## _cr16139 ## Source details **Canonical URL:** [_cr16139](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16139.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16139.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16139.pdf.json) --- ### Context - Thailand remains resilient due to a flexible exchange rate, high international reserves, and relatively low foreign debt. - Additional buffers: moderate public debt, a wide investor base, well-capitalized commercial banks, and strong policymaking institutions. - Structural headwinds: political uncertainty, rapid population aging, relatively low education quality and skill sets, and overdue structural transformation. - Positive social trends: poverty and inequality have consistently declined since the mid-2000s. - Staff advocated a three-pronged approach: (i) deploy an expansionary macroeconomic policy mix that aligns short- and long-term goals; (ii) safeguard financial stability; and (iii) enhance potential growth. ### Recent developments (Key findings) - Real GDP growth in 2015: 2.8 percent. - Growth drivers in H2 2015: government spending, pickup in private consumption, soaring tourism. - Private investment: declined for the third year in a row in 2015. - Public sector primary balance (cyclically-adjusted): improved from 0.2 to 0.8 percent of GDP in FY2014/15. - Public sector debt: about 43 percent of GDP in 2015. - Headline inflation in 2015: negative; undershot the new inflation target (year-average 2.5±1.5 percent) by 3.4 percentage points. - Core inflation: 0.7 percent in December 2015. - Policy rate: Bank of Thailand cut policy rate by 50 basis points in spring 2015 and kept it at 1.5 percent since then. - Credit growth by depository corporations: slowed to 4.9 percent (y/y) in December 2015. - Household debt-to-GDP ratio: 82 percent of GDP in Q4 2015. - Corporate debt: 81.1 percent of GDP in Q3 2015. - Current account surplus in 2015: 8 percent of GDP. - Goods exports decline in 2015: -5.6 percent (U.S. dollars). - Goods imports decline in 2015: -11.3 percent (U.S. dollars). - Capital and financial account in 2015: deficit of 4.6 percent of GDP. - Reserves change: reserves increased by US$16 billion in Jan-Mar 2016 after a US$12 billion loss in 2015. - Exchange rate and asset markets in 2015: the baht depreciated by 9 percent against the U.S. dollar; stock prices declined by 14 percent in 2015. ### Outlook and risks (Staff projections and risk assessment) - GDP growth projections: - 2016: 3 percent - 2017: 3.2 percent - Medium term: decline toward 3 percent potential rate - Output gap: would close gradually by end-2018. - Inflation: headline inflation projected to turn positive in 2016 but would take time to converge to the mid-point of the target band. - Credit expansion: expected to remain subdued and stay broadly in line with nominal GDP growth. - Current account: projected to narrow over the medium term. - Tourism: expected to remain a bright spot. - Downside risks (tilted to the downside): - Faster slowdown or larger spillovers from rebalancing in China. - A bout of global financial volatility accelerating capital outflows and tightening financial conditions. - Slower-than-expected execution of infrastructure projects reducing domestic demand. - Further delays in general elections exacerbating political tensions and denting confidence and investment. - Entrenched deflation increasing real interest rates and real debt burden. - Household debt overhang creating a stronger-than-expected headwind to consumption and affecting financial institutions’ balance sheets in an adverse scenario. - Resilience: strong fundamentals provide policy space to maneuver if downside risks materialize. ### Policies for a long-lasting recovery — Implementing High Quality Fiscal Stimulus - Fiscal stance and infrastructure plan: - Central government FY2015/16 budget foresees a deficit of 3 percent of GDP if fully executed. - Infrastructure rising to 20 percent of total expenditure in FY2015/16. - Multi-year transport infrastructure plan: worth 13 percent of GDP, to be carried out primarily by state-owned enterprises (SOEs). - Staff baseline assumption on execution: 60 percent execution of the infrastructure plan, in line with historical record. - This translates to annual fiscal stimulus by the consolidated public sector of ½ percent of GDP on average between FY2014/15 and FY2017/18. - Staff view on fiscal policy: - Supportive of expansionary fiscal stance, particularly infrastructure investment, consistent with debt sustainability. - Investment would provide multi-year stimulus to domestic demand, crowd in private investment, help close the negative output gap, narrow the current account gap, and enhance potential growth. - Short-term measures: acknowledged need for temporary relief to farmers affected by low commodity prices and drought, but cautioned these may exacerbate contingent liabilities from SFIs and create incentives to remain in low-productivity agriculture. - Staff recommendations: - Develop social safety nets better aligned with structural challenges, including on-budget cash transfers for poor households and skill-upgrading programs to facilitate entry into higher productivity sectors. - Disclose the cost of quasi-fiscal measures and ensure timely compensation to SFIs. - Ensure effective management and implementation of the investment program: - Restructure transport SOEs. - Review tariff setting and compensation agreements of public sector obligations to ensure financial sustainability, contain contingent liabilities, and increase transparency. - Debt sustainability note: - Staff estimate: Assuming a fiscal multiplier of 0.9 and integrating two-way linkages between fiscal policy and economic activity, public debt would peak at 49 percent of GDP in 2019 even under full execution of the investment plan and no payoff in growth, which is below the government’s ceiling of 60 percent of GDP. ### Fiscal projections (selected items, percent of fiscal year GDP unless otherwise stated) - General government revenue (2015/16): 22.3 - Tax revenue (2015/16): 18.8 - Expenditure (2015/16): 22.3 - Net acquisition of non-financial assets (2015/16): 3.6 - Net lending/borrowing (general government, 2015/16): -0.4 - Cyclically-adjusted primary balance (2015/16): 0.5 - Budgetary central government net lending/borrowing (2015/16): -2.4 - Central government debt-to-GDP ratio (end-period, 2015/16): 32.2 - Public sector overall balance (2015/16): 0.5 - Public sector debt-to-GDP ratio (end-period, 2015/16): 43.1 ### Fiscal rules, public investment management, and MTFF recommendations - Investment and