crops central to the economy. - Forecasts predict sea level rise will submerge the capital city, displace more than 12 million people in the Bangkok area by 2050 and devastate coastal tourism. - Emissions and trends: - Total greenhouse gas (GHG) emissions (excluding LULUCF) increased by an annual average of 2.3 percent between 2000 and 2016. - The energy sector increased emissions by 53.7 percent between 2000 and 2016. - Energy sector share of total emissions: 67.2 percent in 2000; 71.7 percent in 2016; projected to contribute to 76 percent of total greenhouse gas emissions in 2050 without proactive climate policies. - Policy framework and commitments: - Thailand submitted an NDC committing to reduce GHG emissions by 20 percent by 2030, and on a conditional basis (with technical and financial assistance) expects it could reduce emissions by 25 percent by that time frame. - The Office of Natural Resource and Environmental Policy and Planning designed a Climate Change Master Plan for 2015–50 with interim targets (example: reduction of GHG emissions from the energy and transport sectors by 7−20 percent by end-2020 compared to 2005 levels). - Energy 4.0 policy (implemented 2016) incorporates renewable energy, fuel-source changes in transportation, and increased energy-efficiency for power generation; no data available to assess Energy 4.0 policy’s impact on greenhouse gas emissions. - Thailand is preparing its first-ever Climate Change bill; if enacted, factories and businesses would be obliged to document their greenhouse gas emissions. - Opportunity and recommendations: - The COVID-19 crisis offers an opportunity to begin the transition toward a climate-resilient and low-carbon economy. - Given the availability of some fiscal space, there is scope for adaptation policies in medium-term fiscal plans and the government’s forthcoming climate change bill. - Policies to consider: green investment programs in fiscal stimulus, adaptation priority, gradual and judicious enforcement of environmental policy and carbon pricing to encourage reduced energy use and cleaner alternatives. *Source: IMF staff.* ### 10. As part of the COVID-19 recovery programs, public policies should be more closely ### 1thaea2021001 - 10. As part of the COVID-19 recovery programs, public policies should be more closely ### Green recovery and policy alignment - Thailand enacted a sizeable stimulus package with spending estimated at 10 percent of GDP to protect lives, mitigate the shock, and protect vulnerable populations and businesses. - Recovery programs should be aligned with climate objectives to avoid locking-in a carbon-intensive economy. - Policy recommendations: - Avoid weakening climate policies: do not combine support to firms and industries with weakening environmental rule enforcement, dismantling carbon standards, or relaxation of fossil fuel related taxes. - Make bailouts and direct support to firms contingent on environmental improvements (example: link airline bailouts to emission reductions; precedent cited: U.S. car industry bailout used to enforce fuel efficiency standards). - Promote investments in renewable energy and green projects: fund clean energy innovation, research, and development; provide incentives (tax breaks or tax credits) for investments in green industries; support training workers in clean energy and green industries. - Employment and sectoral opportunities: - Renewable energy, notably solar photovoltaic (PV) systems, employ more people per unit of investment and energy than fossil-fuel generation (IEA 2020). - IEA announced that solar is now the cheapest form of power globally. - Thailand plans to turn the country into an electric vehicle production hub over the medium term and projects about 1.2 million electric vehicles on the roads by 2030. - Nature-related jobs—ecosystem restoration—are also an important potential source of employment. - Transition requires investing in new skills for both emerging and evolving jobs. ### Pricing carbon and mitigation targets - Global projection without substantial mitigation: global temperatures projected to rise by 4°C above pre-industrial levels by 2100. - Global carbon price context: - Average global carbon price is US$2 per ton of CO2. - The US$75 needed on average (by 2030) to limit global warming to 2°C. - Thailand and carbon pricing: - A carbon pricing policy should be considered as part of the post COVID-19 recovery to encourage cleaner alternatives; fossil fuels still dominate the energy mix and the price of carbon is low. - The government is open to considering a carbon pricing scheme, a vehicle CO2 emissions tax scheme, and tax incentives to promote investment in renewable energy. - Periods of low energy prices and long-term revenue needs could open a window to phase in carbon taxes—or instruments that resemble taxes. - Thailand’s voluntary market and institutional steps: - Thailand Greenhouse Gas management Organization (TGO) established to implement and manage GHG emissions projects. - TGO launched the Thailand Voluntary Emission Reduction program and the Million Tons Thailand Carbon Offsetting Program