## _cr15114

## Source details

**Canonical URL:** [_cr15114](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15114.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15114.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15114.pdf.json)

---

### Overview
- Political context: military coup in May 2014; new constitution to be approved in the year and elections in 2016.
- Structural drags identified: high trade openness; large negative supply shocks (2011 floods, Tohoku disaster); slow technological upgrading; interruption in labor flow from agriculture to more productive sectors; political instability; rapidly aging population.
- Resilience: ample international reserves; flexible exchange rate; prudent fiscal position and moderate public debt; banking system well capitalized, profitable and liquid.
- Policy challenge: reignite short- and medium-term growth while maintaining stability; comprehensive reform agenda across education, healthcare, social inequalities, infrastructure investment, regional integration, and governance.

### Macroeconomic developments
- Growth
  - Economy contracted sharply in 2014 Q1 after intensification of political unrest in November 2013.
  - Economy grew by 1.5 percent (yoy) in the second half of 2014.
  - Real GDP growth averaged 0.7 percent for the year 2014.
  - Import compression was -4.8 percent in 2014 and contributed to positive GDP growth despite flat final domestic demand and exports and an inventory drawdown.
- Inflation
  - Core inflation stable since April 2014 within a very narrow range.
  - Headline CPI inflation fell sharply and turned negative (-0.4 percent) in January 2015.
  - Energy prices declined precipitously starting in the second half of 2014; pass-through partly offset by energy price reform.
- External balance and reserves
  - Current account balance improved to 3.8 percent of GDP in 2014 from a deficit of -0.6 percent in 2013.
  - Net imports of oil around 800 thousand barrels per day.
  - International reserves declined by US$10 billion to US$157 billion over 2014 (primary reason: valuation changes).
  - Gross official reserves about 48 percent of GDP in 2014; reserves at 213 percent of the IMF’s composite metric.
- Exchange rates
  - baht/USD relatively stable; nominal and real effective exchange rates appreciated noticeably (REER assessed within ±5 percent of equilibrium; EBA model estimates REER slightly weak by 1.9 percent in 2014).

### Outlook and risks
- Baseline outlook for 2015
  - Staff forecast growth of 3.7 percent in 2015.
  - Year-average headline inflation projected at 0.1 percent in 2015; headline inflation expected to pick up by end 2015.
  - Near-term drivers: private consumption (pent-up demand and lower fuel prices); investment rebound as project approvals cleared; tourism recovery.
  - Constraints: low capacity utilization, weak demand prospects, political uncertainty, high household debt, tighter credit conditions, slower-than-anticipated public investment ramp-up.
- Risks
  - Risks tilted somewhat to the downside.
  - Domestic risks: policy slippages, weaker private demand, political uncertainty.
  - External risks: surge in global financial volatility; protracted slow growth in advanced and emerging economies.
  - Upside: stronger boost from lower oil prices to consumption, investment and exports.
- Authorities’ view: broadly agreed with staff; assessed risks roughly balanced given downside external risks offset by potential upside from faster government spending and low oil prices.

### Fiscal policy — boosting potential growth sustainably
- Recent developments and fiscal stance
  - Corporate income tax cuts: from 30 to 23 percent in January 2012 and to 20 percent in January 2013.
  - General government revenue decreased from 24.1 percent of GDP in FY2012/13 to 22.5 percent in FY2013/14.
  - General government expenditures remained at 24.3 percent of GDP in FY2013/14.
  - Debt-to-GDP ratio of the overall public sector reached 45.5 percent in FY2013/14; government ceiling 60 percent.
  - FY2014/15 budget: deficit largely unchanged at 2 percent of GDP; fiscal stimulus package of about 3 percent of GDP announced in October 2014.
  - Fiscal year starts October 1.
- Medium-term framework and recommendations
  - Fiscal policy should support recovery while signaling commitment to discipline via a medium-term fiscal framework.
  - Staff strongly supports preparing a new fiscal responsibility law (Public Finance Act).
  - New law should require a medium-term fiscal framework showing the expected path of public debt as percent of GDP; staff views current debt ceiling of 60 percent of GDP as appropriate.
  - Framework expected to include: fiscal policy statement with multi-year macro outlook, fiscal objectives and targets, fiscal risk statement, debt sustainability analysis, long-term fiscal projections.
- Infrastructure and SOE reforms
  - Staff welcomes multi-year public investment plan; moving projects to budget (government and SOEs) for transparency and accountability.
  - SOE debt amounts to 9 percent of GDP and 19 percent of total public debt.
  - Staff welcomes plans to strengthen SOE transparency, governance, strategic review and restructuring (examples: State Railway of Thailand and Bangkok Mass Transit Authority).
- Subsidy and tax recommendations
  - Energy pricing reform underway; staff recommends using lower international oil prices to fully reinstate excises, generating additional 0.5 percent of GDP starting in 2015, with means-tested protection for vulnerable groups.
  - Rice pledging scheme abolished; new scheme provides direct cash transfers to small-scale farmers only, expected savings of about ½ percent of GDP per year.
  - Government transfers to SOEs amount to about 0.8 percent of GDP in FY2014/15 budget; staff recommends improved disclosure of public service obligations of SOEs.
  - Authorities plan to introduce an inheritance tax and strengthen property taxes.
  - Staff recommends considering a gradual increase of VAT to 10 percent from 7 percent within the medium-term fiscal framework, to be implemented only when recovery is well entrenched and accompanied by mitigation programs for vulnerable groups.

### Monetary policy — supporting growth in a low‑inflation environment
- Policy stance and tools
  - Current monetary stance described as accommodative.
  - BOT cut policy rate by 25 basis points in November 2013 and March 2014; policy rate has been 2 percent since then.
  - Large negative output gap estimated at -2.8 percent in 2014; projected to close only gradually under current policies.
  - With negative headline inflation and moderate core inflation, further easing may be justified if fiscal stimulus is slow or private response disappoints.
  - Staff view: lower policy rate would not exacerbate financial stability risks given banks’ tightening of lending standards.
- Inflation targeting
  - Cabinet approved headline inflation (year-average) target at 2.5±1.5 percent for 2015; BOT to provide explanation if inflation falls outside band.
  - BOT issued letter when headline inflation turned negative in January attributing it to one-off oil price fall and concluding accommodative stance should lift inflation back within band by year-end.
  - Staff welcomes switch to headline inflation but notes communication challenges from focusing on year-average measure; suggests considering indicative targets beyond one-year horizon.
- Authorities’ stance
  - Authorities view monetary policy as sufficiently accommodative and expect fiscal measures to be main support; concerned about unintended financial stability consequences of lower rates.

### External sector and regional integration
- Current account and capital flows
  - CA surplus expected to rise in 2015 due to lower oil prices, then decline in medium term.
  - Exports slowed significantly since 2012; declining share of electronic products not fully offset by automotive exports.
  - Tourism growth, especially from China, a main driver of services; tourist arrivals showed strong recovery in December 2014.
  - Imports fell sharply in 2014 due to lower oil prices and demand contraction; gradual recovery expected with infrastructure and oil price recovery.
  - Capital and financial account registered a deficit of about US$15 billion in 2014.
  - Inward FDI declined from US$13 billion in 2013 to US$12 billion in 2014; outward FDI remained at US$7 billion in 2013 and 2014.
- External assessment and buffers
  - CA and REER assessed close to levels consistent with medium-term fundamentals (EBA and regression analysis).
  - REER within ±5 percent of equilibrium.
  - International reserves stand at 213 percent of the Fund’s reserve adequacy metric.
  - External debt projected to decline from 37.9 percent of GDP in 2014 to 33.6 percent of GDP in 2020.
- Regional integration
  - Intensifying integration with CLMV and southern China; SEZs and multilateral infrastructure projects improving mobility of goods and labor.
  - ASEAN Economic Community (AEC) launch in 2015 may provide opportunities for investment and trade.

### Financial stability framework and developments
- Financial landscape and interconnections
  - Financial sector assets near 359 percent of GDP.
  - Commercial banks assets account for 128 percent of GDP.
  - Total financial institution credit rose from 154 percent of GDP in 2007 to 197 percent in 2013; commercial bank credit-to-GDP rose from 99 percent in 2007 to 128 percent in 2013.
  - Non-commercial-banks (SFIs and NBFIs) provided almost 60 percent of household loans.
  - Credit cooperatives’ assets equal to 13 percent of total credit of commercial bank and SFIs in 2013.
- Credit, bank conditions and risks
  - Credit growth slowed considerably in last two years; corporate foreign currency borrowing declined since 2013.
  - Staff does not see need to tighten macroprudential policies given slowing credit growth, low share of real estate loans, and no apparent real estate boom.
  - Commercial banks well capitalized, liquid, and profitable; NPLs rising but remain low. Basle III regulations implemented.
  - Liquidity risks have risen: high loan-to-deposit ratio and higher reliance on wholesale funding.
- Household and corporate debt
  - Household debt-to-GDP rose from 55 percent in 2007 to 84 percent in 2014.
  - More than two thirds of household loans used for consumption (including car purchases), farming, and business; remainder for real estate and land.
  - Household financial assets about twice household debt.
  - Corporate sector: nonfinancial corporates reduced bank loans and used alternative financing.
- Regulation of non-commercial-banks
  - Staff welcomes plan to extend BOT supervisory and regulatory mandate to SFIs and encourages swift operational plan adoption.
  - Supervision of credit cooperatives (regulated by MOA) should be strengthened substantially; BOT technical assistance recommended.
- Recommendations for financial stability framework
  - Publish Financial Stability Reports and maintain Financial Stability Committee.
  - Strengthen data collection to close data gaps in non-commercial banks.
  - Review crisis management framework including liquidity provision and bank resolution protocols.
  - Vigilance urged regarding household debt and large conglomerates.
- Authorities’ views
  - Main risk: over-indebtedness among low-income households borrowing from SFIs.
  - High priority on strengthening financial stability work; Financial Stability Committee tasked with systemic risk monitoring.

### Structural challenges and policy priorities
- Labor, productivity and competitiveness
  - Nearly 40 percent of labor force employed in low-productivity agriculture; reallocation stalled.
  - Thailand’s global competitiveness ranking 31 of 144; weaker on innovation, technological readiness, education quality.
- Measures to lift productivity (staff recommendations)
  - Implement ambitious public infrastructure investment to alleviate bottlenecks.
  - Improve education: emphasis on practical subjects, cognitive skills, teacher standards; align vocational training with labor market.
  - Replace rice and rubber price guarantees with targeted transfers to encourage farm worker movement to higher-productivity sectors.
- Demographics and labor supply
  - Rapid population aging: working age population share to start declining; dependency ratio to rise.
  - Policies to offset demographic headwinds: raise participation rates, facilitate immigration, induce older persons to stay employed longer, reconsider mandatory retirement age for civil servants (current discussion).
- Authorities’ structural program
  - New 7-year BOI strategic plan incentivizing R&D and high value-added manufacturing.
  - Public infrastructure program; plans to improve SME finance access; SOE reform; changes to mandatory retirement age for some civil servants.

### DSA, realism of baseline and stress tests
- DSA baseline and assumptions
  - Real growth projected to average 4 percent in medium term.
  - Overall public sector deficit projected to increase from 1.9 to 2.6 percent of GDP between FY2015 and 2019 before coming down to 2.5 percent in FY2020.
  - Infrastructure program implementation rate assumed at 50 percent of planned disbursements.
  - Public debt coverage includes central government, nonfinancial SOEs, and SFIs (limited to debt with government guarantee); local authorities’ debt excluded.
- Baseline projections and key figures
  - Baseline real GDP growth (percent): 2015: 3.6; 2016: 3.5; 2017: 4.2; 2018: 4.0; 2019: 3.9; 2020: 3.8.
  - Baseline inflation (GDP deflator, percent): 2015: 0.2; 2016: 2.7; 2017: 1.9; 2018: 2.1; 2019: 1.9; 2020: 1.8.
  - Baseline primary balance (percent of GDP): 2015: -1.3; 2016: -1.6; 2017: -1.7; 2018: -1.9; 2019: -2.1; 2020: -2.0.
  - Effective interest rate (percent): 2015: 3.4; 2016: 3.4; 2017: 3.4; 2018: 3.5; 2019: 3.5; 2020: 3.5.
  - Public sector debt projected around 47 percent of GDP under baseline (Table 2: Total public sector debt 2015: 47.5; 2016: 47.2; 2017: 47.0; 2018: 47.0; 2019: 47.4; 2020: 47.8).
- Stress test scenarios and outcomes
  - Growth shock (real GDP growth reduced by 4 percent for two consecutive years from FY2015): debt-to-GDP reaches close to 54 percent in FY2020.
  - Financial sector contingent liability shocks:
    - One-time capital injection equivalent to 10 percent of commercial banks assets → government spending increase of 14 percent of GDP; debt-to-GDP reaches 66 percent by 2020.
    - Augmented shock including SFIs → government spending increase of 18 percent of GDP; debt-to-GDP reaches 71 percent by 2020.
  - Heat map indicators: external financing requirement 17 percent of GDP (exceeds 15 percent upper threshold); official foreign reserves exceed 40 percent of GDP.
- Assessment on realism
  - Median forecast error for real GDP growth during 2005−2013 is -2.2 percent of GDP.
  - Baseline uses current policies and 50 percent implementation rate for infrastructure projects.