PIMA findings: - Investment in Thailand has lagged regional levels; scope to strengthen planning and budgeting, expand budget coverage, and enhance transparency of execution. - Need to formulate a comprehensive national investment plan, expand budget coverage, enhance the transparency of investment execution, and improve project selection. - MTFF and fiscal responsibility law: - Recommend fiscal responsibility law focus on procedural rules and mandate formulation of an MTFF comprising: - A fiscal policy statement with multi-year macro-fiscal forecasts; - A fiscal risk statement; - A debt sustainability analysis. - MTFF should specify indicative rolling ceilings for the deficit ratio consistent with the debt ceiling of 60 percent of GDP endorsed by the Cabinet. - MTFF should underpin a strategy to build fiscal buffers over time and prepare for fiscal implications of the aging population. - Tax policy: - Staff welcomed introduction of the inheritance tax and forthcoming review of the tax system, including property taxes and the personal income tax. - Staff recommended a gradual return of the VAT rate to 10 percent, from the current 7 percent, once growth is on sound footing and the output gap closes, while mitigating the impact on vulnerable groups. - Maintain a single-rate VAT structure. ### Social security, health, and pension reforms - Challenges: - Decline in working-age population will have implications for social security and potential growth. - Inequity in benefits exacerbated by widespread informality, accounting for over half of employment. - Staff advice: - Undertake a comprehensive review of fragmented health and pension schemes and formulate long-term cost projections. - Establish a central unit within the Ministry of Finance to monitor public health and pension expenditures. - Enhance coordination across schemes (e.g., collective purchase of medicines and medical devices). - Minimize fee-for-service payment; increase use of capitation payment and close-ended budgets. - Review contributions with due consideration to social equity (example: private sector scheme ceiling on assessed contribution kept at B15,000/month since 1991 while minimum wage increased from B100/day to B300/day). - Extend pensionable age and review pension benefits/contributions with attention to equity, sustainability, and efficiency. - Consider alternative revenue sources, including an increase of VAT, described as "less distortionary and more growth friendly." ### Monetary policy stance and recommendations - Staff view: scope for further monetary easing given lingering negative output gap, negative headline inflation through Q1 2016, low core inflation, falling inflation expectations, and downside risks. - Risk of inaction: Without further easing, inflation is expected to remain below target for several years. - As policy rates approach the zero lower bound, anchoring expectations through clear and credible communication is critical. - Recommendation: Convey forward-looking monetary policy decisions by targeting monthly year-on-year (not year-average) inflation, in line with global practice. - Policy communication: staff welcomed recent adoption of an explicit medium-term inflation target and suggested it feature more prominently in BOT messages. - Exchange rate: Exchange rate flexibility should remain the first line of defense against external shocks; maintain flexibility with judicious intervention to mitigate excessive volatility. ### Financial sector stability: vulnerabilities and policy recommendations - Financial Soundness Indicators (latest data based on 2015Q4 except credit cycle ratios based on 2015Q3): - SFIs average NPLs: 5.9 percent. - SFIs corporate loan NPLs: as high as 9.2 percent. - Commercial banks: overall well positioned with contained FX liabilities, relatively low currency mismatch risk, and strong buffers — high capital, liquidity, and profitability ratios — notwithstanding an uptick in NPLs and leverage ratios from a low base. - Key FSI table entries (series across years as presented): - Change in credit / GDP ratio (pp, annual): -0.2, 10.93, 3.17, 7.7, 3.6, 4.4. - Growth of credit / GDP (%, annual): -0.2, 11.42, 2.97, 0.73, 3.13, 3.7. - Credit-to-GDP gap (st. dev): 0.4, 2.3, -1.3, -0.3, -0.8, -1.1. - Deposit-to-loan ratio: 100.0, 92.8, 103.7, 102.1, 104.0, 102.5. - FX liabilities % (of total liabilities): 1.1, 1.7, 1.3, 1.6, 1.5, 1.8. - FX loans % (of total loans): 3.4, 4.6, 4.6, 5.6, 5.5, 5.8. - Leverage ratio (%): 11.5, 10.6, 11.4, 11.1, 11.7, 12.3. - ROA: 1.6, 1.6, 1.6, 1.8, 1.7, 1.4. - ROE: 14.1, 14.4, 14.9, 15.9, 14.7, 11.3. - NPL ratio: 3.9, 2.9, 2.4, 2.3, 2.3, 2.7. - NPL ratio change (%, annual): -25.5, -24.6, -17.1, -5.2, 0.1, 16.4. - Macroprudential recommendations: - Reduce loan-to-value (LTV) and debt-to-income (DTI) ratios and tighten mortgage lending standards (e.g., for multiple investment properties). - Monitor systemic risks from interconnectivity and operations of financial conglomerates; watch increased supply of nonrated products to high net worth investors by securities companies. - Framework development: - Strengthen supervision and oversight: complete transfer of SFIs to prudential supervision of the BOT and foster effective coordination between the BOT and other regulators. - Upgrade macroprudential policy framework: deepen systemic risk analysis; expand toolkit to include counter-cyclical prudential requirements, special weights on riskier loans, and capital surcharges for systemic institutions. - Improve crisis prevention and resolution: grant the BOT resolution authority over SFIs and develop contingency plans for bank resolution and systemic crises; clarify roles and responsibilities of the BOT and the Ministry of Finance. - Address risks from high household indebtedness: BOT to establish a contingency plan for a tail event of self-reinforcing household defaults and deleveraging; consider voluntary out-of-court or government-sponsored debt restructuring programs if needed. ### External sector, reserves, and trade integration - Staff assessment: Thailand’s external position stronger than levels consistent with medium-term fundamentals and desired policies. - Based on the EBA model: current account balance in 2015 was about 1.5 to 3.5 percent of GDP higher than warranted by fundamentals and policies. - REER was 2.5 to 6 percent weaker than warranted by fundamentals and policies. - International reserves: exceeded the range of Fund’s composite adequacy metrics and stood at 180 percent of the metric unadjusted for capital controls at end-2015. - Outlook: Current account gap expected to narrow over the