for public and private organizations. - In 2015, TGO launched the Thailand Voluntary Emission Trading Scheme as a pilot. - The Climate Change Act is expected to facilitate development of economic instruments, with a cabinet decision expected in 2022. - IMF modeling and carbon tax estimates: - Meeting Thailand’s Paris pledge implies reducing CO2 emissions by 20 percent below baseline levels in 2030. - Model suggests a US$50 carbon tax to achieve the unconditional NDC and US$90 to achieve the conditional NDC. - The carbon tax would also raise 2 percent of GDP in revenues by 2030. - Excludes GHGs from land use, land use change, and forestry (LULUCF) in projections. - Design considerations: - Carbon pricing should comprehensively cover emissions and ramp up progressively and predictably over time in line with mitigation commitments under the Paris Agreement. - Revenues should be used equitably and productively (for example, to lower taxes on labor and capital). - High carbon prices consistent with the 2030 pledge could face political economy challenges and require a well-coordinated strategy with reinforced fiscal instruments at sectoral level (e.g., electric vehicles, carbon-free power generation). - Distributional impacts and compensation: - Under the IMF model, the carbon tax would increase electricity, oil, and natural gas prices and significantly raise coal prices. - Under the tax, coal prices would increase significantly in 2030 relative to baseline, retail electricity would increase by about 50 percent, gasoline by about 58 percent and kerosene by 60 percent. - Holding prices below levels needed to cover supply and environmental costs is inefficient for helping poor people; most benefits of energy price suppression accrue to higher-income people (typically more than 90 percent). - More effective help for the poor are targeted measures such as adjustments to the tax and transfer/benefit system, which may require only a small fraction of carbon pricing revenues. - Focus should be on a whole policy package; households, workers, and firms more vulnerable to higher energy prices can be identified and compensated adequately through the transfer system. ### Greening the financial system and climate-related financial risk - Sustainable financing from the financial sector is needed; government financing alone will not be sufficient for the transition to a low-carbon future. - Green bond market offers an avenue to tap into the US$100 trillion pool of long-term private capital managed by global institutional fixed-income investors with long duration. - Financial system should better understand and manage climate-related financial risks arising from: - Damage to property, infrastructure, and land (physical risks). - Changes in climate policy, technology, consumer and market sentiment during transition to a lower-carbon economy (transition risks). - Manifestations of climate risk: - Increased default risk in loan portfolios or lower values of assets (e.g., property values affected by rising sea levels and extreme weather events). - Tighter financial conditions if banks reduce lending, especially when climate shocks affect many institutions simultaneously. - Exposure to firms with business models not aligned with low-carbon economics could lead to declining earnings and higher funding costs for fossil fuel companies. - Prudential policy recommendations: - Require financial institutions to incorporate climate-related risk scenarios into their stress tests. - Assess climate risk over long horizons using new methodological approaches so prudential frameworks reflect actual risks. - Example: United Kingdom prudential regulators have incorporated climate change scenarios into stress tests of insurance firms covering both physical and transition risks. ### Mainstreaming climate change into the macro-fiscal framework - Institutional capacity should be strengthened to integrate climate plans into the government’s budgeting process and development plans. - Climate change can disrupt business models, decelerate economic growth, hinder public service delivery, and create new pockets of poverty—requiring preparedness and financing arrangements for adaptation. - Mobilize the private sector and other stakeholders to employ adaptation and mitigation approaches and harness cost-efficient production technologies. ### Appendix: Options for Unconventional Monetary Policy (UMP) for Asian EMs (selected points) - Context: - Thailand’s policy interest rate is at a historic low and approaching an effective lower bound (ELB). - Many EMs have narrower policy space and limited experience with UMP; careful design and exit strategies are needed. - UMP options and considerations: - Negative interest rate policy: - Benefits: reduces borrowing costs, discourages banks from holding deposits at the central bank, encourages lending. - Risks: penalizes bank profitability, disincentivizes savers, encourages cash-holding and search-for-yield behavior, financial stability risks, potential disruptive capital outflows. - Asset purchases: - Aim: lower yields across the economy by compressing risk and term