### Energy price reform (background, fiscal impact, recent developments)
- Background
  - Long history of price controls; Oil Fund created after 1973 oil shock.
  - Diesel and LPG subsidized or exempted from excise taxes; biofuels benefited from lower taxes.
- Fiscal impact examples
  - Excise tax on diesel cut from B 5.84 baht/liter to B 0.0055 baht/liter in 2011.
  - Excise tax exemption on diesel estimated cost: 100 billion baht (about 1 percent of GDP) per year.
  - Oil Fund deficit reached 9 billion baht end-July 2014.
- Recent reforms and outcomes
  - Current government reduced subsidies and reinstated excises and Oil Fund levies on diesel and LPG; Oil Fund deficit eliminated by November 2014.
  - If fully implemented, revenue from excise tax and import duty on petroleum products expected to increase by close to 1 percent of GDP (from 0.6 of GDP in 2014).
- Price pass-through Sept. 1, 2014 to Jan. 30, 2015 (selected)
  - Gasoline average cost declined by B 11/liter (from B 23.65/liter to B 12.89/liter); retail price declined by B 11/liter (from B 44.86/liter to B 33.96/liter).
  - Diesel average cost declined by B 10/liter (from B 24.46/liter to B 14.22/liter); retail price declined by B 5/liter (from B 29.99/liter to B 24.16/liter) due to partial reinstatement of excises (from B 0.83/liter to B 3.58/liter) and Oil Fund levies (from B 1.25/liter to B 3.60/liter). Current excises (B 3.58/liter) remain below pre-2011 level (B 5.84/liter).
  - LPG prices unified January 2015 to B 24.16/liter; LPG retail prices now above average cost (B 14.48/liter). Low-income households and street food vendors kept at B 18.13/liter subject to means testing.
- Outcome: Oil Fund balance strengthened by 0.2 percent of GDP between July and December 2014 (from a deficit of B 7 billion to a surplus of B 15 billion).

### Key selected indicators (excerpted figures preserved exactly)
- Real GDP growth (percent): 2010 7.8, 2011 0.1, 2012 6.5, 2013 2.9, 2014 0.7, 2015 Proj. 3.7.
- Headline CPI (period average, percent): 2010 3.3, 2011 3.8, 2012 3.0, 2013 2.2, 2014 1.9, 2015 Proj. 0.1.
- Core CPI (period average, percent): 2010 0.9, 2011 2.4, 2012 2.1, 2013 1.0, 2014 1.6, 2015 Proj. 1.7.
- Current account balance (billions of U.S. dollars): 2014 14.2, 2015 Proj. 17.2.
- Current account (percent of GDP): 2014 3.8, 2015 Proj. 4.4.
- Public sector debt (percent of GDP): 2014 45.5, 2015 Proj. 47.5.
- Household debt-to-GDP: 2014 84 percent (rose from 55 percent in 2007).
- Financial sector size: assets near 359 percent of GDP; commercial banks assets 128 percent of GDP.
- Bank of Thailand policy rate: 2 percent (since March 2014 cuts of 25 basis points in Nov 2013 and Mar 2014).
- REER assessment phrase preserved: "3.2 percent weaker than its 2013 average level."

### Staff appraisal — policy priorities summary
- Near term: both monetary and fiscal stimuli needed to support recovery.
- Medium term: fiscal consolidation and structural reforms essential to accelerate growth while maintaining stability.
- Fiscal policy: welcome energy price reform, replacement of price supports with targeted transfers, endorse near-term fiscal stimulus via accelerated infrastructure investment followed by consolidation within a medium-term framework; raising VAT once recovery is entrenched critical for fiscal balance.
- Monetary policy: accommodative stance appropriate; further easing possible if fiscal stimulus weak; endorsement of transition from core to headline inflation targeting.
- Financial sector: credit growth slowed; interconnectedness increased; welcome extension of BOT oversight to SFIs and publication of Financial Stability Reports; oversight of credit cooperatives needs strengthening.
- Structural policies: reduce price distortions, enhance infrastructure, promote high-value manufacturing, boost regional integration, improve education and training; consider raising mandatory retirement age and regularizing migration to mitigate demographic headwinds.

_Italic: Source: IMF staff report excerpt._

### 1. Real Sector Developments _____________________________________________________________________  19

### 1. Real Sector Developments

### Overview
- Political context: A military coup in May 2014 ended large-scale social protests; authorities indicate a new constitution will be approved this year and new elections will take place in 2016.
- Structural drag on growth identified: high trade openness; large negative supply shocks (notably 2011 floods and the impact of Japan’s Tohoku disaster); slow technological upgrading; interruption in labor flow from agriculture to more productive sectors; political instability; and a rapidly aging population that will generate headwinds to growth.
- Resilience: ample international reserves; flexible exchange rate as a buffer; prudent fiscal position and moderate public debt; credible institutions; banking system described as well capitalized, profitable and liquid.
- Policy challenge: reignite short- and medium-term growth while maintaining stability; government has embarked on a comprehensive reform agenda across education, healthcare, social inequalities, infrastructure investment, regional integration, and governance.

### Macroeconomic Developments
- Growth
  - Economy contracted sharply in 2014 Q1 after intensification of political unrest in November 2013.
  - Economy grew by 1.5 percent (yoy) in the second half of 2014.
  - Real GDP growth averaged 0.7 percent for the year 2014.
  - Import compression was -4.8 percent in 2014 and contributed to positive GDP growth despite flat final domestic demand and exports and an inventory drawdown.
- Inflation
  - Core inflation has been stable since April 2014, moving within a very narrow range.
  - Energy prices declined precipitously starting in the second half of 2014; pass-through of lower global oil prices partly offset by energy price reform.
  - Headline CPI inflation fell sharply and turned negative (-0.4 percent) in January 2015.
- External balance and reserves
  - Current account balance improved to 3.8 percent of GDP in 2014 from a deficit of 0.6 percent in 2013; main reason: sharp drop in the price of oil.
  - Thailand’s net imports of oil are around 800 thousand barrels per day.
  - A financial account deficit roughly offset the current account surplus.
  - International reserves declined by US$10 billion to US$157 billion over the course of 2014, primarily due to valuation changes.
- Exchange rates: baht/USD relatively stable in recent months despite global volatility; nominal and real effective exchange rates have appreciated noticeably.

### Outlook and Risks
- Baseline outlook for 2015
  - Staff forecast growth of 3.7 percent in 2015.
  - Year-average headline inflation projected at 0.1 percent in 2015; headline inflation expected to pick up by end 2015.
  - Near-term drivers: private consumption supported by pent-up demand and lower fuel prices; investment expected to rebound as project approvals are cleared; tourism expected to continue recovery.
  - Constraints on recovery: low capacity utilization, weak demand prospects, political uncertainty, high household debt, tighter credit conditions, and slower-than-anticipated ramp-up of public investment.
- Risks
  - Risks tilted somewhat to the downside.
  - Domestic risks: possible policy slippages, weaker-than-expected private demand, political uncertainty.
  - External risks: surge in global financial volatility, protracted slow growth in advanced and emerging economies.
  - Upside: stronger boost from lower oil prices to consumption, investment and exports.
- Authorities’ view: broadly agreed with staff on outlook; viewed risks to growth as roughly balanced with downside external risks offset by potential upside from faster-than-expected government spending and low oil prices stimulating domestic demand; noted Thailand has sufficient buffers to deal with potential global financial volatility.

### Fiscal Policy — Boosting Potential Growth in a Sustainable Way
- Recent fiscal developments
  - Corporate income tax cuts: from 30 to 23 percent in January 2012 and to 20 percent in January 2013.
  - General government revenue decreased from 24.1 percent of GDP in FY2012/13 to 22.5 percent in FY2013/14.
  - General government expenditures remained at 24.3 percent of GDP in FY2013/14.
  - Debt-to-GDP ratio of the overall public sector, including state-owned enterprises (SOEs), reached 45.5 percent in FY2013/14; government’s ceiling is 60 percent.
  - FY2014/15 budget: deficit largely unchanged at 2 percent of GDP; fiscal stimulus package announced in October 2014 of about 3 percent of GDP intended to boost spending in the first half of the year.
  - Preliminary data suggest budget execution in the first quarter did not meet authorities’ expectations.
  - Fiscal year starts October 1.
- Fiscal strategy and medium-term framework
  - Fiscal policy should support recovery while signaling commitment to fiscal discipline via a medium-term fiscal framework.
  - Staff strongly supports authorities’ plan to prepare a new fiscal responsibility law (Public Finance Act).
  - New law should require a medium-term fiscal framework showing the expected path of public debt as percent of GDP; staff views current debt ceiling of 60 percent of GDP as appropriate.
  - Framework expected to include a fiscal policy statement with a multi-year macroeconomic outlook, fiscal objectives and targets, fiscal risk statement, debt sustainability analysis, and long-term fiscal projections.
- Infrastructure and SOE reforms
  - Staff welcomes a multi-year public investment plan for large infrastructure projects aimed at enhancing connectivity and reducing logistic costs.
  - Moving projects to the budget (government and SOEs) is welcomed for transparency and accountability.
  - Given past implementation problems, authorities should consider evaluating the public investment process to identify bottlenecks and efficiency gains.
  - SOE debt amounts to 9 percent of GDP and 19 percent of total public debt.
  - Staff welcomes authorities’ plan to strengthen SOE transparency and governance and to carry out a strategic review and restructuring of SOEs (examples: State Railway of Thailand and Bangkok Mass Transit Authority).
- Subsidy reforms
  - Energy pricing reform underway to reduce large cross-subsidies while protecting the vulnerable via means-testing.
  - Excises on diesel being gradually reinstated while LPG subsidies are reduced; retail gasoline price reduced by pass-through of lower international price.
  - Staff recommends using lower international oil prices to fully reinstate excises, which would generate an additional 0.5 percent of GDP starting in 2015, while protecting vulnerable groups with means-tested transfers.
  - Rice pledging scheme abolished; new scheme provides direct cash transfers to small-scale farmers only, expected to result in savings of about ½ percent of GDP per year.
  - Government transfers to SOEs amount to about 0.8 percent of GDP in the FY2014/15 budget; staff recommends improved disclosure of public service obligations of SOEs, possibly via an annual consolidated fiscal risks report.
- Tax policy and administration
  - Authorities plan to introduce an inheritance tax and to strengthen property taxes to enhance tax progressivity.
  - Staff recommends considering, under the medium-term fiscal framework, a gradual increase of the VAT rate to 10 percent from the current 7 percent, to be implemented only when the recovery is well entrenched and accompanied by programs to mitigate impacts on vulnerable groups.
  - Higher VAT seen as critical to bring the fiscal balance back towards equilibrium over the next few years, offset revenue losses from recent reductions in personal and corporate income taxes, and allow higher infrastructure spending and meet needs of an aging population.
  - Authorities are undertaking a strategic review of tax administration (Revenue Department) and have initiated technical dialogue with the Fund.
  - Opportunities identified to improve core tax administration processes, including registering taxpayers, filing and processing returns and payments, and collecting tax arrears.

*Source: IMF staff report excerpt, "1. Real Sector Developments."*

### 20.      Authorities‘ views. The authorities broadly agreed with the staff view of the overall

### _cr15114 - 20.      Authorities‘ views. The authorities broadly agreed with the staff view of the overall

### Authorities’ short-term strategy and fiscal policy
- Short-term priority: stimulate the domestic economy through expansionary fiscal policy while committing to fiscal discipline via new legislation on fiscal responsibility, drawing on international best practices.
- FY2015/16 budget (under consideration) envisages an increase in the allocation of funds for capital expenditures.
- Authorities emphasize balancing speedy spending with the need to ensure high transparency.
- Review of governance of state enterprises is underway, with “The State Enterprises Policy Committee” taking the lead in proposing the restructuring of some entities.
- Authorities noted sensitivity in raising the VAT rate while recognizing need to enhance tax revenue in a medium-term setting; agreed a sustained economic recovery is necessary before increasing the VAT rate.

### Monetary Policy—Supporting Growth in a Low-Inflation Environment
- Policy stance
  - Current monetary stance described as accommodative; scope for further easing if the recovery is weaker than anticipated.
  - Bank of Thailand (BOT) cut the policy rate by 25 basis points in November 2013 and March 2014 and has maintained the rate at 2 percent since then.
  - Large negative output gap estimated at -2.8 percent in 2014; projected to close only gradually under current policies.
  - With negative headline inflation, moderate core inflation, and slowdown in credit growth, further easing may be justified if fiscal stimulus is slow or private sector response disappoints.
  - Staff view: lower policy rate would not exacerbate financial stability risks given banks’ tightening of lending standards.
- Inflation target
  - Cabinet approved use of headline inflation instead of core inflation and set year-average CPI inflation target at 2.5±1.5 percent for 2015.
  - If inflation falls outside the band BOT is to provide an explanation, expectation on timing of return to band, and contemplated monetary policy response in an open letter to the Minister of Finance.
  - BOT issued a letter when headline inflation turned negative in January attributing it to a sharp one-off fall in oil prices, emphasized stability of inflation expectations, positive impact of terms-of-trade improvement, long lags in monetary policy transmission, and concluded accommodative stance should help lift headline inflation back within the target band by year-end.
  - Staff welcomes switch to headline inflation target but notes potential communication challenges from focusing on year-average measure; suggests considering indicative targets beyond one-year horizon.
- Authorities’ views on monetary policy
  - Authorities view current monetary policy stance as sufficiently accommodative given steady path of economic recovery in 2015.
  - Agreed cyclical stance suggested need for stimulus but believed fiscal measures would be main support; effectiveness of monetary policy transmission may be weakened in low interest rate environment.
  - Concerned about unintended financial stability consequences of lower rates.
  - Saw targeting headline inflation as facilitating communication and anchoring expectations; annual average targeting provides flexibility for temporary shocks but does not preclude monitoring monthly inflation.