medium term as policy stimulus is deployed, political uncertainty dissipates, and domestic demand recovers. External debt projected to remain relatively low under various shocks. - Trade concerns: - Goods exports have fallen across all destinations except to CLMV countries, and across most products except automobiles. - Decline attributed to weak demand abroad, low commodity prices, and a slide in competitiveness. - Trade with ASEAN-5 declined more than trade with China. - Significant drop in the income elasticity of trade in recent years. - Policy recommendation: Formulate a clear strategy for trade integration; actively participate in global and regional initiatives (e.g., ASEAN Economic Community, assess benefits of joining the Trans-Pacific Partnership (TPP)) to expand market access, develop services sectors, and catalyze structural reforms. ### Structural challenges, productivity, and potential growth - Diagnosis: - Thailand is an aging society with relatively low educational attainment and an oversized agricultural sector. - Industry has been losing competitiveness; R&D investment and innovation are low. - Potential growth slowed from 5 percent in the mid-2000s to 3 percent in the last five years, driven by a sharp fall in TFP growth and lower employment growth. - Working-age population (15–64) growth declined from 1 percent in 2003-07 to less than 0.4 percent in 2011–15. - Staff estimates potential growth of 3 percent in absolute and per capita terms over the medium-term. - Targets and scenarios: - Achieving the 5 percent potential growth target in the 12th NESDP would require lifting TFP growth to 3.5 percent (from 1.8 percent in staff’s baseline). - To increase potential growth to 4 percent (from 3 percent in the baseline), TFP growth would need to accelerate to 2.5 percent (from 1.8 percent). - Policy levers include increasing participation of older workers, facilitating migration, improving public investment execution, and gradually increasing VAT to statutory rate while broadening the tax base. - Illustrative scenario: With constant labor input over 2019–21 and fixed investment growth of 5.5 percent per year, factor inputs would contribute 1.5 percentage points to growth (from 1.2 percentage points in the baseline). ### Short-term stimulus and transport infrastructure plan (selected measures and amounts) - Multi-year transport infrastructure development plan (2015–2022) prioritized transport infrastructure projects worth 13 percent of GDP, including near-term motorways and mass rapid transportation in Bangkok and medium-term inter-city rail projects. - Planned financing mix: government budget (5 percent), borrowing by SOEs with government guarantees (75 percent), and private investment (20 percent). - Selected stimulus measure amounts: - Community-based infrastructure projects: B 36 billion - Acceleration of ongoing small-scale infrastructure projects: B 40 billion - Subsidized loans to Village Funds through public banks: B 60 billion - Grassroots Economic Empowerment infrastructure projects: B 35 billion - Subsidized loans through public and private banks for SMEs: B 150 billion - Credit guarantee for SMEs through a public agency: B 100 billion - Venture capital fund for SMEs funded by public and publicly-owned banks: B 6 billion - Subsidized loans for low-income house buyers through a public bank: B 10 billion - Subsidized loans for low-income housing projects (developers and low-income buyers): B 70 billion - Income tax deduction measure to boost consumption (selected goods and services Dec 25–31, 2015): B 4 billion ### Trade agreements and competitiveness (Box 2 summary highlights) - Thailand’s trade peaked in 2012 (exports 57 percent of GDP; imports 55 percent of GDP) and has contracted since then. - Industrial exports account for 80 percent of total exports; industrial exports declined by 5.5 percent while rice and rubber exports declined by 15 percent. - The TPP covers about 40 percent of world GDP and the 12 TPP countries account for roughly 40 percent of Thailand’s total exports and 45 percent of FDI inflows. - Some studies indicate Thailand could be among the most negatively impacted countries in terms of income and export losses due to the TPP; potential beneficiaries include the automobile industry and garment and textile industries. ### Household debt—statistics, drivers, and recommendations - Key statistics: - Household debt reached 141 percent of disposable income at end-2014. - Household debt at 82 percent of GDP as of Q4 2015. - Mortgage loans account for a quarter of total debt and grew at 9.5 percent (y/y) on average during 2007–2015. - Growth in household debt excluding mortgage loans slowed to 4 percent by end-2015. - Drivers: quasi-fiscal measures, expansion of credit card use, sluggish growth during 2013–15, declines in commodity prices, severe drought, and low inflation widening gap between real interest rates and real income growth. - Financial sector exposure: - Commercial banks: sound balance sheets; consumer NPLs recently ticked up but remain relatively low; banks are well-capitalized and profitable. - SFIs and credit cooperatives: higher exposure to household sector with household loans exceeding household deposits; some increases in households facing difficulties remaining current. - Policy recommendations: - Consider proactive strategies to address risks from high household debt. - Vigilance on housing market developments and search-for-yield behavior. - Continue transfer of prudential supervision of SFIs to the BOT and enhance coordination among regulators. - Expand data collection and analysis of systemic risks; strengthen resolution framework. ### Public Debt Sustainability Analysis (DSA) — main findings and stress tests - Baseline projections: - Under the baseline, the debt-to-GDP ratio is projected to hover around 45-46 percent, below the government’s ceiling of 60 percent. - Staff assume an implementation rate of 60 percent for the transport plan in the baseline. - Full execution scenario: - Full execution of the transport sector infrastructure plan (100 percent execution instead of 60 percent) would raise the peak debt-to-GDP ratio by 3 percent to reach 49 percent of GDP by 2019. - Stress-test shock outcomes: - Growth shock: real GDP growth falls by one 10-year historical standard deviation (3 percent) for two consecutive years from 2017 → debt-to-GDP ratio reaches 50 percent in 2018. - Financial sector contingent liability shocks: - One-time capital injection equivalent to 10 percent of commercial banks’ assets → one-off increase in government spending of 13 percent of GDP; debt-to-GDP