premia via portfolio rebalancing, expectations, and asset prices. - Quantitative easing (QE): large scale asset purchases; effectiveness limited in shallow markets with limited government bond supply. - Yield curve control (YCC): could credibly guide market expectations in shallow markets; theoretical risk of committing to unlimited purchases, but required purchases may be limited due to expectations channel. - Preferably carried out via secondary debt markets; avoid monetization of government debt in primary markets due to risks of fiscal dominance. - Forward guidance: - Can signal that rates will stay low for a long time and buttress asset purchase impacts. - Time-dependent guidance (e.g., no movement for 24 months) or state-dependent guidance (e.g., unemployment or output thresholds) are options. - State-dependent forward guidance may be easier to implement; time-dependent guidance could include a state-dependent escape clause to handle sudden capital flow shocks. - EM-specific constraints: - EMs often have less developed and liquid financial markets, fewer safe assets, and shorter track records of inflation targeting, independence, and governance. - Effective lower bound (ELB) for many Asian EMs is non-zero because very low rates can disrupt funding markets and bank profitability (example: Thailand banks pay fees to the Financial Institutions Development Fund (FIDF); current contribution is 23 basis points on banks’ deposit holdings, lowered from 46 basis points prior to February 8, 2020). *1thaea2021001 — Thailand chapter (IMF PDF content provided).* ### 3. There are several options Asian EMs can consider depending on country ### 3. There are several options Asian EMs can consider depending on country ### Unconventional monetary policy (UMP) options and guidance - Consideration of yield curve control (YCC), especially the softer approach aiming to prevent yield curve steepening, with adequate preparations. - Rationale: managing volatility at the long end of the yield curve can encourage long maturity debt issuance and head off pressure for direct off-market purchases that could compromise the credibility of the monetary policy framework. - India cited as an example of success with this approach during global financial turbulence in early- to mid-2020. - Essential preconditions for successful use of UMP instruments: - An exit strategy and clear communication. - Strong forward guidance given the highly uncertain nature and duration of the pandemic. - UMP merits consideration even if, relative to advanced economies, the benefits could be smaller; coordination with fiscal support and sound macroprudential policies is important. - Potential strategy: use a variety of UMP instruments, as each may have a relatively small marginal effect, but a coordinated mix could produce a large cumulative reinforcing impact. ### Thailand: preferred UMP instruments and market rationale - Asset purchases and the softer approach to YCC, along with forward guidance, may be the best course of action for Thailand. - QE and YCC share the same objective: reducing or preventing increases in the cost of borrowing through purchasing high-quality assets. - Experience suggests YCC sends stronger price signals with fewer government bond purchases—important in a smaller market like Thailand. - QE may have less positive effect on inflation expectations in Thailand because market participants may find the link between quantities purchased and aggregate demand less clear than the link between yields and aggregate demand. - Market size considerations: - Thai market is more limited than advanced economies but is the largest of the ASEAN countries. - High share of domestic investors: at least 70 percent in the various segments. - Implementation challenges for QE in a smaller market: - Difficulty for the BOT to hold to a preannounced schedule of asset purchases; deviations could be interpreted as a change in monetary policy. - A possible BOT commitment: at a minimum, commit to prevent any steepening of the yield curve if downside risks materialize while the government issues new debt to cover fiscal stimulus measures. - Expected quantitative impact: - A flatter yield curve could lower yields by 30 to 100 basis points for maturities over 5 years. - Focusing on longer maturities can better signal to corporate debt markets, which already issue a lot of debt at those maturities. - In 2019Q4, 43 percent of bond issuance by larger corporations (about 90 billion baht of the outstanding stock of 3,800 billion) had a maturity of 5 years or longer and have spreads of around 100 to 300 bps relative to government bonds. - Market suitability: - Thai market may not be large enough to sustain an effective QE program, but the BOT might be able to use YCC given the market is medium-sized. ### Risks, reversibility, and limits of stimulus - Concern: too much stimulus in an untested market could lead to rapidly increasing inflation beyond controlled overshooting that lowers real interest rates and increases stimulus. - Historical evidence: little overshooting of inflation from these programs (Dell’Ariccia, Rabanal, and