### Maintaining External Resilience
- Current account
  - CA surplus expected to rise somewhat in 2015 due to lower oil prices, then decline in the medium term.
  - Export growth has slowed significantly since 2012 due to weaker global demand, government intervention in the rice market, and lower commodity prices; Thailand’s export share in global markets has declined slightly since early this decade.
  - Declining share of electronic products in total exports not fully offset by increase in automotive exports.
  - Exports projected to grow only modestly on account of weak global demand.
  - Rapid growth of tourism (especially from China) has been main driver of service exports; political unrest adversely affected tourism in 2014 but tourist arrivals showed strong recovery in December 2014.
  - Imports fell sharply in 2014 due to decline in oil prices and demand contraction; gradual recovery in imports expected with public infrastructure programs and oil price recovery.
- Capital and financial account
  - Capital and financial account balances deteriorated in last two years; overall capital and financial account registered a deficit of about US$15 billion in 2014.
  - Foreign direct investment (FDI)
    - Inward FDI declined from US$13 billion in 2013 to US$12 billion in 2014.
    - Outward FDI remained at US$7 billion in 2013 and 2014.
    - Net FDI turned positive in 2013 and 2014 (from a deficit in 2012).
    - Government steps to encourage inward FDI and liberalize outward FDI may contribute to startup of newly approved foreign investment projects and sustained increase of Thai FDI, especially to China and neighboring countries.
  - Portfolio flows: net portfolio outflows in 2014 but Thailand’s bond and equity markets remained resilient; trends similar to other industrialized ASEAN countries driven by changing investor risk appetite.
  - NIIP deteriorated from -2 percent of GDP in 2009 to -18 percent of GDP in 2013; given overall CA surplus during that period, deterioration likely reflects valuation effects and data revision. NIIP expected to remain broadly stable in medium term.
- External sector assessment
  - Thailand’s 2014 CA and REER are close to levels consistent with medium-term fundamentals and appropriate policies (based on External Balance Assessment (EBA) and regression analysis, incorporating oil price declines and delayed public investment in 2014).
  - CA surplus expected to widen in 2015 on account of lower oil prices, then narrow to balance in medium term.
  - REER is within a range of ±5 percent of the equilibrium level.
  - International reserves stand at 213 percent of the Fund’s reserve adequacy metric.
  - External debt projected to remain relatively low over medium term, declining from 37.9 percent of GDP in 2014 to 33.6 percent of GDP in 2020.
- Regional integration
  - Thailand intensifying integration with Cambodia, Laos, Myanmar, and Vietnam (CLMV) and southern China; multilateral infrastructure projects improving mobility of goods and labor; rapid growth in neighboring economies expanded markets for Thai goods and services.
  - Thai and foreign companies relocating basic processing and assembly to Special Economic Zones (SEZs) in neighboring countries to take advantage of lower labor costs.
  - Launch of the ASEAN Economic Community (AEC) in 2015 may provide opportunities for investment and trade, including reduction of tariffs for Thai goods in CLMV countries.
- Authorities’ views on external resilience
  - Authorities project CA in 2015−20 to remain in surplus but decline gradually toward near-balance.
  - Expect financial account, especially foreign portfolio flows, to remain volatile due to global financial market volatility; strong local investor base should enable orderly adjustments.
  - Flexible exchange rate seen as important first line of defense against external shocks.
  - Authorities noted deteriorating competitiveness and loss of FDI share relative to regional peers but highlighted promising prospects supported by strong fundamentals, planned public infrastructure projects, geographic advantages, and BOI’s new approach to investment incentives.
  - Recently established SEZs in five border provinces facilitate regional integration.

### Strengthening Financial Stability Framework
- Financial landscape
  - Financial sector large with assets near 359 percent of GDP.
  - Commercial banks assets account for 128 percent of GDP, higher than in Indonesia and the Philippines.
  - Growth in non-commercial banks financial assets has outpaced commercial bank assets since 2008.
  - Commercial bank credit-to-GDP ratio increased from 99 percent in 2007 to 128 percent in 2013; total financial institution credit rose from 154 percent of GDP to 197 percent in same period.
  - Non-commercial-banks, including SFIs and NBFIs, provided almost 60 percent of household loans.
  - Credit cooperatives’ assets equal to 13 percent of total credit of commercial bank and SFIs in 2013.
- Interconnectedness
  - Other depository corporations have become net borrowers from other financial corporations and from abroad since early 2008, with total borrowing about 18 percent of their liabilities at end-2014.
  - Non-commercial-banks borrow from interbank money market: 17 percent of SFI liabilities and 23 percent of credit cooperatives liabilities funded by other financial institutions.
  - Credit cooperatives are less well regulated and supervised and generally have weaker profitability than commercial banks.
- Credit and bank conditions
  - Total financial institution credit rose from 154 percent of GDP in 2007 to 197 percent in 2013; credit growth has slowed considerably in last two years.
  - Thai corporate foreign currency borrowing declined since 2013.
  - Supply and demand factors: banks and SFIs more cautious in lending; expiration of tax incentives for car purchase, lower investment, and high household debt dampened credit demand.
  - Staff does not see need to tighten macroprudential policies despite low-interest-rate environment due to slowing credit growth, low share of real estate loans, and no apparent real estate boom.
  - Commercial banks are well capitalized, liquid, and profitable; NPLs rising but remain low. Basle III regulations on capital implemented.
  - Liquidity risks have risen as seen in high loan-to-deposit ratio and higher reliance on wholesale funding.
  - Banks do not face capital or liquidity constraints to expand credit.
- Household and corporate debt
  - Household debt-to-GDP rose from 55 percent in 2007 to 84 percent in 2014.
  - Commercial banks provided about 40 percent of household loans; SFIs and NBFIs supplied the rest.
  - More than two thirds of household loans used for consumption (including purchases of cars and other durables), farming, and business; remainder used to buy real estate and land.
  - Household financial assets about twice the level of household debt.
  - Corporate sector: nonfinancial corporates reduced bank loans partly due to alternative financing (domestic bonds and debentures, external loans, international debt securities).
  - Currency mismatch risk has receded with declining share of foreign currency borrowing in total debt issuance after 2012.
  - Some Thai conglomerates undertook rapid debt-financed external expansions; authorities need vigilance due to cross-ownership risks and potentially opaque balance sheets.
- Regulation of non-commercial-banks
  - SFIs and NBFIs are large and growing; SFIs interconnected with commercial banks via interbank loans and common customer exposures.
  - Staff welcomes authorities’ plan to extend BOT’s supervisory and regulatory mandate to SFIs and encourages swift adoption of an operational plan.
  - Authorities should undertake strategic review of SFIs (mandate, services, financial operations) to clarify mandates and focus operations in areas not covered by commercial banks; separate transitional plans likely needed.
  - Credit cooperatives regulated by Ministry of Agriculture (MOA) which appears to have insufficient supervisory resources; supervision of credit cooperatives should be strengthened substantially, including BOT technical assistance to MOA.
- Financial stability framework and recommendations
  - BOT steps welcomed: publication of Financial Stability Reports (FSRs) and establishment of a Financial Stability Committee.
  - BOT stress test of an interest rate shock (amounting to 2 percent) suggested Thai firms can withstand the shock though loan growth would slow and banks’ nonperforming assets would increase somewhat.
  - Staff encourages strengthening data collection to close data gaps in non-commercial banks.
  - Staff urges vigilance regarding financial risks related to household debt and large Thai conglomerates.
  - Authorities should review crisis management framework including modalities for liquidity provision and bank resolution, and protocols for information sharing and policy coordination among financial regulators.
- Authorities’ views on financial stability
  - Authorities see main risk as over-indebtedness among low-income households that borrowed from SFIs; believe middle- and upper-middle income groups may still have borrowing space.
  - High priority placed on strengthening financial stability work (monitoring, mitigating, managing systemic risks).
  - Financial Stability Committee within BOT tasked with systemic risk monitoring and mitigation; composed of high-level executives from departments such as monetary policy, financial markets operations, financial institutions policy, banking supervision, and others.
  - Two FSRs published in 2013 and 2014 identified credit risks from household and SME loans with domestic consumption-related businesses as main risks to financial sector.
  - BOT encourages savings and credit cooperatives to include clients in national credit bureau database to strengthen financial surveillance.

*Italic: Content derived from the provided IMF chapter/section text.*

### 38.      Structural challenges. Thailand faces rapid population aging, with the dependency ratio

### 38.      Structural challenges. Thailand faces rapid population aging, with the dependency ratio

### Structural challenges: labor, productivity, and competitiveness
- Nearly 40 percent of the labor force is employed in low-productivity agriculture, and the reallocation of resources to higher value-added sectors appears to have stalled (Appendix X).
- A significant share of Thailand’s export capacity is in electronics, with some products facing low global demand growth (hard disk drives, fax machines, digital cameras).
- Thailand’s ranking in overall global competitiveness is 31 of 144, while it ranks much lower on innovation, technological readiness, and education quality.7

### Avoiding the middle-income trap: measures to lift productivity
- Increasing productivity growth is crucial and can be achieved through several complementary channels:
  - Implement ambitious public infrastructure investment plans to alleviate bottlenecks and boost connectivity within Thailand and with neighboring countries.
  - Put greater emphasis on practical subjects and cognitive skills in schools, improve teacher standards, and align vocational training with labor market demand to better prepare the workforce.
  - The replacement of rice and rubber price guarantees with targeted transfers should encourage movement of farm workers to higher-productivity sectors.8

### Addressing the demographic challenge: raising participation and facilitating immigration
- There is scope to offset the impact of unfavorable demographics by:
  - Raising participation rates.
  - Facilitating immigration and streamlining the immigration system to open Thailand’s doors to more migrants.
- Inducing older persons to stay employed longer through more flexible and accommodative working arrangements.
- Reconsider mandatory retirement at age 60 for government employees; the mandatory retirement age has already been raised for some categories of civil servants and a broader increase is under discussion.

### Authorities’ views on structural reform priorities
- The authorities emphasized efforts to lay a more solid foundation for future growth through reforms aimed at modernizing the economy:
  - A new 7-year strategic plan launched by the Board of Investment incentivizes R&D and innovation and promotes high value-added manufacturing.
  - The ongoing public infrastructure program aims to eliminate logistic bottlenecks.
  - A plan to improve access to finance by SMEs to facilitate structural transformation.
  - SOE reform to improve efficiency and transparency.
  - Changes to mandatory retirement age for some civil servants, with broader increases under discussion.

*7 World Economic Forum, Global Competitiveness Indicators.*  
*8 World Bank, 2012, Leading with Ideas: Skills for Growth and Equity in Thailand.*

### STAFF APPRAISAL

#### Outlook
- The economy is recovering gradually from shocks, including political unrest.
- A recovery in domestic demand is projected to boost GDP growth by 3.7 percent in 2015, but with public investment projects slow to take off the ground and a weak global environment, the economy is still lacking a strong engine of growth, and risks are to the downside.

#### Policy overview
- Near term: both monetary and fiscal stimuli are needed to support the fledgling economic recovery.
- Medium term: fiscal consolidation and structural reforms are essential to accelerate growth while maintaining stability.

#### Fiscal policy
- Staff welcomes ongoing energy price reform aimed at eliminating price distortions and replacing price subsidies with targeted income support.
- Replacing price support for rice and rubber with transfers to needy farmers will reduce price distortions and increase fiscal space.
- Staff endorses providing fiscal stimulus in the near term, particularly by accelerating infrastructure investment, followed by consolidation within a medium-term framework.
- Raising the VAT rate once the recovery is firmly entrenched is essential for strengthening the revenue system and capping the public debt within the government’s ceiling in the face of the ambitious public investment program.

#### Monetary policy
- With the economy still below potential, the current accommodative monetary policy stance remains appropriate.
- Further easing of the monetary stance may be considered if fiscal stimulus is weaker than expected and the economic recovery remains sluggish.
- Staff endorses the transition from targeting core to headline inflation to facilitate communication and enhance accountability.

#### External sector
- An improvement in the terms of trade has boosted the current account in the short term.
- The exchange rate reacted flexibly to domestic and external shocks, including volatile capital flows.
- On the whole, the baht has been broadly stable against the U.S. dollar over the course of 2014, but has appreciated in nominal and real effective terms, particularly since July.
- Both the current account balance and the real exchange rate are assessed to be close to levels consistent with medium-term fundamentals and appropriate policies.

#### Financial sector
- Credit growth has slowed, but the degree of interconnectedness in the financial system has increased and remains a source of vulnerability.
- Staff welcomes recent measures to enhance financial stability, including the publication of the Financial Stability Report and the extension of BOT’s regulation and supervision to include SFIs and the formation of the Financial Stability Committee.
- Oversight of the fast-growing credit cooperative sector needs to be strengthened.

#### Structural policies (staff recommendations)
- Government measures already taken are likely to spur productivity growth and lift inclusive growth over the medium term: reducing price distortions, enhancing public infrastructure, promoting high-value-added manufacturing, boosting regional integration, and improving education and training.
- In light of the tight labor market, the authorities should consider measures to offset the impact of population aging on labor supply, including:
  - Raising the mandatory retirement age for civil servants.
  - Regularizing migration from neighboring countries.

*Source: IMF staff report extract.*

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

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

### Real Sector Developments
- Domestic demand slowdown depressed growth in last two years.
- Investment has come off its 2012 peak associated with post-flood reconstruction.
- Private sector confidence, shaken by political turmoil, has recovered somewhat after the coup but remains low.
- Private consumption is picking up gradually.
- Industry and services lifted GDP toward the end of 2014 even though car production has fallen after tax incentives expired.
- Growth decomposition (In percent) shown for 2003–2014 with series for Final domestic demand, Change in inventories, Net exports, and GDP (sources: CEIC Data Co. Ltd.; and IMF staff calculations).
- Investment (In percent of GDP) comparative series for Indonesia, Thailand, Malaysia, Philippines (source: IMF, World Economic Outlook).
- Consumer Confidence and Business Sentiment Index shown from Jun-07 to Dec-14 (sources: CEIC Data Co. Ltd.; and IMF staff estimates).
- Private Consumption and Retail Sales (In percent, 3-month change in 3-month moving average) series covering Jul-07 to Jun-14 (sources: CEIC Data Co. Ltd.; and IMF staff calculations).
- Growth Contributions by Industry (In percentage points, quarter-on-quarter seasonal adjusted) show Agriculture, Industry, Services, GDP (sources: Haver Data Analytics; and IMF staff calculations).
- Car Production and Sales (In thousand units) series from May-06 to Nov-14; note: "End of car purchase incentives" annotation (source: CEIC Data Co. Ltd.).