ratio reaches 62 percent in 2019. - Augmented shock including SFIs → government spending increase jumps to 17 percent of GDP; debt-to-GDP ratio reaches 67 percent in 2019. - Heat map and vulnerability indicators: - External financing requirement: 9 percent (exceeds the lower threshold of early warning benchmarks of 5 percent). - Share of public debt held by nonresidents: 16 percent. - Fiscal multiplier and assumptions: - Staff assume a nominal fiscal multiplier of 0.9. ### External debt projections and stress-test highlights - Baseline: external debt projected to decline from about 33 percent of GDP in 2015 to about 29 percent of GDP in 2021. - Exchange-rate shock: one-time 30 percent real depreciation in 2016 → external debt-to-GDP ratio rises to about 54 percent of GDP (scenario does not incorporate trade-flow adjustment). - Other shocks considered: higher interest rate shock, weaker GDP growth shock, lower current account balance shock (modeled as permanent one-half standard deviation shocks). ### Appendix IV — Monetary policy simulations and implications - Simulation framework: stylized new Keynesian model with Inflation-Forecast Targeting (IFT); simulation horizon 12 quarters. - Current policy rate: 150 basis points. - Two scenarios: - “Aggressive easing”: policy rate hits zero-lower bound from current 150 basis points in three quarters and stays there → headline inflation returns to target point in three quarters and fluctuates within target range thereafter; avoids unanchored inflation expectations; helps close output gap by end of horizon. - “Delayed” (rates on hold for another five quarters): headline inflation subdued below target band; core inflation negative for most of horizon; delayed 50 basis point cut cannot close output gap within horizon; real rates rise by around 200 basis points. - Recommendation: decisive and timely easing and clear communication to prevent deflationary “dark corners.” ### Authorities’ response and policy stance - Authorities emphasized public spending's role in supporting growth, shoring up confidence, and crowding in private investment. - Committed to executing the infrastructure plan; noted challenges from complexities of mega projects. - Fiscal governance: - Draft Fiscal Responsibility Act approved by the Cabinet in March 2016 and submitted to the Council of State. - Ongoing SOE reforms and establishment of a Holding Company for SOEs. - Monetary policy: - Authorities maintain an accommodative stance to complement fiscal expansion while preserving financial stability; BOT kept policy rate at 1.5 percent (MPC voted unanimously on May 11). - Authorities cautious on further easing to preserve policy space and avoid search-for-yield risks. - Financial stability and supervision: - High priority on strengthening supervision and oversight of SFIs; transfer of supervisory authority over SFIs to the BOT expected to be completed by end-2016. - Cooperatives: exposure increased but small in absolute terms; supervisory coordination ongoing. - Household debt and macroprudential stance: - Authorities acknowledge debt overhang; working on measures to facilitate bank household debt restructuring. - Current macroprudential toolkit includes LTVs, provisioning, specific risk weights, capital surcharges, and moral suasion; further measures under study (e.g., Debt-to-Income Ratio). - Structural reforms and regional integration: - Authorities pursuing reforms to promote high value-added industries, digital economy, and deeper regional integration (AEC, assessment of TPP, RCEP). - National Savings Fund established in 2015 as a voluntary saving scheme for informal workers. - Final remarks: - Authorities believe strong fundamentals and resilience provide a solid foundation; seek continued Fund technical assistance. *Source: IMF staff report excerpts and country authorities’ statement (content unit: _cr16139).* ### 1. Stimulus Measures and the Multi-Year Transport Infrastructure Plan__________________________ 20 ### 1. Stimulus Measures and the Multi-Year Transport Infrastructure Plan__________________________ 20 ### Context - Thailand remains resilient due to a flexible exchange rate, high international reserves, and relatively low foreign debt. - Additional buffers: moderate public debt, a wide investor base, well-capitalized commercial banks, and strong policymaking institutions. - Structural headwinds: political uncertainty, rapid population aging, relatively low education quality and skill sets, and overdue structural transformation. - Positive social trends: poverty and inequality have consistently declined since the mid-2000s. - Staff advocated a three-pronged approach: (i) deploy an expansionary macroeconomic policy mix that aligns short- and long-term goals; (ii) safeguard financial stability; and (iii) enhance potential growth. ### Recent developments (Key findings) - Real GDP growth in 2015: 2.8 percent. - Growth drivers in H2 2015: government spending, pickup in private consumption, soaring tourism. - Private investment: declined for the third year in a row in 2015. - Public sector primary balance (cyclically-adjusted): improved from 0.2 to 0.8 percent of GDP in FY2014/15. - Public sector debt: about 43 percent of GDP in 2015. - Headline inflation in 2015: negative; undershot the new inflation target (year-average 2.5±1.5 percent) by 3.4 percentage points. - Core inflation: 0.7 percent in December 2015. - Policy rate: Bank of Thailand cut policy rate by 50 basis points in spring 2015 and kept it at 1.5 percent since then. - Credit growth by depository corporations: slowed to 4.9 percent (y/y) in December 2015. - Household debt-to-GDP ratio: 82 percent of GDP in Q4 2015. - Corporate debt: 81.1 percent of GDP in Q3 2015. - Current account surplus in 2015: 8 percent of GDP. - Goods exports decline in 2015: -5.6 percent (U.S. dollars). - Goods imports decline in 2015: -11.3 percent (U.S. dollars). - Capital and financial account in 2015: deficit of 4.6 percent of GDP. - Reserves change: reserves increased by US$16 billion in Jan-Mar 2016 after a US$12 billion loss in 2015. - Exchange rate and asset markets in 2015: the baht depreciated by 9 percent against the U.S. dollar; stock prices declined by 14 percent in 2015. ### Outlook and risks (Staff projections and risk assessment) - GDP growth projections: - 2016: 3 percent - 2017: 3.2 percent - Medium term: decline toward 3 percent potential rate - Output gap: would close gradually by end-2018. - Inflation: headline inflation projected to turn positive in 2016 but would take time to converge to the mid-point of the target band. - Credit expansion: expected to remain