Sandri, 2018). - Advantage for Thailand: the BOT could more rapidly unwind a program than larger central banks as international spillovers are much less likely (i.e., a lesser “Taper Tantrum” risk). - Overall impact of an asset purchase program may be limited due to corporate sector reliance on bank lending. - By end-2020, outstanding bank loans were US$460 billion versus US$120 billion of corporate bonds. - Nevertheless, existence of an asset purchase program could influence whether firms borrow from banks or issue fixed income. ### Corporate sector scarring from COVID-19: diagnosis and policy priorities - COVID-19 effects concentrated in contact-intensive sectors (food and accommodation, transportation, retail), affecting many MSMEs. - MSME statistics (2019, OSMEP): - 3.2 million firms, or 99 percent of the total. - 12.1 million jobs (about 30 percent of total employment). - 35.3 percent of GDP. - 13 percent of exports. - Two-thirds of MSMEs are in the trade and services sectors. - Pre-pandemic corporate position: - Corporate debt to GDP around 51.4 percent of GDP. - Increase in prevalence of zombie firms since the Global Financial Crisis; these firms tend to have lower productivity. - Corporate non-performing loans (NPLs) had been low at about 3 percent, though higher among MSMEs at 8 percent. - Bank lending predominates firm financing; larger investment-grade corporates increasingly used the bond market. - Policy measures in 2020Q2: - Measures included a 500-billion-baht soft loan scheme, debt payment moratoria, and loan guarantees by the Thai Credit Guarantee Corporation. - Soft loan eligibility initially for performing MSMEs holding credit lines below 500 million baht; criteria widened due to limited up-take to include firms listed on the Market for Alternative Investments. - Many schemes extended to end-June 2021. - Banking sector outcomes: - Bank loan growth remained relatively steady at 5.1 percent year-over-year by 2020Q4 (compared to Asian Financial Crisis -12.1 percent year-over-year and the GFC 0 percent year-over-year). - Gross NPLs increased marginally from 3 percent at December 2019 to 3.1 percent at December 2020. - Special mention loans increased from 2.8 percent of total loans in December 2019 to 6.7 percent in December 2020, and have now begun declining. - Comparators: peak NPL ratio of 40 percent during the Asian Financial Crisis and around 8 percent post-GFC. ### Strategies and principles to limit corporate scarring - Policy focus as recovery progresses: - Continue liquidity support where needed. - Help otherwise viable firms efficiently restructure—thereby flattening the insolvency curve. - Allow unviable firms to exit through efficient formal procedures to reallocate resources and raise aggregate productivity. - Key principles for eligibility and policy assignment: - Limit moral hazard by setting terms of compliance and a clear exit strategy. - Articulate clear eligibility requirements to limit adverse selection and preserve fiscal space. - Facilitate efficient reallocation of resources in line with moving up the value chain and raising aggregate productivity. - Targeting versus broad support: - Targeted support preferred to broad support to minimize fiscal costs, preserve fiscal space, and limit governance challenges. - Matching support type to firm problems: - Firms not viable pre-COVID-19: encourage exit through liquidation. - Solvent firms with pandemic-related liquidity difficulties: provide liquidity assistance (soft loans, expenditure deferrals, debt moratoria). - Firms rendered insolvent by the pandemic but expected to recover: assist through loans or equity injections. - Firms that cannot be supported: pursue efficient restructuring or liquidation; simplify and incentivize informal out-of-court resolution frameworks. - MSME and informality considerations: - High informality and limited recordkeeping complicate assessment of financial health and increase misuse risk. - Eligibility could consider firms generating high social value via local employment externalities. - For firms with limited information, size of support could be gradually extended based on objective performance markers. - Maintain institutional independence and clear assignment of tasks among BOT, Ministry of Finance, Ministry of Industry, SOEs, SFIs, and banks to avoid mandate compromise. ### Government equity and public–private co-investment - Government equity injections, particularly with private participation, can preserve firm health without exacerbating leverage. - Design features: - Government equity could be junior to other investment, allowing owners to preserve ownership while sharing upside in future profits. - Public-private co-investment schemes may be preferred in Thailand to preserve fiscal space, limit fiscal risk, and ease administrative burden while leveraging private sector assessment and oversight. - Implementation risks remain significant given the large degree of informality. *Source: IMF staff, 1thaea2021001.