### Inflation and Capacity Indicators
- Core inflation is in the middle of the past target band while headline inflation has fallen to negative territory as energy and food prices declined.
- Inflation is lower than elsewhere in the region. Inventories are coming down from bloated levels.
- Spare capacity is considerable and the labor market is showing some slack.
- Headline and Core CPI Inflation (In percent, year-on-year) series from 2002M3 to 2015M1 (sources: CEIC Data Co. Ltd.; and IMF staff calculations).
- Contributions to Headline Inflation (Raw food, Energy, Core, Headline inflation y/y percent change) series Apr-04 to Oct-14 (sources: Haver Data Analytics; and IMF staff calculations).
- Inflation (Year-on-year percent change) comparative series Jan-10 to Jan-15 across Indonesia, Malaysia, Philippines, Thailand (sources: APD CORE; and IMF staff calculations).
- Inventory Index: Inventory (s.a., 2000=100, RHS) with y/y growth and 3 mma growth from Jan-10 to Jan-15 (sources: CEIC Data Co. Ltd.; and IMF staff calculation).
- Output Gap and Capacity Utilization Rate (Output gap in percent; Capacity utilization rate, sa RHS) series from Jan-07 to Dec-14 (sources: Haver Data Analytics; and IMF staff calculations).
- Labor Market: Employment growth (y/y percent change) and Share of those working more than 50 hours/week in total employment (percent, RHS) from Mar-11 to Dec-14 (sources: Haver Data Analytics; and IMF staff calculations).

### Public Finances
- Fiscal balances have worsened, reflecting responses to the flood, stimulus measures and lower growth.
- As a result, the debt has increased somewhat.
- Non-resident holdings of baht-denominated public debt have stabilized after increasing rapidly until early 2013.
- Thailand needs to boost public investment.
- Corporate income tax rates have been reduced to enhance growth while the VAT rate remains in the lower range in the region.
- General Government and Public Sector Balance and Public Debt (In percent of fiscal year GDP) series 2005–2019 with Public debt and balances (sources: CEIC Data Co., Ltd.; and IMF staff estimates and projections).
- ASEAN–5: General Government Gross Debt (In percent of GDP, fiscal year basis) shown for 2008–2013 (sources: CEIC Data Co. Ltd; Bank of Thailand; IMF, World Economic Outlook; and IMF staff estimates).
- Public Debt Held by Non-residents (In percent of total; In bill. Baht RHS) Jan-10 to Jan-15 (sources: CEIC Data Co. Ltd.; and IMF staff calculation).
- Link Between Government Revenue and Public Investment (Public investment, 2000-12 average; Government revenue, 2000-13 average) comparative across countries.
- Corporate Income Tax Rates, 2014 (In percent) comparative across Singapore, Thailand, Indonesia, Philippines, Malaysia (Source: National authorities).
- Value Added Tax Rates, 2014 (In percent) comparative across Malaysia 1/SingaporeThailandIndonesiaPhilippines (Source: National authorities). Note: "1/ Rate of the Goods and Services Tax scheduled to be introduced in April 2015."

### Monetary Policy Instruments
- Monetary policy stance is accommodative.
- Money market rates have been steered close to the policy rate.
- Money supply growth has slowed.
- International reserves have declined, reducing the need for liquidity absorption.
- Banks are liquid, with large holdings of repo-eligible securities.
- ASEAN-4: Policy Rates (In percent, end of period) Jan-05 to Jan-15 (source: Haver Data Analytics).
- Interest Rates (Policy rate, Lending facility rate, Deposit facility rate, Interbank overnight rate) Jan-07 to Dec-14 (sources: CEIC Data Co. Ltd.; and Haver Data Analytics).
- Money Supply (Year-on-year percent change, 3-month moving average) series for Broad money, Reserve money, Money multiplier Jan-07 to Sep-14 (Source: Haver Data Analytics; and IMF staff calculations).
- Bank of Thailand's International Reserves (In billions of US dollars) Jan-07 to Dec-14: Foreign reserves and Net forward position (Source: Haver Data Analytics).
- Bank of Thailand's Sterilization Instruments (In billions of baht) Jan-07 to Dec-14: BOT bills, Repos, Forex swaps (Source: Bank of Thailand).
- Liquid Assets of Commercial Banks (In percent of reserve base) Jan-07 to Oct-14: Deposits at BOT, Cash, Eligible securities, Required reserve ratio, Minimum current balances at BOT (Sources: Bank of Thailand; and IMF staff calculations).

### External Sector
- The REER has been appreciating since mid 2014.
- Thailand’s export share in global markets declined since early this decade.
- Thailand’s current account balance has been volatile in recent years.
- FDI dominated net capital inflows to Thailand.
- Portfolio flows to Thailand followed the pattern of its peers.
- Tourist arrivals are slowly recovering after a sharp dip during the political unrest.
- Real Effective Exchange Rate (2010=100) Jan-10 to Jan-15 comparative across Indonesia, Malaysia, Philippines, Thailand (Sources: APD CORE; and IMF staff calculations).
- Export Market Share in ASEAN-5 (In percent of the World, seasonally adjusted) series 1997Q1–2014Q1 across Indonesia, Malaysia, Philippines, Singapore, Thailand (Sources: IMF, Direction of Trade; and IMF staff calculations).
- Current Account Balance (In percent of GDP) series 2005–2015 (Sources: CEIC Data Co. Ltd.; and IMF staff calculations).
- Financial Balance in ASEAN-4, 2014* (In percent of GDP) components: Other, Financial derivatives, Portfolio investment, FDI, Financial balance. Note: "*Year to date up to Q3 for Philippines and to November for Thailand." (Sources: CEIC Data Co. Ltd.; and IMF staff calculations).
- Equity and Bonds Net Flow (In millions of U.S. dollars) Feb-12 to Dec-14 for Malaysia, Philippines, Indonesia, Singapore, Thailand (Sources: EPFR Global, accessed through Haver Analytics).
- Tourist Arrival (year-on-year percent change) Jan-11 to Jan-15 comparative across Indonesia, Malaysia, Thailand (Sources: APD CORE; and IMF staff calculations).

### Financial Sector Developments
- All financial institution credit rose sharply from 2006 to 2011 but credit by deposit-taking institutions, including commercial banks and SFIs, has decelerated since 2012.
- Asset quality in SFIs is weaker than in commercial banks.
- SFIs’ liabilities to other financial institutions have been increasing from low levels.
- Deposit-taking institutions continued to be the net borrowers from Thai NBFIs and overseas.
- Non-commercial-banks, including SFIs and NBFIs, have been growing steadily.
- Domestic Credit Provided by Financial Sector (In percent of GDP) series 1984–2012 across Indonesia, Philippines, Thailand, Malaysia, Singapore (Sources: World Bank, World Development Indicators; and IMF staff calculations).
- Loan Growth (Other depository corporations, year-on-year percent change) Mar-11 to Dec-14: Total, Credit to business, Credit to households (Sources: CEIC Data Co. Ltd.; and IMF staff calculations).
- Asset Quality 1/ (NPLs in percent of total loans, end of 2013 or latest data available) comparative across GHBBAACCom. Banks GSB (Sources: BankScope; CEIC Data Co. Ltd.; and IMF staff estimates). Note: "1/ Major SFIs."
- SFIs' Liabilities to Other Deposit Corporations and Other Financial Groups (Amount in billions of baht; Share in total liabilities percent RHS) Jun-03 to Dec-14 (Sources: CEIC Data Co. Ltd.; and IMF staff calculations).
- Net Liabilities of Other Depository Corporations to Other Financial Corporations (In billions of baht) monthly series 2007M1–2014M9 (Sources: IMF, Integrated Monetary Database; and IMF staff estimates).
- Net Foreign Liabilities of Other Depository Corporations series shown.
- Non-commercial-banks in Thailand: Ratios of Assets, Credit and Short-term Funding to GDP (In percent) series for 2000–2012 (Sources: BankScope; IMF staff estimates).

### Financial Soundness Indicators
- Thailand commercial banks’ capital buffers are strong but one-year liquidity coverage should improve.
- Thailand loan-to-deposit ratio is the highest in the ASEAN-5 (note: "In the case of Thailand, the ratio includes interbank positions; without the latter, the ratio would be lower by 14  percentage points.").
- Asset quality is moderately high.
- Thailand commercial banks are profitable, as shown by return on equity and return on assets.
- Regulatory Tier 1 Capital to Risk-Weighted Assets (In percent) comparative across a wide set of economies (Source: IMF, Financial Soundness Indicators).
- Liquid Assets to Short-Term Liabilities (In percent) comparative across economies (Source: IMF, Financial Soundness Indicators).
- Loan to Deposit Ratio (In percent) comparative across economies (Sources: CEIC Data Co. Ltd.; Haver Analytics; and IMF staff calculations).
- Nonperforming Loans to Total Gross Loans (In percent) comparative across economies (Source: IMF, Financial Soundness Indicators).
- Return on Equity (In percent) and Return on Assets (In percent) comparative series across economies (Source: IMF, Financial Soundness Indicators).

### Asset Prices and Private Debt
- Increases in housing prices have been the lowest in the region.
- Stock prices recovered in 2014.
- Government bond yields declined.
- Thailand’s household debt was more concentrated in consumption loans rather than mortgage loans in contrast to other countries.
- Nonfinancial corporate debt to equity ratio was not high compared with its peers.
- SFIs and NBFIs provided 40 percent of home loans (Market Share of Home Loans Outstanding, In percent, 2014 Q3: Commercial banks 60%, Government Housing Bank 28%, Government Saving Bank 10%, Other 2%).
- House Price Index (2007:Q1 = 100) Mar-08 to Dec-14 comparative across Malaysia, Singapore, Indonesia, Thailand (Sources: CEIC Data Co. Ltd; and IMF staff calculations).
- Stock Market Index (January 2011=100) Jan-11 to Jan-15 for S&P 500, Thailand (SET), Malaysia (Source: Bloomberg Data LP).
- Government Bond Yields (In percent) maturities 1-year, 2-year, 3-year, 5-year, 10-year, 15-year with dates 2/19/2015, 5/30/2014, 12/31/2013 (Source: Bloomberg LP).
- Asia: Household Debt (In percent of GDP) comparative across countries with "Latest" and historical series (Sources: CEIC Co. Ltd.; Haver Analytics; WEO; OECD; National Authorities; and staff calculations). Earliest available data list by country.
- Nonfinancial Corporate Debt to Equity Ratio (In percent) mean for nonfinancial corporates; comparative across economies (Source: IMF, Corporate Vulnerability Indicators).

### Structural Challenges
- Thailand faces a sharp demographic transition.
- Thailand’s electronics exports may have lost competitiveness to lower-cost producers.
- Thailand’s agricultural productivity is rather low while agricultural employment is considerably higher than would be expected for its level of income.
- Thailand has a welcoming regulatory environment but lags behind higher-income ASEAN countries on most structural indicators.
- Working Age Population (Percent of total population) series 1970–2050 for Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Vietnam, Thailand (Sources: UN; and IMF staff calculations).
- Exports (In millions of US dollars, 3mma) for Thailand: Electronics and Vietnam series Mar-03 to Nov-14 (Sources: Bank of Thailand; General Statistics Office of Vietnam; and Haver Data Analytics).
- Value Added per Worker (U.S. dollars) comparative (2010 data for Japan, 2011 for China, 2012 for others) across Malaysia, Thailand, Indonesia, Philippines (Sources: World Bank, World Development Indicators).
- Employment in Agriculture (percent of total) and GDP per capita (PPP constant 2005 International $) scatter across selected Asian economies (Source: World Bank, World Development Indicators).
- Ease of Doing Business (Score, 100=best) comparative across indicators: Starting a business, Dealing with construction permits, Getting electricity, Registering property, Getting credit, Protecting minority investors, Paying taxes, Trading across borders, Enforcing contracts, Resolving insolvency for Indonesia, Malaysia, Philippines, Singapore, Thailand (Source: World Bank, Doing Business 2015).
- Global Competitiveness (Score, 7=best) by pillars (Institutions; Infrastructure; Macroeconomic environment; Health and primary education; Goods market efficiency; Labor market efficiency; Financial market development; Technological readiness; Market size; Business sophistication; Innovation) comparative across Indonesia, Malaysia, Philippines, Singapore, Thailand (Source: World Economic Forum, Global Competitiveness Report 2014-15).