subdued and stay broadly in line with nominal GDP growth. - Current account: projected to narrow over the medium term. - Tourism: expected to remain a bright spot. - Downside risks (tilted to the downside): - Faster slowdown or larger spillovers from rebalancing in China. - A bout of global financial volatility accelerating capital outflows and tightening financial conditions. - Slower-than-expected execution of infrastructure projects reducing domestic demand. - Further delays in general elections exacerbating political tensions and denting confidence and investment. - Entrenched deflation increasing real interest rates and real debt burden. - Household debt overhang creating a stronger-than-expected headwind to consumption and affecting financial institutions’ balance sheets in an adverse scenario. - Resilience: strong fundamentals provide policy space to maneuver if downside risks materialize. ### Policies for a long-lasting recovery — Implementing High Quality Fiscal Stimulus - Fiscal stance: - Central government FY2015/16 budget foresees a deficit of 3 percent of GDP if fully executed. - Infrastructure rising to 20 percent of total expenditure in FY2015/16. - Multi-year transport infrastructure plan: worth 13 percent of GDP, to be carried out primarily by state-owned enterprises (SOEs). - Staff baseline assumption on execution: 60 percent execution of the infrastructure plan, in line with historical record. - This translates to annual fiscal stimulus by the consolidated public sector of ½ percent of GDP on average between FY2014/15 and FY2017/18. - Staff view on fiscal policy: - Supportive of expansionary fiscal stance, particularly infrastructure investment, consistent with debt sustainability. - Investment would provide multi-year stimulus to domestic demand, crowd in private investment, help close the negative output gap, narrow the current account gap, and enhance potential growth. - Short-term measures: acknowledged need for temporary relief to farmers affected by low commodity prices and drought, but cautioned these may exacerbate contingent liabilities from SFIs and create incentives to remain in low-productivity agriculture. - Staff recommendations: - Develop social safety nets better aligned with structural challenges, including on-budget cash transfers for poor households and skill-upgrading programs to facilitate entry into higher productivity sectors. - Disclose the cost of quasi-fiscal measures and ensure timely compensation to SFIs. - Ensure effective management and implementation of the investment program: - Restructure transport SOEs. - Review tariff setting and compensation agreements of public sector obligations to ensure financial sustainability, contain contingent liabilities, and increase transparency. - Debt sustainability note: - Staff estimate: Assuming a fiscal multiplier of 0.9 and integrating two-way linkages between fiscal policy and economic activity, public debt would peak at 49 percent of GDP in 2019 even under full execution of the investment plan and no payoff in growth, which is below the government’s ceiling of 60 percent of GDP. - Fiscal projections (selected items, percent of fiscal year GDP unless otherwise stated): - General government revenue (2015/16): 22.3 - Tax revenue (2015/16): 18.8 - Expenditure (2015/16): 22.3 - Net acquisition of non-financial assets (2015/16): 3.6 - Net lending/borrowing (general government, 2015/16): -0.4 - Cyclically-adjusted primary balance (2015/16): 0.5 - Budgetary central government net lending/borrowing (2015/16): -2.4 - Central government debt-to-GDP ratio (end-period, 2015/16): 32.2 - Public sector overall balance (2015/16): 0.5 - Public sector debt-to-GDP ratio (end-period, 2015/16): 43.1 *Source: IMF staff report excerpt — "1. Stimulus Measures and the Multi-Year Transport Infrastructure Plan" (content unit: _cr16139 - 1.)* ### 1. Fiscal Rules ### 1. Fiscal Rules ### Public investment and PIMA findings - Investment in Thailand has lagged regional levels, allowing peers to catch up in public capital stock and competitiveness. - Thailand scores relatively well on investment processes, though there is scope to strengthen planning and budgeting, expand budget coverage, and enhance transparency of execution. - IMF staff highlighted the need to formulate a comprehensive national investment plan, expand the budget coverage, enhance the transparency of investment execution, and improve project selection. - Relevant diagnostic: Strength of Public Investment Management by Institution (PIMA Scores, highest =10) — chart referenced (no numerical PIMA scores provided in the text excerpt). ### Medium-Term Fiscal Framework (MTFF) and fiscal responsibility law - Recommendation: Fiscal responsibility law should focus on procedural rules and mandate formulation of an MTFF comprising: - A fiscal policy statement with multi-year macro-fiscal forecasts; - A fiscal risk statement; - A debt sustainability analysis. - The MTFF should specify indicative rolling ceilings for the deficit ratio consistent with the debt ceiling of 60 percent of GDP endorsed by the Cabinet, which "continues to be appropriate." - The MTFF should underpin a strategy to build fiscal buffers over time and prepare for fiscal implications of the aging population. - Tax policy recommendations: - Staff welcomed the recent introduction of the inheritance tax and the forthcoming review of the tax system, including property taxes and the personal income tax. - Staff recommended a gradual return of the VAT rate to 10 percent, from the current 7 percent, once growth is on sound footing and the output gap closes, while mitigating the impact on vulnerable groups. - Maintain a single-rate VAT structure to preserve good policy design and ease of compliance. ### Social security, health, and pension reforms - Challenges noted: - Decline in working-age population will have implications for social security and potential growth. - Inequity in benefits exacerbated by widespread informality, accounting for over half of employment. - Staff advice: - Undertake a comprehensive review of the fragmented health and pension schemes (major schemes include those for civil servants, formal private sector employees, and informal workers such as farmers). - Formulate long-term cost projections across all schemes. - Establish a central unit within the Ministry of Finance (MOF) to monitor public health expenditures across all schemes and public pension expenditures. - Enhance coordination across different schemes (e.g., collective purchase of medicines and medical devices). - Minimize fee-for-service payment; increase use of capitation