* ### 12. The institutional and legal framework needs to be upgraded without delay in view of ### 12. The institutional and legal framework needs to be upgraded without delay in view of ### Institutional and legal framework: rationale for upgrade - Thailand has a well-established corporate resolution framework relative to regional peers, particularly for both ex ante and ex post liquidation measures. - The COVID-19 crisis is likely to bring new acute challenges, such as a potential wave of restructurings that could overwhelm courts, and the large share of distressed MSMEs for whom formal proceedings could be burdensome. - Half of new infections are related to the highly transmissible B.1.1.7 COVID-19 new variant, reinforcing uncertainties about the path of the pandemic. ### Priority reform areas and operational recommendations - Priority areas for reform include both upgrading the resolution system to bring in line with current best practice as well as allow for more streamlined processes that encourage restructuring instead of liquidation. - Develop simplified out-of-court procedures to expedite efficient restructuring and resolution for smaller, more informal firms: - Procedures can provide a simple mapping of firms’ underlying problems with solutions for quicker resolution, given the number of creditors and value of claims for such firms are likely to be small. - Judicial resources can then be prioritized for hybrid solutions (that have limited judicial involvement) and conventional bankruptcy proceedings. - Continuation of external support can be made conditional on the successful adoption of measures to adjust to the new operating environment; some measures could also be facilitated by public-private partnerships instead of solely relying on government funding. ### Exit strategy and monitoring - Exit from emergency measures should be data dependent to avoid a premature withdrawal of stimulus or discourage moral hazard, both of which would lower firm productivity. - The decision to taper support should be based on evolving macroeconomic conditions and the performance of firms relative to preset reporting and compliance standards. - Monitoring could include excessive spreads of banks’ SME lending versus other corporate lending, transparently recorded both at the firm level and to monitor fiscal risks to ensure overall effectiveness of funds. ### Financial sector preparedness and oversight - Banks and other financial institutions should be prepared for a downside risk scenario: - Supervisors should encourage banks and other financial institutions to prudently provision in case of a downside scenario that further deteriorates asset quality. - Improve timely information gathering to better assess credit risk to MSMEs. - As the recovery takes hold, banks should proceed to rebuild capital and liquidity buffers, while ensuring capacity to extend credit. - Efforts should be made to monitor other financial institutions such as savings cooperatives, which are currently outside of the BOT regulatory perimeter. ### Facilitating resource reallocation and labor market adjustment - Support measures should be designed to both reduce the costs of resource allocation and incentivize firms to adjust productively to the post-COVID-19 new normal. - Possible measures include: - Strengthening income assistance to workers now unemployed because of bankrupt firms until they find new employment. - Increased training and upskilling. - Adoption of digital infrastructure (including in payments and service delivery). - Providing support to comply with costly health regulations related to the pandemic (social distancing or providing certain medical supplies). ### Macroeconomic and pandemic-related key statistics and targets (as supplied) - REER depreciated by 2.6 percent during 2020. - NEER depreciated by 0.47 percent during 2020. - New daily infections peaked at about 2,800 cases on April 24, 2021. - New daily infections moderated to just about 2,000 cases per day, on average, in early May 2021. - Government’s updated vaccination goal: inoculate about 50 million people (70 percent of the population) by end-2021. - Actual vaccination administered so far: only about 1.8 million doses administered. - Three vaccine brands currently registered for emergency use in Thailand: AstraZeneca, Sinovac, and Johnson and Johnson. - Moderna, Covaxin, and Sputnik V brands are awaiting registration. *Source: STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (Thailand), April 26, 2021.