### Selected Economic Indicators (Table 1: Thailand: Selected Economic Indicators, 2010–15)
- Main exports (percent of total 2013): machinery and appliances (13.1), automotives (14)
- GDP per capita (2013): US$5,676
- Unemployment rate (2013): 0.7 percent
- Poverty headcount ratio at national poverty line (2011): 13.2 percent
- Net FDI (2013): US$6.08 billion
- Population (2013): 68.2 million
- Projections/Indicators (2010–2015):
  - Real GDP growth (percent): 7.8 0.1 6.5 2.9 0.7 3.7
  - Headline CPI (period average, percent): 3.3 3.8 3.0 2.2 1.9 0.1
  - Core CPI (period average, percent): 0.9 2.4 2.1 1.0 1.6 1.7
  - Gross domestic investment (excl. stocks) (percent of GDP): 24.7 26.3 28.5 26.7 25.9 26.9
  - Private investment (percent of GDP): 18.8 20.8 22.8 21.2 20.7 21.2
  - Public investment (percent of GDP): 5.9 5.5 5.7 5.5 5.2 5.7
  - Gross national saving (percent of GDP): 28.2 30.0 30.6 25.8 29.9 31.6
  - Central government budgetary balance (percent of GDP, fiscal year basis): -2.6 -1.7 -2.6 -1.9 -2.5 -2.7
  - General government balance 2/: -0.8 -0.6 -1.8 -0.2 -1.8 -2.0
  - Public sector balance 3/: -1.5 -0.7 -2.8 0.3 -1.7 -1.9
  - Public sector debt (percent of GDP): 42.6 41.7 45.4 45.5 45.5 47.5
  - Broad money growth (end-period, percent): 10.9 15.1 10.4 7.3 4.7 ...
  - Narrow money growth (end-period, percent): 10.9 8.6 13.0 3.9 1.3 ...
  - Private sector credit growth (end-period, percent): 12.3 17.0 14.6 9.6 5.0 ...
  - Current account balance (billions of U.S. dollars): 10.0 8.9 -1.5 -2.5 14.2 17.2
  - Current account (percent of GDP): 3.1 2.6 -0.4 -0.6 3.8 4.4
  - Exports, f.o.b. (billions US$): 191.6 219.1 225.9 225.4 224.8 219.9
  - Imports, f.o.b. (billions US$): 161.9 202.1 219.9 218.7 200.2 200.3
  - Capital and financial account balance 4/: 21.3 -7.7 6.7 -2.6 -15.4 -17.2
  - Overall balance (billions US$): 31.3 1.2 5.3 -5.0 -1.2 0.0
  - Gross official reserves (end-year, US$ billions): 191.7 206.3 205.7 190.3 180.2 180.3
  - Reserves (In months of following year's imports): 11.4 11.3 11.3 11.3 10.8 10.0
  - External debt (percent of GDP): 31.5 30.2 35.7 36.7 37.7 37.9
  - External debt (billions US$): 100.6 104.3 130.7 141.9 140.9 149.2
  - Memorandum: Nominal GDP (In billions of baht): 10,105 10,540 11,375 11,899 12,141 12,718 (In billions U.S. dollars): 318.9 345.7 366.0 387.3 373.8 393.6
- Notes and sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections. 1/ On a fiscal year basis. The fiscal year ends on September 30. 2/ Includes budgetary central government, extrabudgetary funds, and local governments. 3/ Includes general government and nonfinancial public enterprises. 4/ Includes errors and omissions. 5/ With remaining maturity of one year or less. 6/ Excludes debt of state enterprises. 7/ Percent of exports of goods and services.

### Macroeconomic Framework (Table 2: 2009–20)
- Real GDP growth (percent) series 2009–2020: -2.3 7.8 0.1 6.5 2.9 0.7 3.7 4.0 4.1 4.0 3.9 3.8
- Headline CPI inflation (period average, percent) 2009–2020: -0.9 3.3 3.8 3.0 2.2 1.9 0.1 2.5 2.1 2.2 2.2 2.2
- Core CPI inflation (period average, percent) 2009–2020: 0.3 0.9 2.4 2.1 1.0 1.6 1.7 1.8 1.9 2.0 2.1 2.1
- Saving and investment (percent of GDP) series for Gross domestic investment, Private, Public, Gross national saving (2009–2020) with exact yearly values included in table.
- Fiscal accounts (percent of GDP, fiscal year basis) Central government budgetary balance and General government balance 2009–2020 with exact yearly values in table.
- Total public sector debt (end-period) 2009–2020: 45.2 42.6 41.7 45.4 45.5 45.5 47.5 47.2 47.0 47.0 47.4 47.8
- Balance of payments and reserve metrics including Exports, Imports, Trade balance, Services, Income, Current account balance (billions and percent of GDP), Financial account balance, Overall balance, Gross official reserves (US$ billions), months of imports, external debt percent of GDP, debt-service ratio (percent of exports) with series 2009–2020 as presented in the table.
- Sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections. Notes: 1/ Includes errors and omissions. 2/ With remaining maturity of one year or less.

### Balance of Payments (Table 3: 2012–20)
- Trade balance (in percent of GDP) series 2012–2020: 1.6 1.7 6.6 5.0 3.2 2.3 1.8 1.4 1.1
- Current account balance (billions and percent of GDP) 2012–2020: -1.5 -2.5 14.2 17.2 9.6 6.4 3.3 2.2 1.1 (In percent of GDP: -0.4 -0.6 3.8 4.3 2.3 1.4 0.7 0.4 0.2)
- Exports, f.o.b. (billions US$) 2012–2020 with percent of GDP series (exact annual values included).
- Imports, f.o.b. (billions US$) 2012–2020 with percent of GDP series (exact annual values included).
- Of which: oil and oil products values for select years: 47.4 52.0 47.5 27.6 33.8 38.8 43.0 46.4 49.5.
- Services and tourism receipts, Income and transfers series as reported.
- Capital and financial account balance 2012–20 and components: Foreign direct investment, net; Portfolio investment, net; Financial derivatives, net; Other investment, net.
- Errors and omissions -7.2 -3.1 -0.2 0.0 0.0 0.0 0.0 0.0 0.0 (In percent of GDP: -2.0 -0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0).
- Overall balance: 5.3 -5.0 -1.2 0.0 0.0 0.0 0.0 0.0 0.0.
- Memorandum items: Gross official reserves (incl. net forward position, US$ billion) 205.7 190.3 180.2 180.3 180.3 180.3 180.3 180.3 180.3; months of imports; percent of short-term debt; ARA metrics; Export growth and volume growth; Import growth and unit value growth; External debt/GDP 35.7 36.7 37.7 37.9 37.3 35.6 35.2 34.1 33.6; External debt (billions US$) 130.7 141.9 140.9 149.2 156.9 157.9 165.0 168.4 174.3; Debt service ratio 4.2 4.0 4.4 4.4 4.6 4.6 4.1 3.8 3.6; GDP (US$ billion) 366.0 387.3 373.8 393.6 420.4 443.3 468.7 493.2 519.4.
- Sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections. Note: "1/ Includes financing facilities arranged by AsDB and IBRD and disbursements under the Miyazawa Plan."

### Monetary Survey (Table 4: 2008–14)
- Bank of Thailand (Net foreign assets; Net domestic assets) and components for 2010–2014 with exact billion-baht values:
  - Net foreign assets (Bank of Thailand): 3,872 4,525 5,082 5,441 5,359 5,444 5,262
  - Net domestic assets (Bank of Thailand): -2,833 -3,422 -3,839 -4,075 -3,861 -3,863 -3,594
  - Narrow money (currency in circulation; deposits at Bank of Thailand) and Reserve money figures for 2010–2014 listed with exact values.
- Monetary survey (Net foreign assets; Net domestic assets; Domestic credit; Net credit to central government; Credit to nonfinancial public enterprises; Credit to financial corporations; Total credit to private sector; Credit to other nonfinancial corporations; Credit to other resident sector; Other items (net); Broad money; Quasi-money) with exact 2010–2014 values in billions of baht.
- Memorandum items:
  - Broad money growth (y/y percent change) 2010–2014: 9.2 6.8 10.9 15.1 10.4 7.3 6.3
  - Narrow money growth (y/y percent change) 2010–2014: 4.1 12.8 10.9 8.6 13.0 3.9 8.5
  - Credit to private sector growth (y/y percent change) 2010–2014: 8.8 2.5 12.3 17.0 14.6 9.6 6.4
  - Contribution to broad money growth: Net foreign assets (in percent) and Net domestic assets (in percent) and Domestic credit (in percent) with exact values for 2010–2014.
- Sources: CEIC Data Co. Ltd.; and IMF staff calculations.

*Italic: Data and figures cited above are drawn from the IMF staff report content provided in the source PDF.*

### 1. Revenue 17.018.218.919.519.719.119.319.619.619.719.719.8

### 1. Revenue 17.018.218.919.519.719.119.319.619.619.719.719.8

### Central government: Revenue composition and time series
- Total Revenue (central government) by period: 17.0 18.2 18.9 19.5 19.7 19.1 19.3 19.6 19.6 19.7 19.7 19.8
- Tax revenue: 14.9 15.8 16.9 16.9 17.4 16.7 16.9 17.2 17.2 17.3 17.3 17.4
  - Taxes on income and profits: 7.2 6.9 8.0 7.8 8.1 7.4 7.4 7.4 7.5 7.5 7.6 7.6
  - Taxes on goods and services: 6.7 7.9 7.8 7.9 8.3 8.3 8.6 8.8 8.8 8.8 8.8 8.8
  - Taxes on international trade: 0.9 0.9 0.9 1.1 0.9 0.9 0.8 0.8 0.8 0.9 0.9 0.9
  - Taxes not elsewhere classified: 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
- Social contributions: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- Grants: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
- Other revenue: 2.0 2.4 2.0 2.7 2.2 2.4 2.4 2.4 2.4 2.4 2.4 2.4

### Central government: Expenditure and investment
- Total expenditure (central government): 21.2 20.8 20.6 22.1 21.6 21.7 22.0 22.3 22.2 22.3 22.4 22.4
- Expense (central government): 19.2 18.4 19.0 20.4 19.7 20.4 20.2 20.4 20.4 20.1 20.1 20.1
  - Compensation of employees: 7.2 7.6 5.6 6.1 5.8 5.6 5.8 6.0 6.0 5.9 5.9 5.9
  - Purchase/use of goods and services: 5.1 4.9 3.9 3.9 3.9 3.4 5.1 3.7 3.7 3.6 3.6 3.6
  - Interest: 1.1 1.3 1.3 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2
  - Social benefits: 1.3 0.4 1.9 2.0 1.9 1.7 1.9 1.9 1.9 1.9 1.9 1.9
  - Expense not elsewhere classified: 4.5 4.3 6.3 7.1 7.4 6.8 6.8 7.6 7.5 7.5 7.5 7.5
- Net acquisition of nonfinancial assets: 2.0 2.4 1.6 1.7 1.9 1.2 1.8 1.9 2.0 2.1 2.3 2.2

### Central government: Balances
- Net lending/borrowing (budgetary): -4.2 -2.6 -1.7 -2.6 -1.9 -2.5 -2.7 -2.7 -2.6 -2.6 -2.7 -2.6
- Extrabudgetary balance: 0.9 0.5 0.3 0.4 1.1 0.3 0.3 0.3 0.3 0.3 0.3 0.3
- Social security balance: 0.3 1.4 0.2 -0.1 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3
- Net lending/borrowing (consolidated): -3.1 -0.6 -1.1 -2.3 -0.5 -2.0 -2.1 -2.2 -2.1 -2.1 -2.1 -2.1

### Local government
- Revenue: 3.8 3.5 4.1 4.6 4.5 4.6 4.6 4.6 4.6 4.6 4.6 4.6
- Total expenditure: 3.8 3.7 3.5 4.1 4.2 4.4 4.4 4.4 4.4 4.4 4.4 4.4
- Net lending/borrowing: -0.1 -0.2 0.5 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2

### General government (consolidated): Key aggregates
- Revenue (general government): 20.8 22.4 22.6 23.1 24.1 22.5 22.7 23.0 23.0 23.1 23.1 23.2
- Tax revenue (general government): 16.7 17.5 18.8 18.8 19.7 18.5 18.7 19.0 19.0 19.1 19.1 19.1
  - Taxes on income and profits: 7.2 6.9 8.0 7.8 8.1 7.4 7.4 7.4 7.5 7.5 7.6 7.6
  - Taxes on goods and services: 8.2 9.3 9.4 9.4 10.1 9.6 9.9 10.1 10.1 10.1 10.1 10.1
  - Taxes on international trade: 0.9 0.9 0.9 1.1 0.9 0.9 0.8 0.8 0.8 0.9 0.9 0.9
  - Taxes not elsewhere classified: 0.5 0.4 0.5 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6
- Social contributions (general government): 0.9 1.3 0.9 0.8 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9
- Other revenue: 3.1 3.5 2.9 3.5 3.5 3.1 3.1 3.1 3.1 3.1 3.1 3.1
- Total expenditure (general government): 24.0 23.2 23.2 24.9 24.3 24.3 24.7 25.0 24.9 24.9 25.1 25.0
  - Expense (general government): 20.8 19.8 20.1 21.4 20.8 21.4 21.2 21.4 21.2 21.1 21.1 21.1
    - Compensation of employees: 8.4 8.6 7.1 7.9 7.7 6.7 6.7 6.9 7.1 7.1 7.0 7.0
    - Purchase/use of goods and services: 7.3 7.4 6.2 6.6 6.1 6.1 6.1 6.1 6.1 6.1 6.1 6.1
    - Interest: 1.1 1.3 1.3 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2
    - Social benefits: 2.7 1.2 2.3 2.5 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4
    - Expense not elsewhere classified: 1.3 1.3 3.2 3.2 3.4 5.1 4.7 4.7 4.5 4.4 4.4 4.4
  - Net acquisition of nonfinancial assets: 3.2 3.5 3.1 3.4 3.5 2.9 3.5 3.6 3.7 3.8 3.9 3.9
- Net lending/borrowing (consolidated, general government): -3.2 -0.8 -0.6 -1.8 -0.2 -1.8 -2.0 -2.0 -1.9 -1.9 -2.0 -1.9
- General Government cyclically adjusted primary balance: -1.1 0.3 0.4 0.1 0.9 0.0 -0.3 -0.4 -0.6 -0.7 -0.7 -0.7