payment and close-ended budgets. - Review contributions with due consideration to social equity (example cited: under the private sector scheme, the ceiling on assessed contribution has been kept at B15,000/month since 1991 while the minimum wage has increased from B100/day to B300/day). - Extend pensionable age and review pension benefits/contributions with attention to equity, sustainability, and efficiency. - Consider alternative revenue sources, including an increase of VAT, which is described as "less distortionary and more growth friendly." - Projections referenced: Selected Asian Countries—Projected Increase in Public Health Expenditure, 2010-2050 and Projected Increase in Public Pension Expenditure, 2010-2050 (charts referenced; specific series shown include Indonesia, Philippines, Malaysia, China, Thailand). ### Authorities’ response on fiscal priorities - Authorities emphasized public spending's role in supporting growth, shoring up confidence, and crowding in private investment. - Committed to executing the infrastructure plan; noted challenges from complexities of mega projects. - Stated the 12th National Economic and Social Development Plan (NESDP, 2017–21) would contain a comprehensive investment plan. - Agreed SOE reform should strengthen governance and investment management. - Reiterated high priority attached to enacting the fiscal responsibility law (under consideration of the Council of State). - Agreed on need to increase tax revenues over time, prioritizing broadening the tax base by streamlining tax expenditures and enhancing collection efficiency through a national e-payment system. - Noted ongoing review of the health system addressing sustainability, adequacy, fairness, and efficiency; mentioned National Savings Fund (established in 2015) as a voluntary saving scheme for informal workers. ### Monetary policy stance and recommendations - Staff view: scope for further monetary easing given lingering negative output gap, negative headline inflation through Q1 2016, low core inflation, falling inflation expectations, and downside risks. - Risk of inaction: Without further easing, inflation is expected to remain below target for several years. - As policy rates approach the zero lower bound, anchoring expectations through clear and credible communication is critical. - Recommendation: Convey forward-looking monetary policy decisions by targeting monthly year-on-year (not year-average) inflation, in line with global practice. - Policy communication: Staff welcomed recent adoption of an explicit medium-term inflation target and suggested it feature more prominently in BOT messages. - Exchange rate: Exchange rate flexibility should remain the first line of defense against external shocks; maintain flexibility with judicious intervention to mitigate excessive volatility. - Authorities’ view: Assessed monetary policy as sufficiently accommodative; favored fiscal stimulus in the pipeline over interest rate cuts to preserve policy space and avoid triggering excessive search-for-yield behavior. ### Financial sector stability: vulnerabilities and policy recommendations - Financial Soundness Indicator map suggests a medium rating on financial sector vulnerability, due to rapid credit cycle and buildup of household debt. - Key indicators (latest values as provided in the Financial Soundness Indicator table): - Change in credit / GDP ratio (pp, annual): -0.2, 10.93, 3.17, 7.7, 3.6, 4.4 (series across years; table presents multi-period data). - Growth of credit / GDP (%, annual): -0.2, 11.42, 2.97, 0.73, 3.13, 3.7. - Credit-to-GDP gap (st. dev): 0.4, 2.3, -1.3, -0.3, -0.8, -1.1. - Deposit-to-loan ratio: 100.0, 92.8, 103.7, 102.1, 104.0, 102.5. - FX liabilities % (of total liabilities): 1.1, 1.7, 1.3, 1.6, 1.5, 1.8. - FX loans % (of total loans): 3.4, 4.6, 4.6, 5.6, 5.5, 5.8. - Leverage ratio (%): 11.5, 10.6, 11.4, 11.1, 11.7, 12.3. - ROA: 1.6, 1.6, 1.6, 1.8, 1.7, 1.4. - ROE: 14.1, 14.4, 14.9, 15.9, 14.7, 11.3. - NPL ratio: 3.9, 2.9, 2.4, 2.3, 2.3, 2.7. - NPL ratio change (%, annual): -25.5, -24.6, -17.1, -5.2, 0.1, 16.4. - Note: The latest data is based on 2015Q4 data, except credit cycle ratios based on 2015Q3 data. - Commercial banks: overall well positioned with contained foreign exchange liabilities, relatively low currency mismatch risk, and strong buffers on average — high capital, liquidity, and profitability ratios — notwithstanding an uptick in NPLs and leverage ratios from a low base. - SFIs and credit cooperatives: more exposed to strained credit segments. - SFIs average NPLs: 5.9 percent. - SFIs corporate loan NPLs: as high as 9.2 percent. - Concerns about evergreening of loans; staff welcomed BOT onsite inspections revealing relatively strong capital adequacy and provisioning (except for two smaller institutions). - Tighter macroprudential policies recommended to safeguard financial stability in a low interest-rate environment: - Reduce loan-to-value (LTV) and debt-to-income (DTI) ratios and tighten mortgage lending standards (e.g., for multiple investment properties). - Monitor systemic risks from interconnectivity and operations of financial conglomerates; watch increased supply of nonrated products to high net worth investors by securities companies. - Specific framework development recommendations: - Strengthen supervision and oversight: complete transfer of SFIs to the prudential supervision of the BOT and foster effective coordination between the BOT and other regulators. - Upgrade macroprudential policy framework: deepen systemic risk analysis; priorities include tracking credit cycle strength, leverage ratios, unhedged exposures, and systemic interconnectivity risks. Expand toolkit to include counter-cyclical prudential requirements, special weights on riskier loans, and capital surcharges for systemic institutions. - Improve crisis prevention and resolution: grant the BOT resolution authority over SFIs and develop contingency plans for bank resolution and systemic crises. Clarify roles and responsibilities of the BOT and the Ministry of Finance. - Address risks from high household indebtedness: BOT to establish a contingency plan for a tail event of self-reinforcing household defaults and deleveraging; consider voluntary out-of-court or government-sponsored debt restructuring programs if needed. ### External sector, reserves, and trade integration - Staff assessment: Thailand’s external position stronger than levels consistent with medium-term fundamentals and desired policies. - Based on the External Balance Assessment (EBA) model: current account balance in 2015 was about 1.5 to 3.5 percent of GDP higher