* ### 2. Tightened containment measures in response to the COVID-19 third wave could ### 2. Tightened containment measures in response to the COVID-19 third wave could challenge the government’s reopening plans ### Containment measures and government actions - Effective April 26, the government implemented targeted measures by closing parks, gyms, cinemas, and day care centers in Bangkok. - Authorities introduced a fine of up to 20,000 baht ($635) for not wearing masks in public. - Partial travel restrictions were imposed and the mandatory quarantine period for all arrivals was increased to two weeks effective May 1, marking a setback to previous plans of gradually reopening borders to foreign visitors. ### Market reactions and monetary policy stance - Yields on government bonds were largely unchanged since the surge in daily new infections. - Equity prices were volatile but did not record noticeable losses through early May. - The Thai baht initially depreciated by about ½ percent, and subsequently strengthened through early May, largely offsetting its initial losses. - On May 5, the Bank of Thailand’s Monetary Policy Committee (MPC) voted unanimously to maintain the policy rate at 0.5 percent, citing the need to preserve the limited policy space and to act at the appropriate and most effective timing. ### Recent economic developments and outlook - Foreign tourism accounts for 11-12 percent of GDP; tourism-related businesses account for 20 percent of employment. - After the second wave was brought under control, the economy gradually improved in Q1 2021, but the third wave in April 2021 disrupted domestic spending and delayed tourism recovery. - GDP growth projection for 2021 was marked down primarily to 2.0 percent, depending upon the pace of vaccination rollout, and is expected to recover in 2022. - Key downside risks include: - (i) the distribution and efficacy of COVID-19 vaccination; - (ii) uneven recovery across economic sectors resulting in more vulnerable labor markets affecting household income and private consumption; - (iii) more fragile financial positions, particularly of SMEs and tourism businesses with lower debt servicing capability, and households with lower savings-to-income ratio. ### Fiscal policy and targeted support - The 1-Trillion-Baht loan decree introduced in May 2020 funded public health spending, subsidized living costs, and provided life-line liquidity and guarantees for businesses. - Increased spending is undertaken within a sound medium-term fiscal framework anchoring post-COVID fiscal discipline. - Targeted support to affected groups during the first wave included: - 15.3 million self-employed workers, - 7.6 million farmers, - 6.7 million vulnerable people (disabled, infants, and elderly), - over 13.9 million people who do not meet the requirements of the social security system, - 1.02 million state welfare cardholders. - The most recent package launched in early May 2021 will cover approximately 9.3 million workers in the social security system and approximately 33.5 million qualified applicants. - With robust digital payment infrastructure and high financial inclusion, subsidy programs disbursed via electronic wallets target vulnerable households and spending at local businesses and small vendors to maximize multiplier effects. ### Monetary policy and financial measures - Authorities view the current monetary policy stance as appropriately accommodative; priority is channeling abundant liquidity to affected businesses to prevent liquidity shortages from turning into insolvency. - Interest rate is viewed as a blunt instrument; limited policy space should be preserved for appropriate timing. - Focus is on financial and credit assistance measures such as credit guarantee schemes to mitigate credit risks. - Examples of measures: - Soft Loan Scheme providing partial credit guarantee to channel low-cost credits to SMEs. - Mutual Fund Liquidity Facility (MFLF) and Corporate Bond Stabilization Fund (BSF) provided liquidity backstops to mutual funds and investment-grade corporate bond issuers. - Authorities consider unconventional monetary policy (UMP) tools used by AEs (asset purchase programs or yield curve control) but caution limited effectiveness in Thailand’s largely bank-based financial system and potential unintended consequences. ### Foreign exchange policy and FX ecosystem - Authorities remain committed to exchange rate flexibility; FX operations are limited to curbing excessive exchange rate volatility and disorderly market conditions. - Over the past 7 months (October 2020-April 2021), the Thai baht fluctuated around 10% against the US dollar, and around 6% in nominal effective exchange rate (NEER). - In Q4, 2020 the Thai baht appreciated 5.8% against the US dollar and the NEER strengthened 2.6%; since the beginning of 2021 the Thai baht has reversed gains and depreciated around 4.1%, weakening by almost 3% in terms of NEER. - BOT notes idiosyncratic features making the baht prone to excessive movements: high sensitivity to gold trading flows, perceived status as an EM safe-haven, and dominance of non-resident activities. - BOT initiatives to deepen the FX ecosystem include: - Liberalizing capital accounts to promote private sector outflows, particularly portfolio investment. - Allowing greater flexibility for non-resident companies under the Non-Resident Qualified Company (NRQC) Scheme to manage baht liquidity without the daily outstanding limit imposed on Non-resident Baht Accounts (NRBA). - Authorities defend the longstanding adjustment of the daily limit of NBRA/NRBS from 300 million baht to 200 million baht in 2019 as necessary to curb short-term speculative inflows. ### External balance assessment (EBA) views - Authorities broadly share staff’s assessment of a narrowing current account gap as the CA surplus trends downward due