### Memorandum items: public sector balances and debt
- Central government net lending/borrowing (budgetary): -4.2 -2.6 -1.7 -2.6 -1.9 -2.5 -2.7 -2.7 -2.6 -2.6 -2.7 -2.6
- Central government net lending/borrowing (consolidated): -3.1 -0.6 -1.1 -2.3 -0.5 -2.0 -2.1 -2.2 -2.1 -2.1 -2.1 -2.1
- Local government net lending/borrowing: -0.1 -0.2 0.5 0.4 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2
- General government net lending/borrowing (consolidated): -3.2 -0.8 -0.6 -1.8 -0.2 -1.8 -2.0 -2.0 -1.9 -1.9 -2.0 -1.9
- Public enterprise balance: 2/ -0.5 -0.7 -0.1 -1.0 0.5 0.1 0.1 -0.1 -0.3 -0.5 -0.7 -0.6
- Public sector balance: -3.6 -1.5 -0.7 -2.8 0.3 -1.7 -1.9 -2.1 -2.2 -2.4 -2.6 -2.5
- Public sector debt: 45.2 42.6 41.7 45.4 45.5 45.5 47.5 47.5 47.2 47.0 47.0 47.4 47.8
  - Central government: 29.2 29.3 29.8 32.4 31.9 31.6 33.8 34.0 34.1 34.1 34.4 34.6
  - Non-financial Public Enterprises: 12.5 10.9 10.1 9.8 9.4 9.0 8.6 8.1 7.9 8.0 8.2 8.4
  - Specialized Financial Institutions guaranteed debt, and Autonomous Agency Debt: 2.4 1.8 1.5 3.3 3.4 2.4 4.9 5.1 5.1 5.0 4.9 4.9 4.8
- Public sector consumption: 21.9 21.0 21.0 22.8 22.3 23.2 22.9 23.1 22.9 22.8 22.9 22.9
- Public sector investment: 5.3 5.1 4.8 5.2 5.9 5.0 5.6 6.0 6.3 6.6 6.9 6.8
  - General government investment: 3.2 3.4 3.1 3.4 3.5 2.9 3.5 3.6 3.7 3.8 3.9 3.9
  - Public enterprises investment: 2.1 1.7 1.7 1.7 2.4 2.1 2.2 2.4 2.6 2.8 3.0 2.9

_Source: IMF Staff estimates and projections._

---

### Banks' Financial Soundness Indicators (2009–2014 Sep.)
- Capital adequacy
  - Regulatory capital to risk-weighted assets: 15.8 16.1 14.8 16.2 15.5 16.9
  - Regulatory Tier 1 capital to risk-weighted assets: 11.7 11.9 11.0 11.0 11.9 13.3
- Asset quality
  - Nonperforming loans net of provisions to capital: 19.5 13.8 10.6 7.7 7.7 8.2
  - Nonperforming loans to total gross loans: 5.2 3.9 2.9 2.4 2.3 2.5
- Earnings and profitability
  - Return on assets: 1.3 1.6 1.6 1.6 1.8 1.8
  - Return on equity: 12.1 14.1 14.1 14.4 14.9 15.6
- Liquidity
  - Liquid assets to total assets: 20.8 18.3 17.4 19.0 17.7 17.2
  - Liquid assets to short term liabilities: 26.9 24.9 22.5 25.9 24.0 24.1

_Source: IMF, Financial Soundness Indicators database._

---

### Appendix I — Reform Agenda: scope and priorities
- Reform process: national reform council prepares reforms for the National Legislative Assembly; three phases:
  - Phase 1: completed by the National Council for Peace and Order (pacification).
  - Phase 2: began with interim constitution in July 2014 and formation of National Legislative Assembly and Council of Ministers.
  - Phase 3: organization of a general election under a new Constitution.
- Government identified 11 policy areas (listed by the authorities):
  1. Protecting and Upholding the Monarchy
  2. Maintaining National Security and Foreign Affairs
  3. Reducing Social Inequality and Creating Opportunities to Access Public Services
  4. Education, Learning, and Fostering Religions, Arts and Culture
  5. Improving the Quality of Public Health Services and Public Health
  6. Enhancing the Country's Economic Potential
  7. Promoting Thailand's Role and Exploring Opportunities in the ASEAN Community
  8. Developing and Promoting the Application of Science, Technology, Research and Development, and Innovation
  9. Maintaining the Security of the Resource Base and Creating Balance between Conservation and Sustainable Use
  10. Promoting Administration of State Affairs that Upholds Good Governance and Prevents and Suppress Corruption and Malfeasance in the Public Sector
  11. Improving Laws and the Judicial Process
- Economic reform priorities cited: energy prices (Appendix III), tax structure, transport infrastructure, management of state enterprises, promotion of innovation and high value-added sectors.

_Source: Thai Authorities._

---

### Appendix II — Risk Assessment Matrix: principal risks and policy responses
- External risks
  - A surge in financial volatility — Likelihood: H; Impact: M
    - Policy guidance: Allow exchange rate flexibility; use judicious currency intervention; provide liquidity; hold monetary policy and use fiscal stimulus if volatility and capital outflows affect the real economy.
  - Protracted slower growth in advanced economies — Likelihood: H; Impact: M
    - Policy guidance: Structural reforms and infrastructure development to raise returns to private investment.
  - Protracted slower growth in emerging economies — Likelihood: H; Impact: H
    - Policy guidance: Policy stimulus, structural reforms, infrastructure investment, reorientation toward CLMV regional markets.
- Domestic risks
  - Slippages in implementing government’s economic program — Likelihood: M; Impact: M
    - Policy guidance: Lower policy rate if fiscal stimulus not forthcoming; accelerate structural reform agenda.
  - Tepid private sector response to political stabilization and reform — Likelihood: M; Impact: M
    - Policy guidance: Use fiscal and monetary stimulus; announce ambitious reform agenda.
  - Renewed political instability — Likelihood: M; Impact: H
    - Policy guidance: Allow automatic stabilizers; provide ample liquidity to banks; let exchange rate depreciate if outflows modest while using reserves to avoid overshooting.
  - Stronger response to oil price decline (upside) — Likelihood: M; Impact: M
    - Policy guidance: Welcome stronger domestic demand given weak cyclical state and strong current account; no offsetting measures in near term.

- Note: “L”=Low (<10 percent), “M”=Medium (10–30 percent), “H”=High (30–50 percent). RAM reflects staff views as of discussions with authorities.

---

### Appendix III — Energy Price Reform: background, impact, and recent developments
- Background
  - Long history of price controls; Oil Fund created after 1973 oil shock.
  - Diesel and LPG subsidized or exempted from excise taxes; biofuels benefited from lower taxes.
- Fiscal impact examples
  - Excise tax on diesel cut from B 5.84 baht/liter to B 0.0055 baht/liter in 2011.
  - The excise tax exemption on diesel estimated cost: 100 billion baht (about 1 percent of GDP) per year revenue shortfall.
  - Oil Fund deficit reached 9 billion baht end-July 2014.
- Recent reforms and outcomes
  - LPG price adjustments started 2011; by September 2012 LPG for industry B 30.13/liter, for automobile B 21.38/liter; low-income households maintained at B 18.13/liter.
  - Current government reduced subsidies and reinstated excises and Oil Fund levies on diesel and LPG; reduced levies on other fuels.
  - Oil Fund deficit eliminated by November 2014.
  - If fully implemented, revenue from excise tax and import duty on petroleum products expected to increase by close to 1 percent of GDP (from 0.6 of GDP in 2014).
- Specific price pass-through (Sept. 1, 2014 to Jan. 30, 2015)
  - Gasoline: average cost declined by B 11/liter (from B 23.65/liter to B 12.89/liter); retail price declined by B 11/liter (from B 44.86/liter to B 33.96/liter).
  - Diesel: average cost declined by B 10/liter (from B 24.46/liter to B 14.22/liter); retail price declined by B 5/liter (from B 29.99/liter to B 24.16/liter) due to partial reinstatement of excises (from B 0.83/liter to B 3.58/liter) and Oil Fund levies (from B 1.25/liter to B 3.60/liter). Current excises (B 3.58/liter) remain below pre-2011 level (B 5.84/liter).
  - LPG: prices unified January 2015 to B 24.16/liter; LPG retail prices now above average cost (B 14.48/liter). Low-income households and street food vendors kept at B 18.13/liter subject to means testing; low-income households have free electricity up to 50Wh a month.
- Price structure snapshot (selected lines from authorities’ table)
  - As of Sept. 1, 2014 (average cost / excises / Oil Fund / VAT / Retail):  
    - Gasoline: 23.65 ... 44.86  
    - Diesel: 24.46 ... 29.99  
    - LPG for industry: 19.99 ... 29.33  
    - LPG for cooking: 19.99 ... 22.63  
    - LPG for automobile: 19.99 ... 21.38  
    - LPG for low-income households: 19.99 ... 18.13
  - As of Jan. 30, 2015 (average cost / excises / Oil Fund / VAT / Retail):  
    - Gasoline: 12.89 ... 33.96  
    - Diesel: 14.22 ... 25.09  
    - LPG: 14.48 ... 24.16  
    - LPG for low-income households: 14.48 ... 18.13

- Conclusion: Staff welcomes reforms as contributing to rationalizing public expenditures and enhancing fiscal transparency; Oil Fund balance strengthened by 0.2 percent of GDP between July and December 2014 (from a deficit of B 7 billion to a surplus of B 15 billion).

_Source: Thai authorities._

---

### Appendix IV — Public Debt Sustainability Analysis (DSA): framework and baseline assumptions
- DSA framework: market access countries framework expanded to include realism assessment of baseline, risk analysis of debt profile, macrofiscal risks, stochastic debt projection reflecting past macrofiscal volatility, and standardized heat map.
- Macroeconomic assumption: real growth projected to average 4 percent in the medium term.
- Fiscal assumption: overall public sector deficit will gradually increase from 1.9 to 2.6 percent of GDP between FY2015 and 2019 before coming down to 2.5 percent in FY2020 (staff baseline projections).
- Infrastructure program assumption: implementation rate of 50 percent compared to planned disbursement schedules.
- Data coverage: public debt coverage includes central government, nonfinancial SOEs, and SFIs (limited to debt with government guarantee); local authorities’ debt is excluded from this DSA.

_Source: IMF staff projections._

### 5.      Realism of baseline assumptions.

### 5. Realism of baseline assumptions.

### Forecast track record and realism
- The median forecast error for real GDP growth during 2005−2013 is -2.2 percent of GDP.
- The period 2005−2013 included unexpected shocks with significant impact on growth: the Global Financial Crisis, the flood in 2011, and more recent political unrests.
- Past assumptions on primary balance and inflation are comparable to other countries.
- Baseline scenario assumption: current policies and an implementation rate of 50 percent of infrastructure projects.

### DSA baseline projections and scenarios
- Under the baseline, the debt-to-GDP ratio is projected to hover around 47 percent of GDP, which is below the government’s ceiling of 60 percent and far below the benchmark of 70 percent.
- Historical scenario: debt-to-GDP is reduced steadily to about 38 percent in FY2020 on the back of sustained fiscal surplus and stronger growth.
- Fan chart results: even under the worst quartile case, debt-to-GDP remains well under the benchmark of 70 percent.
- Of four macro-fiscal shock scenarios (primary balance shock, interest rate shock, growth shock, exchange rate shock), the growth shock has the largest impact:
  - Real GDP growth is reduced by 10-year historical standard deviation (4 percent) for two consecutive years from FY2015, resulting in deterioration of the primary balance.
  - This leads to higher interest rate and lower inflation (0.25 percentage point per 1 percent of GDP worsening of the deficit).
  - Consequence: debt-to-GDP ratio reaches close to 54 percent of GDP in FY2020, still below the government’s ceiling of 60 percent and far below the benchmark of 70 percent.
- Financial sector contingent liability shocks have the largest impact on debt ratios:
  - A one-time capital injection equivalent to 10 percent of commercial banks assets results in a one-off increase in government spending of 14 percent of GDP.
  - If the shock is augmented to include SFIs, the government spending increase jumps to 18 percent of GDP.
  - These shocks are combined with an increase in interest rate (0.25 percentage points per 1 percent of GDP worsening of the deficit) and one standard-deviation shock to growth.
  - By 2020, debt-to-GDP reaches 66 percent under the commercial banks shock.
  - Under the augmented shock involving SFIs in addition to commercial banks, debt-to-GDP reaches 71 percent.
  - These scenarios are characterized as possibly low probability but underscore importance of enhancing regulatory frameworks on financial institutions, including SFIs.

### Heat map and risk indicators
- External financing requirement (current account balance plus amortization of total short-term external debt at remaining maturity) is 17 percent of GDP, which exceeds the upper threshold of early warning benchmarks (15 percent).
- Official foreign reserves exceed 40 percent of GDP, providing comfortable buffers.
- Share of public debt held by foreigners (including official lenders such as the World Bank) is 17 percent of total, slightly exceeding the lower threshold of early warning benchmarks (15 percent).
- Existence of a well functioning domestic bond market underpinned by a wide group of investor types provides some comfort.

### Key baseline and projection figures (selected)
- Baseline real GDP growth: 2015: 3.6; 2016: 3.5; 2017: 4.2; 2018: 4.0; 2019: 3.9; 2020: 3.8 (in percent).
- Baseline inflation (GDP deflator): 2015: 0.2; 2016: 2.7; 2017: 1.9; 2018: 2.1; 2019: 1.9; 2020: 1.8 (in percent).
- Baseline primary balance: 2015: -1.3; 2016: -1.6; 2017: -1.7; 2018: -1.9; 2019: -2.1; 2020: -2.0 (in percent of GDP).
- Effective interest rate: 2015: 3.4; 2016: 3.4; 2017: 3.4; 2018: 3.5; 2019: 3.5; 2020: 3.5 (in percent).
- Historical median forecast errors and percentile ranks:
  - Real GDP growth median forecast error, 2006-2014: -2.21 percent (has a percentile rank of: 3%).
  - Primary Balance median forecast error, 2006-2014: 1.22 percent of GDP (has a percentile rank of: 86%).
  - Inflation (Deflator) median forecast error, 2006-2014: 0.50 percent (has a percentile rank of: 38%).
- Public sector debt projections and debt-creating flows (cumulative 2015–2020 highlights):
  - Change in gross public sector debt cumulative: 2.3 (percent of GDP).
  - Identified debt-creating flows cumulative: 4.4 (percent of GDP).
  - Primary deficit cumulative: 10.5 (percent of GDP).
  - Primary (noninterest) revenue and grants cumulative: 47.6 (percent of GDP).
  - Primary (noninterest) expenditure cumulative: 158.1 (percent of GDP).
  - Automatic debt dynamics cumulative: -6.1 (percent of GDP).
  - Residual, including asset changes cumulative: -2.2 (percent of GDP).