than warranted by fundamentals and policies. - REER was 2.5 to 6 percent weaker than warranted by fundamentals and policies. - International reserves: exceeded the range of Fund’s composite adequacy metrics and stood at 180 percent of the metric unadjusted for capital controls at end-2015. - Outlook: Current account gap expected to narrow over the medium term as policy stimulus is deployed, political uncertainty dissipates, and domestic demand recovers. External debt projected to remain relatively low under various shocks. - Trade concerns: - Goods exports have fallen across all destinations except to CLMV countries, and across most products except automobiles. - Decline attributed to weak demand abroad, low commodity prices, and a slide in competitiveness. - Trade with ASEAN-5 declined more than trade with China. - Significant drop in the income elasticity of trade in recent years. - Policy recommendation: Formulate a clear strategy for trade integration; actively participate in global and regional initiatives (e.g., ASEAN Economic Community, assess benefits of joining the Trans-Pacific Partnership (TPP)) to expand market access, develop services sectors, and catalyze structural reforms. - Authorities’ view: They attributed much of the current account surplus rise to the sharp decline in oil prices and projected the surplus to decline over the medium term driven by a pickup in domestic demand and partial reversal of terms-of-trade shocks. Authorities are assessing pros and cons of joining the TPP. *Source: IMF staff calculations.* ### 33. Thailand is a middle-income country facing numerous structural challenges. It is an ### Thailand is a middle-income country facing numerous structural challenges ### Structural challenges and diagnosis - Thailand is an aging society with relatively low educational attainment and an oversized agricultural sector. - Industry has been losing competitiveness, with some products becoming obsolete; R&D investment and innovation are low. - Thailand’s potential growth slowed from 5 percent in the mid-2000s to 3 percent in the last five years, driven by a sharp fall in TFP growth and lower employment growth. - Working-age population (15–64) growth declined from 1 percent in 2003-07 to less than 0.4 percent in 2011–15. - Staff estimates potential growth of 3 percent in absolute and per capita terms over the medium-term—insufficient to escape the middle-income trap. ### Goals and productivity targets - Achieving the potential growth target of 5 percent set in the 12th NESDP would require lifting Total Factor Productivity (TFP) growth to 3.5 percent (from 1.8 percent in staff’s baseline). - To increase potential growth to 4 percent (from 3 percent in the baseline), TFP growth would need to accelerate to 2.5 percent (from 1.8 percent in the baseline). - Over 2019–21, labor input is forecast to decline in line with the working-age population (UN, 2015, World Population Prospects). ### Policy recommendations — structural reform priorities - Infrastructure - Improve investment execution and management to crowd in private investment, boost capital accumulation, and productivity. - Structural fiscal reforms should build fiscal space over time. - Human capital - Raise quality of education, increase focus on Science, Technology, Engineering, and Math subjects. - Better align vocational training with employers’ needs to raise labor productivity. - Population aging and labor supply - Better align the effective retirement age with life expectancy to raise participation of older workers. - Adopt a more open policy toward foreign workers to alleviate shortages in skilled and unskilled occupations. - Structural transformation and incentives - Coordinate and clearly communicate investment incentives (e.g., revised Board of Investment incentives, super-clusters, high value-added activities, and R&D investment) to enhance cost-effectiveness; ensure appropriate design, evaluation, and disclosure. - Encourage transition from low-yield agriculture to higher-yield crops and agri-business while providing interim support to farmers. - Expand programs to provide education, information, and incentives for rural workers to shift to other sectors to address reported labor shortages. - Trade and integration - Further trade integration (including careful assessment of TPP implications) could boost competitiveness and catalyze structural reforms. ### Fiscal, monetary, and financial stability guidance - Fiscal - The expansionary fiscal stance is welcome but should be placed within a Medium-Term Fiscal Framework (MTFF). - Implement the government’s investment plan without delay with attention to good governance and transparency. - Short-term stimulus measures should give way to social safety nets better aligned with structural challenges. - MTFF should underpin a strategy to increase tax revenues over time and prepare for fiscal implications of aging; social security reform should aim to strengthen equity, sustainability, and efficiency. - Monetary - There is room for further monetary easing: output is below potential, headline inflation was in negative territory through Q1 2016, and core inflation is low. - Effectiveness of easing could be enhanced by communicating the Bank of Thailand’s determination to fight deflationary pressures and steer inflation toward the medium-term target. - Macroprudential and financial stability - Authorities should be ready to tighten macroprudential policies to curb lending to highly indebted households and certain segments of the real estate sector. - Monitor systemic risks from interconnectivity and financial conglomerates; continue improving supervision of SFIs, foster coordination among regulators, upgrade the macroprudential policy framework, and improve crisis prevention and resolution. ### External position - Thailand’s external position is strong: high foreign reserves, low foreign debt, and an elevated current account surplus. - Large current account surplus is expected to narrow over time as domestic demand strengthens and terms-of-trade shocks partially reverse. - Thailand’s gross reserves exceed the Fund’s adequacy metrics; there is no need to build up reserves for precautionary purposes. - The exchange rate should continue to move flexibly and serve as the first line of defense in response to external shocks. ### Short-term stimulus and transport infrastructure plan (Box 1) - Short-term fiscal stimulus measures announced since September 2015 focus on vulnerable segments (farmers and SMEs) and comprise mainly quasi-fiscal measures (subsidized loans by public and private banks), complemented by some