to the pandemic’s impact on tourism revenue. - Authorities emphasize the persistent savings-investment imbalance as a core structural issue driving Thailand’s CA imbalance. - Authorities call for the Fund to revisit EBA model parameters and global imbalance assessments in the planned review next year to better reflect country-specific external positions and policy recommendations. ### Financial sector support and stability measures - Early pandemic measures (March–April 2020) alleviated liquidity stress and stabilized financial markets, including a government bond purchase program. - Financial Institutions Development Fund (FIDF) contributions were halved to pass cost savings to businesses and households via lower loan rates and assistance. - Financial assistance provided by financial institutions totaled 7.2 trillion baht and supported up to 13 million debtors at its peak in July 2020. - BOT encouraged banks to continue support for selected SME debtors through repayment holidays and interest relief until June 30, 2021. - April 2021 Financial Rehabilitation measures include a new special loan facility for SMEs and a debt restructuring program through Asset Warehousing with Buy-Back options. - Asset Warehousing allows business debtors to transfer collateral assets for debt settlement, retain first right to buy back assets later, and includes an option to rent assets for business operations. - Household-focused measures: - Moratorium on repayment of principal and interest for different loan types and lower minimum repayment rates on credit card and revolving loans (March 2020). - Interest rate ceilings on credit card and personal loans were reduced later in 2020. - Debt Consolidation Program (starting September 2020) allows borrowers with good housing loan servicing ability to convert unsecured loans to secured loans using houses as collateral. - Credit Card and Personal Loan’s Debt Mediation Fair during February-April 2021 to reduce court cases and lower operational costs. - To facilitate out-of-court debt resolution, three MOUs were signed between the BOT and the Ministry of Justice, the Court of Justice, and the Office of the Attorney General to enhance mediation practices. - Thai banking system remained resilient with high levels of capital, loan loss provisions and liquidity; authorities remain vigilant with stringent monitoring to detect early signs of balance sheet deterioration. ### Vaccine policy and rollout targets - Vaccine procurement includes contracts with manufacturers, one of which includes licensing and technological transfers for local production expected to start in June 2021. - Negotiations with other pharmaceutical companies are ongoing to ensure sufficient supply and control of virus variants. - Vaccine distribution plan prioritizes healthcare workers, population in high-risk areas, population aged over 60, and those with underlying diseases to be fully vaccinated by July 2021. - Next phase starting in August 2021 will cover the rest of the population. - Government expects to inoculate 100 million doses covering approximately 70 percent of the Thai population by the end of 2021. ### Medium- to long-term structural priorities - Authorities agree on advancing structural reforms for a sustainable and green recovery, aiming to facilitate efficient resource allocation, enhance potential growth, and support transformation towards a high-value and eco-friendly economy. - Four key priority areas in the development strategy: - (i) innovative- and knowledge-based economy; - (ii) a high-opportunity society for all people and geographical areas; - (iii) an eco-friendly economy and a sustainable development strategy to support risk mitigation and adaptation to climate change; - (iv) a highly competent workforce and an efficient public sector as key enablers for competitiveness. - The Bio-Circular-Green Economy (BCG) model focuses on food and agriculture; medical and wellness; bioenergy, biomaterial and biochemical; and tourism and the creative economy. - Climate strategy and carbon-neutrality objectives are integrated into the Medium-Term National Development Plan with efforts to increase clean and alternative energy share and incentivize lower-carbon transitions. - Tourism strategy aims to reshape the sector toward high-value markets, promote sustainability, and develop niche sectors such as health and wellness, culture and heritage, and natural environment tourism. - Social inclusion measures include promoting fair competition between large enterprises and SMEs, reducing regional disparities, improving urban-rural connections, enhancing social mobility, narrowing income and wealth inequalities using the welfare database, expanding digital access, enhancing educational opportunities beyond compulsory education, facilitating job creation and labor reallocation, and fine-tuning the social protection system to support changing nature of work. *Statement by Ms. Alisara Mahasandana, Executive Director for Thailand and Mr. Krist Dacharux, Advisor to Executive Director; May 17, 2021* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1thaea2021001.pdf_