### Stress tests—scenario summaries (selected)
- Primary Balance Shock scenario (selected path): Real GDP growth: 2015: 3.6; 2016: 3.5; 2017: 4.2; 2018: 4.0; 2019: 3.9; 2020: 3.8. Primary balance path: 2015: -1.3; 2016: -2.5; 2017: -2.6; 2018: -1.9; 2019: -2.1; 2020: -2.0.
- Real GDP Growth Shock scenario (selected path): Real GDP growth: 2015: 3.6; 2016: -0.4; 2017: 0.3; 2018: 4.0; 2019: 3.9; 2020: 3.8. Primary balance path: 2015: -1.3; 2016: -2.9; 2017: -4.3; 2018: -1.9; 2019: -2.1; 2020: -2.0.
- Real Interest Rate Shock scenario (selected path): Effective interest rate rises to 4.0 by 2020 in that scenario.
- Combined Macro-Fiscal Shock scenario replicates the adverse growth and interest impacts: example combined path shows real GDP growth dipping in 2016 and primary balance worsening accordingly.
- Financial Sector Contingent Liability Shock scenario: primary balance in 2016 falls to -15.8 (percent of GDP) and in the Augmented Contingent Liability Shock to -20.2 (percent of GDP) in 2016; effective interest rates rise in these scenarios (examples: 2016 effective interest rate 3.1 in the financial sector shock; 4.9 in augmented shock).

### External debt and external-sector assessment (summary)
- External debt is projected to decline from 37 percent of GDP in 2014 to 33 percent of GDP in 2020.
- Stress tests indicate external debt would remain stable under various scenarios including weaker GDP growth, a lower current account balance, and a one-time 30 percent depreciation of the baht.
- In the exchange rate depreciation scenario, the external debt ratio would rise to about 56 percent of GDP (scenario does not model ensuing trade-flow adjustments).
- Net international investment position (NIIP) deteriorated to -18 percent of GDP in 2013 after earlier improvement; net foreign liabilities expected to remain broadly stable.
- Rising share of short-term external debt in total external debt (almost 44 percent) needs close monitoring.
- Current account: 2014 CA was 3.8 percent of GDP; staff assesses 2014 CA to be close to the level consistent with medium-term fundamentals (within a range of -5 to +5 percent of GDP). EBA CA model estimate of a gap is 1.4 percent of GDP; cyclically adjusted EBA estimated CA norm and outcome are -0.8 and 0.7 percent of GDP, respectively.
- Policy considerations noted: a medium-term infrastructure investment policy to boost private investment; authorities should allow exchange rate to follow fundamentals; more-than-adequate reserves can support two-way flexibility of the baht; no need to tighten macroprudential policies given net capital outflows, slowing credit growth, low share of real estate loans, and no apparent real estate boom.

*Source: IMF staff (Thailand Public Sector Debt Sustainability Analysis and External Debt Sustainability Analysis, as presented in the provided content).*

### 3.2 percent weaker than its 2013 average level.

### _cr15114 - 3.2 percent weaker than its 2013 average level.

### Real Effective Exchange Rate (REER) assessment
- Staff assesses the REER to be broadly consistent with medium-term fundamentals and appropriate policies, within a range of -5 percent below to +5 percent above such a level.
- The EBA REER regression model estimates an REER slightly on the weak side in 2014 by 1.9 percent.
- Statement: "3.2 percent weaker than its 2013 average level."

### Capital and financial accounts: flows and policy measures
- Background findings:
  - Equity and bond flows declined and became negative in 2013 and 2014 due to Fed’s tapering talk and political uncertainties.
- Assessment findings:
  - Capital flows to banks reflect mostly hedging activities of the trade sector and therefore follow the trade balance.
  - Portfolio flows benefited from the relatively better fundamentals of the Thai economy compared with advanced economies, but faced headwinds from the withdrawal of unconventional monetary policies, emerging market sell-offs and domestic political uncertainties.
  - The authorities have allowed exchange rate flexibility to smooth capital flow volatility.
  - Capital inflows are expected to continue, although they will be partially offset by outward investment as the authorities push forward with their financial account liberalization plans.

### FX intervention and reserves level
- Background findings:
  - The exchange rate is largely floating without evidence of intervention.
  - International reserves declined primarily on valuation changes.
  - Gross official reserves are about 48 percent of GDP in 2014.
  - Gross official reserves are over three times short-term debt.
  - Gross official reserves are at 213 percent of the IMF’s composite metric.
  - Thailand’s net forward FX position has declined to six percent of GDP in 2014.
- Assessment:
  - Thailand’s gross reserves are more than adequate and there is no need to build up reserves for precautionary purposes.
  - The exchange rate should continue to react flexibly to domestic and external shocks, including volatile capital flows.

### Regional integration with CLMV (Cambodia, Laos, Myanmar, Vietnam)
- Trade:
  - Thailand’s exports to CLMV expanded in 2014 despite falling demand from China, Japan, and ASEAN-4.
  - Shares of Thailand exports to CLMV countries continued to rise.
  - Thailand’s exports to Cambodia and Laos as a share of total Thai exports have almost tripled in the last decade and have increased more than 70 percent in the last four years.
  - Thailand’s imports from CLMV countries as a share of total Thai imports have also been rising steadily, albeit at a slower pace than exports.
  - Both Laos and Myanmar’s exports to Thailand as a share of total Laos and Myanmar’s exports reached more than 33 percent in 2013.
- FDI:
  - More than 10 percent of Thailand outward FDI is destined to CLMV.
  - Thailand inward FDI from CLMV turned negative after receiving inward FDI during 2009−10, indicating CLMV’s investment flowing from Thailand back to CLMV.
- Migration:
  - CLMV countries are the main source of foreign workers in Thailand, with Myanmar accounting for two thirds of all immigrants.
  - There were 1.8 million registered immigrants (mostly from Myanmar) and approximately 1 million unregistered immigrants.
- AEC implications:
  - The ASEAN Economic Community (AEC) is expected to help transform ASEAN into a region with free movement of goods, services, investment, skilled labor, and freer flow of capital.
  - Further cuts in tariffs and elimination of behind-the-border barriers could reap substantial dividends for Thailand and CLMV countries, including upgrading of the service sector and unlocking structural reforms.

### Global liquidity transmission and changing financial landscapes in the ASEAN-5
- Global liquidity expansion (proxies and magnitudes):
  - Money supply of the G4 rose from US$ 15 trillion in 2000 to US$ 36 trillion in 2014.
  - Foreign exchange reserves increased six-fold from US$ 2 trillion in 2000 to over US$ 12 trillion in 2014.
  - International debt security issuance by emerging market economies increased four-fold from US$ 554 billion in 2000 to US$ 2.6 trillion in 2014.
  - External loans to emerging markets increased four-fold from US$ 777 billion in 2000 to US$ 3.1 trillion in 2014.
- Transmission to ASEAN-5 (December 2000 to June 2014):
  - International debt security issuance (by nationality) increased from US$70 billion in 2000 to US$ 288 billion.
  - External loans and deposits increased from US$ 272 billion to US$ 787 billion.

### Non-commercial-banks and changing financial landscapes: country developments
- Indonesia:
  - Non-commercial-bank asset-to-GDP ratio increased from less than three percent in 2006 to five percent in 2013.
  - Non-commercial-bank assets as a share of total assets of all financial institutions grew from six percent in 2006 to nine percent in 2013.
- Malaysia:
  - Asset-to-GDP ratio remained high around 26−28 percent during 2011 and 2013.
- Philippines:
  - Asset-to-GDP ratio remained around 10 percent during 2006 and 2013.
- Singapore:
  - Asset-to-GDP ratio increased from less than 100 percent in 2006 to 120 percent in 2013.
  - Non-commercial-bank short-term funding as a share of total funding of all financial institutions grew from 22 percent in 2006 to almost 24 percent in 2013.
- Thailand:
  - Excluding SFIs, non-commercial-banks’ asset-to-GDP ratio increased from 13 percent in 2006 to 21 percent in 2013.
  - Non-commercial-bank assets as a share of total assets of all financial institutions grew from 10 percent in 2006 to 14 percent in 2013.

### Risks to financial stability and policy implications for Thailand / ASEAN-5
- Risks:
  - Protracted monetary accommodation and search for yield could be fueling credit mispricing and buildup of systemic liquidity risk, especially in the nonbank sector.
  - Potential risks to monitor: credit, liquidity, and exchange rate risks.
  - These risks are amplified by weak global economic recovery and uncertainties about the China slowdown and rebalancing.
- Policy implications and recommendations:
  - Regulation on non-commercial-banks:
    - Enlarge financial regulatory perimeters to non-commercial-banks, including SFIs, and contain the rapid growth of leverage.
  - Liquidity management:
    - Prepare for possible liquidity tightening arising from the expected U.S. monetary policy normalization.
    - Useful measures include encouraging greater exchange rate flexibility and taking macroprudential and cooperative measures to provide liquidity when global liquidity shortages actually materialize.
  - Financial stability framework:
    - Strengthen a formal and transparent financial stability framework.
    - Useful measures include giving the central banks a more formal mandate to ensure financial stability; strengthening data collection to cover data gaps and monitor the buildup of financial stability risks; enhancing coordination and information sharing among regulators across jurisdictions.

### Thailand’s demographic challenge
- Demographic transition:
  - Thailand’s total population will peak in 2023 (UN population projections).
  - Working age population (age 15−64) will start declining this year as a share of total population and in 2018 in absolute numbers.
- Drivers:
  - Total fertility rate fell from 5.2 to 2.2 between 1970 and 1990.
  - Current total fertility rate stands at 1.4.
  - Life expectancy went up from 64 in 1980 to 74 in 2012.
- Implications:
  - The dependency ratio is at its trough and will start climbing, driven by old-age dependency, with negative implications for growth, old-age security, and public finances.
  - Assuming employment shrinks in proportion to working age population, the labor input will decline by 0.3 percent in 2020 and at even faster rates going forward.
  - If age- and gender-specific participation rates remain at their average levels of the last five years, employment projections show labor input declining by 0.1 percent in 2020 and 0.3 percent in 2023.
  - Aging will lead to higher health care spending, particularly in the public sector given Thailand’s universal coverage.
  - The existing formal sector social security scheme may not be sustainable, given low contribution rates and low retirement age.
- Policy responses and augmentation of labor supply:
  - Increase labor productivity through infrastructure investment plans, improving quality of education and training, and reallocating resources toward higher-value-added activities.
  - Augment labor supply by engaging the elderly and migrant workers:
    - Facilitate accommodating work environments (including flexible hours and part-time arrangements), improved health care, targeted training, and removing institutional obstacles such as mandatory retirement of government employees at age 60.
    - Some measures, and improved quality of daycare and more generous maternity benefits, may boost fertility and increase female labor force participation.
    - Regularizing inflow of migrants from neighboring labor-rich countries and making it easier to employ high-skill foreigners would help complement the supply of native-born workers.
  - Note: Thailand hosts over one million registered economic migrants, primarily from Myanmar, Cambodia and Laos; the total number including undocumented workers is estimated to be around 4 million—about 10 percent of the country’s labor force.

*International Monetary Fund (excerpt).*

### Appendix X. Thailand’s Structural Transformation in Regional

### Appendix X. Thailand’s Structural Transformation in Regional Perspective

### Snapshot: productivity and employment dispersion
- Thailand exhibits a high dispersion of productivity across sectors, with especially low labor productivity in agriculture.
- The share of agricultural employment in Thailand is "nearly 40 percent," which is considerably higher than expected for a country at Thailand’s level of income.
- The combination of low agricultural productivity and high agricultural employment depresses the country’s overall productivity and standard of living.

### Dynamics: past contribution and recent stall
- Historically, inter-sectoral labor reallocation—from agriculture to manufacturing and modern services—accounted for a considerable share of productivity growth in Thailand (and many other Asian economies).
- Over the last few years, structural transformation has stalled:
  - Both agricultural employment and agricultural productivity have been "nearly stagnant."

### Explanation: factors behind high agricultural employment and stalled reallocation
- Longstanding drivers of high agricultural employment include culture, tradition, and educational gaps (skills mismatches between rural workers and requirements of modern sectors).
- Recent factors that have likely contributed to the leveling of the agricultural employment share after a trend decline:
  - A pickup in global food prices.
  - Intensified government support for agriculture, particularly the rice pledging scheme.
  - An increase in the uniform minimum wage, which may discourage employment in the formal sector.

### Way forward: policy recommendations to accelerate structural transformation
- Replace generalized price support programs with targeted income transfers:
  - The government moved to replace the rice pledging scheme and price support for rubber with targeted income transfers (noted as a right-step policy action).
- Labor market and skills policies:
  - Modernize curriculum and increase support for rural schools to equip future generations with appropriate skills.
  - Improve information dissemination to direct people toward gainful employment in the formal sector.
  - Enhance incentives to hire newcomers to the formal labor market, for example through temporary tax breaks or minimum wage waivers.
- Measures to raise agricultural productivity and living standards for those remaining in agriculture:
  - More efficient water management.
  - Enhanced agricultural research and knowledge transfer.
  - Reformed land tenure laws to facilitate consolidation and realize economies of scale.

### Related IMF staff advice and policy actions (selected)
- Fiscal and subsidy reform:
  - Strengthen the medium-term fiscal framework and embed it in the planned revision of the Public Finance Act (authorities working on fiscal responsibility law).
  - Replace generalized subsidies with programs targeted at vulnerable groups (the rice scheme has been replaced with transfers to small-scale farmers; energy price reform steps noted).
- Labor and inclusive growth:
  - Directors supported plans to boost workers’ skills to address skills mismatches and labor shortages and to promote more inclusive growth.
- Infrastructure and state enterprise reform:
  - Expand infrastructure investment; authorities endorsed a large-scale public infrastructure investment program and plan restructuring of state enterprises such as the State Railway of Thailand.
- Financial sector and exchange rate:
  - Allow exchange rate to move flexibly; Bank of Thailand has adhered to a policy of flexible exchange rates, intervening only to prevent overshooting.
  - Consider extending the regulatory and supervisory regime of commercial banks to all deposit-taking institutions; government decided to extend BOT’s supervisory and regulatory mandate to SFIs.

### Statistical and data context (selected points)
- National accounts:
  - Annual GDP volume measures are derived at previous year’s prices and as chain-linked indices with 2002 as the reference year.
  - Quarterly national accounts estimates use a fixed base year (1998); NESDB plans to introduce new quarterly GDP current price and chain-linked volume estimates in 2015.
- Price statistics:
  - BTEI compiles a monthly consumer price index with weights based on the 2011 Socio-Economic Survey; index coverage is restricted to middle-income urban households. Aggregate indexes for low-income and rural populations are also published.
- Government finance statistics:
  - Authorities provide data consistent with GFSM 2001; general government fiscal data are provided annually, and central government monthly data are published on the authorities’ website.
- Balance of payments and external statistics:
  - BOP statistics under BPM6 published since September 2011 (historical data back to 2005). Quarterly IIP data disseminated since late 2014 (starting with first quarter of 2012); last observation available at assessment was Q3-2014.
- Data adequacy:
  - Data provision is described as "broadly adequate for surveillance"; further dissemination of additional data would enhance macroeconomic analysis.

*This appendix is based on Vladimir Klyuev, 2015, Structural Transformation: How Does Thailand Compare? IMF WP/15/51.*

### 3.8 percent of GDP in 2014 from a -0.6 percent deficit the previous year.

### _cr15114 - 3.8 percent of GDP in 2014 from a -0.6 percent deficit the previous year.

### Near‑term growth outlook
- Real GDP growth:
  - 2014 recorded 0.7 percent growth.
  - Recovery projected at 3.7 percent for 2015 (staff projection).
  - Authorities’ latest growth projection for 2015 is 3.8 percent (Bank of Thailand’s projection as of March 2015).
- Drivers of recovery:
  - Rebound in consumption, including from lower fuel prices.
  - Private investment recovery as backlogs of project approvals have been largely cleared.
  - Accommodative monetary policy supportive.
- Headline and core inflation:
  - Headline inflation projected to remain subdued in 2015 and recover somewhat toward the end of the year.
  - Authorities adopted a headline inflation target with an annual average target of 2.5 ± 1.5 percent.
- External sector:
  - Current account surplus projected to increase further in 2015 as oil prices are expected to be considerably lower on average than in 2014.
  - Global demand for Thailand’s exports described as weak.

### Risks to the outlook
- Downside risks (domestic):
  - Possible policy slippages.
  - Weaker-than-expected private demand.
  - Political uncertainty.
  - Low capacity utilization.
  - High household debt and tighter credit conditions weakening private consumption.
  - Expansion of public investment proving more difficult than expected; government investment can face delays from the fiscal reform process.
- Downside risks (external):
  - Surge in global financial volatility.
  - Protracted slow growth in advanced and emerging economies.
  - Policy divergence among major economies heightening uncertainty in global financial markets.
- Upside possibility:
  - Consumption, investment, and exports may receive a stronger boost from sharply lower oil prices.

### Policy assessment and recommendations (Executive Board and staff views)
- Fiscal policy:
  - Stimulating the economy while introducing a multi-year policy framework to safeguard public finance sustainability is appropriate.
  - Continued fiscal support is needed in the near term.
  - Support welcomed for reforms to generalized subsidies (rice pledging scheme and energy pricing) replaced by targeted and means-tested support.
  - Authorities plan a new fiscal responsibility law requiring a medium-term fiscal framework; welcomed strategic review of state-owned enterprises and formulation of a multi-year public investment plan for large infrastructure projects.
- Monetary policy:
  - Current monetary stance viewed as warranted.
  - Further monetary easing could be considered if the expected recovery is delayed, with due regard to lower interest rates’ impact on financial stability.
  - Transition to a headline inflation target welcomed; inflation expectations remain well anchored and recent price developments do not suggest risk of entrenched deflation.
- Financial stability:
  - Thailand’s strong policy buffers, including ample reserves and a flexible exchange rate regime, have served the country well.
  - Progress in strengthening financial stability welcomed, including expanding prudential oversight of Specialized Financial Institutions (SFIs) by the Bank of Thailand.
  - Continued efforts needed to strengthen supervision of nonbank financial institutions such as credit cooperatives.
- Structural and institutional reforms endorsed by authorities:
  - Fuel price reform implementation.
  - Replacement of rice pledging scheme with transfers to small-scale farmers.
  - Endorsement of a large public infrastructure investment program.
  - Review of state-owned enterprises initiated.
  - Extension of the Bank of Thailand’s oversight to state-owned Specialized Financial Institutions.
  - Establishment of five special economic zones in border regions.
  - Board of Investment’s new investment promotion strategy aimed at enhancing competitiveness.

### Authorities’ policy intentions and measures (statement by Ms. Pornvipa Tangcharoenmonkong)
- Growth and macro policy stance:
  - Authorities expect growth driven by gradual recovery of domestic demand, fiscal tailwinds from increased capital spending, and improved external prospects.
  - Authorities view accommodative fiscal policy, while committing to fiscal prudence, as key to near-term reinvigoration and longer-term potential.
- Monetary policy details:
  - Monetary Policy Committee eased policy at the 11 March 2015 meeting to support a sluggish recovery.
  - Low probability of deflationary pressure; declining headline inflation viewed as transitory and supply driven.
  - Welcome change from core to headline inflation targeting with annual average target of 2.5 ± 1.5 percent to strengthen policy communication and credibility.
  - Commitment to flexible exchange rate and sufficient international reserves as buffers; judicious currency intervention to curb excessive volatility when needed.
- Fiscal policy details:
  - Public Finance Act (fiscal responsibility legislation) being finalized to promote transparent budget processes and a prudent medium-term fiscal framework.
  - Plans to improve tax compliance and public finance management, and to broaden revenue bases.
  - Consideration of gradual VAT increase from the current 7 percent to 10 percent if economic recovery is strongly entrenched.
  - Exploring options to reduce tax expenditures by scaling down exemptions while using direct transfers and targeted subsidies to protect vulnerable groups.
  - Use of low oil prices to reform domestic fuel pricing structure and energy subsidy programs.
- Financial sector and stability actions:
  - Banking system described as highly capitalized with ample liquidity and low NPL ratio.
  - Household debt risks moderated by slowdown in credit growth.
  - Timely implementation of Basel III and other prudential regulations ongoing.
  - Expansion of BOT’s mandate to supervise SFIs intended to limit risks from greater inter-linkages between commercial banks and nonbank financial institutions.
  - Continued enhancement of financial surveillance through joint MPC and Financial Institutions Policy Committee meetings and internal financial stability committees.
- Requests and use of Fund assistance:
  - Authorities appreciate Fund technical assistance on tax administration and SFIs reform and consider it helpful for governance and regulatory reform agendas.

### Key statistics (selected from Thailand: Selected Economic Indicators, 2010–15)
- Real GDP growth (percent): 2010: 7.8, 2011: 0.1, 2012: 6.5, 2013: 2.9, 2014: 0.7, 2015 Proj.: 3.7
- Headline CPI (period average, percent): 2010: 3.3, 2011: 3.8, 2012: 3.0, 2013: 2.2, 2014: 1.9, 2015 Proj.: 0.1
- Core CPI (period average, percent): 2010: 0.9, 2011: 2.4, 2012: 2.1, 2013: 1.0, 2014: 1.6, 2015 Proj.: 1.7
- Gross domestic investment (percent of GDP): 2014: 25.9, 2015 Proj.: 26.9
  - Private: 2014: 20.7, 2015 Proj.: 21.2
  - Public: 2014: 5.2, 2015 Proj.: 5.7
- Gross national saving (percent of GDP): 2014: 29.9, 2015 Proj.: 31.6
- Current account balance (billions of U.S. dollars): 2014: 14.2, 2015 Proj.: 17.2
  - (Percent of GDP): 2014: 3.8, 2015 Proj.: 4.4
- Central government budgetary balance (percent of GDP, fiscal year basis): 2014: -2.5, 2015 Proj.: -2.7
- General government balance (percent of GDP): 2014: -1.8, 2015 Proj.: -2.0
- Public sector debt (percent of GDP): 2014: 45.5, 2015 Proj.: 47.5
- Gross official reserves (end-year, billions of U.S. dollars): 2014: 180.2, 2015 Proj.: 180.3
- Nominal GDP (in billions of baht): 2014: 12,141, 2015 Proj.: 12,718
- Nominal GDP (in billions U.S. dollars): 2014: 373.8, 2015 Proj.: 393.6

*Based on IMF staff report and authorities’ statements in the Article IV consultation document.*

### 13.  We take note of staff’s concern over the rapid expansion of saving cooperatives’

### 13. We take note of staff’s concern over the rapid expansion of saving cooperatives’

### Financial stability and saving cooperatives
- Staff express concern over the rapid expansion of saving cooperatives’ share in the financial system and the potential added risks to financial vulnerability.
- Characteristics mitigating risk:
  - Loans are relatively restrictive in nature: credit is mostly extended to shareholders and loan installments are tied to monthly salary.
  - The current NPL ratio stands at a very low level (less than 0.5% of total loans in 2013).
- Operational and supervisory improvements:
  - Saving cooperatives are exploring ways to strengthen their operational and supervisory framework towards international standards.

### Regional financial integration and banking sector reforms
- ASEAN integration:
  - The recent success of ASEAN nations in reaching agreement on Qualified ASEAN Bank is described as a key milestone for advancing financial integration to support the ASEAN Economic Community agenda.
  - Expected effects: gradual liberalization of financial services, facilitation of greater regional trade and investment, mutual benefit to consumers, and improved mobilization of regional resources to finance economic activities.
- Thailand’s Financial Sector Master Plan:
  - BOT’s second phase of Financial Sector Master Plan (2010-2014) helped enhance efficiency and soundness of the Thai banking system by preparing banks for greater competition, developing growth-conducive financial architecture, and strengthening supervisory capacity.
  - The third phase of Financial Sector Master Plan (2015-2019) aims to:
    - further promote connectivity and financial inclusion,
    - enter the new era of digital banking,
    - preserve financial system stability.

### Structural reforms: priorities and initiatives
- General approach:
  - Implementing well-prioritized structural reforms is crucial for removing supply-side bottlenecks and enhancing potential growth.
  - The current government has spearheaded a reform plan to prepare the country for long-term challenges and to improve good governance of public sector entities.
- Large-scale investment and infrastructure:
  - Authorities have laid out multi-year plans to upgrade infrastructure and quality of logistics services to facilitate long-run economic growth.
  - Better transportation networks are expected to promote intra-regional trade and connectivity and to induce private sector investment for subsequent domestic investment phases.
- State-owned enterprises (SOEs) reform:
  - Reform of SOEs is a high policy priority.
  - The State Enterprise Policy Commission has been appointed to provide policy guidance and monitor the SOE reform agenda.
  - Commission mandate includes making necessary decisions to strengthen SOEs’ financial positions to limit future fiscal burdens and to restructure organizations as appropriate.
  - Key objective: enhance efficiency and high degree of transparency of SOEs’ operations with improved corporate governance to prevent political interference.
  - Recent decision in principle: establishment of a holding company to be an independent regulator to oversee listed SOEs on the Stock Exchange of Thailand such as the Thai Airways International Plc. and the Airports of Thailand Plc.
- Technological upgrade and investment targeting:
  - Recognition of changing global trade patterns has led Thailand to gear toward technological upgrade to high-value added production.
  - The Board of Investment has launched new 7-year investment strategies focused on promoting high value investments and those with a positive impact on society and the environment.
  - Targeted sectors include high-tech and creative industries, service industries that support the development of a digital economy, and industries that utilize local resources.
  - Parallel measures: support financing to small and medium enterprises (SMEs) through the SFIs, and promote coordination among entrepreneurs, academia, and financial institutions.
- Labor supply and skills development:
  - A key structural challenge is declining labor supply due to aging population.
  - Research indicates that increasing labor supply by extending retirement age and reliance on foreign labor is neither sufficient nor sustainable.
  - Government, in close collaboration with the private sector, continues efforts to develop labor force skills that match industry needs.
  - Priority: alignment of hiring needs, education in relevant skills, and the right incentive structure to unlock Thailand’s productivity limit.

### Final remarks and outlook
- Despite economic headwinds, Thailand’s strong fundamentals, political clarity, and unique cultural identity have aided navigation through difficult times and helped resuscitate confidence from domestic and international stakeholders.
- Policy priorities going forward:
  - Preserving macroeconomic and financial stability amidst global uncertainty.
  - Utilizing ample space for short-term policy mix and advancing supply-side structural changes.
  - Encouraging close cooperation between public and private sectors to realize promising opportunities for sustainable long-term growth.

*Source: IMF staff report excerpt.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15114.pdf_