expenditure and tax initiatives. - Multi-year transport infrastructure development plan (2015–2022) prioritized transport infrastructure projects worth 13 percent of GDP, including: - Near term: motorways and mass rapid transportation in Bangkok. - Medium term: more complex inter-city rail projects with longer preparation time. - Planned financing mix for the transport plan: government budget (5 percent), borrowing by SOEs with government guarantees (75 percent), and private investment (20 percent). - Selected stimulus measure amounts (as presented): - Community-based infrastructure projects: B 36 billion (across more than 7,000 villages) - Acceleration of ongoing small-scale infrastructure projects: B 40 billion - Subsidized loans to Village Funds through public banks: B 60 billion - Grassroots Economic Empowerment infrastructure projects: B 35 billion - Subsidized loans through public and private banks for SMEs: B 150 billion - Credit guarantee for SMEs through a public agency: B 100 billion - Venture capital fund for SMEs funded by public and publicly-owned banks: B 6 billion - Subsidized loans for low-income house buyers through a public bank: B 10 billion - Subsidized loans for low-income housing projects (developers and low-income buyers): B 70 billion - Income tax deduction measure to boost consumption (selected goods and services Dec 25–31, 2015): B 4 billion ### Trade agreements and competitiveness (Box 2 summary) - Thailand’s trade peaked in 2012 (exports 57 percent of GDP; imports 55 percent of GDP) and has contracted since then. - Industrial exports account for 80 percent of total exports; industrial exports declined by 5.5 percent while rice and rubber exports declined by 15 percent. - The TPP covers about 40 percent of world GDP and includes tariff reductions, lower barriers to investment and services trade, and rules on intellectual property, government procurement, e-commerce, environmental protection, and labor standards. - The 12 TPP countries account for roughly 40 percent of Thailand’s total exports and 45 percent of FDI inflows. - Thailand would face greater competition in the U.S. market (10 percent of total exports) where tariffs on major exports range from 3 to 22 percent. - Some studies indicate Thailand could be among the most negatively impacted countries in terms of income and export losses due to the TPP, given large export share to TPP countries, strong competition from TPP members, and high tariffs on main exports. - Potential beneficiaries from TPP membership include the automobile industry (exports nearly 60 percent of its overall production) and garment and textile industries. ### Potential growth scenarios and policy levers (Box 3) - Staff baseline: potential growth of 3 percent; TFP growth 1.8 percent; labor input declines with working-age population. - Policy levers to raise potential growth: - Increase participation of older workers (e.g., increase mandatory retirement age). - Facilitate migration of workers from neighboring countries. - Improve public investment execution to crowd in private investment. - Gradually increase VAT to statutory rate, broaden tax base, and strengthen tax administration to create fiscal room. - Illustrative scenario: With constant labor input over 2019–21 and fixed investment growth of 5.5 percent per year (the forecast for 2018, rather than the drop to 4.6 percent in staff’s baseline), factor inputs would contribute 1.5 percentage points to growth (from 1.2 percentage points in the baseline). - Conclusion: A moderate acceleration in TFP is within reach to allow slow yet steady convergence; reaching the 12th NESDP target of 5 percent potential growth would require a very substantial acceleration in TFP growth. ### Institutional and procedural notes - Authorities broadly agreed that structural reforms are critical and emphasized a multi-faceted strategy to upgrade the economy and boost productivity; they noted programs underway to enhance competitiveness, including incentives for super-clusters, high value-added activities, and R&D investment. - On immigration, the authorities considered Thailand sufficiently open to foreign workers. - It is recommended that the next Article IV consultation with Thailand take place on a standard 12-month cycle. *Source: IMF staff report excerpt provided in the supplied PDF content.* ### 3.5 percent and an urgent push to ambitious structural reforms. ### 3.5 percent and an urgent push to ambitious structural reforms. ### Productivity and structural reform priorities - The following steps could significantly increase TFP: - Improving the quality and relevance of education and vocational training; - Facilitating the hiring of skilled foreign workers; - Improving public investment management processes; - Providing incentives, information and training to facilitate transition into higher-productivity occupations; - Increasing agricultural productivity, including by scaling up average farm size; - Increasing competition, particularly in the service sector; and - Advancing trade integration. - Research note: economy-wide TFP increases by 20 percent in 8 years following significant agricultural reform. ### Real sector developments and growth - Growth recovered in 2015 led by domestic demand. Private demand picked up in the second half of 2015. - Stimulus measures near the end of 2015 induced a slight rebound in durables consumption and private sector confidence. - On the supply side, services are leading the recovery. - Car production stagnated as lower exports offset a spike in domestic sales. - Growth decomposition (2003–2015): Final domestic demand, Change in inventories, Net exports, GDP (visual figures provided). ### Inflation and capacity indicators - Headline inflation was negative through Q1 2016, and core is below the new inflation-targeting band. - Energy prices have been the main contributor to the fall in the CPI. - Inflation is lower than elsewhere in the region. - Inventories have started to recover; spare capacity remains with bigger slack than in most other regional economies. - Headline and Core CPI Inflation (year-on-year) and contributions: Raw food, Energy, Core series shown (visual figures provided). - Output gap and capacity utilization rate series (visual figures provided). - Excess capacity and inflation gap, 2015: cross-country comparisons provided. ### Public finances and fiscal stance - The fiscal balance strengthened recently, but is projected to weaken as infrastructure investment accelerates. - The pace of increase in general government debt has slowed down. - Nonresident holdings of baht-denominated public debt has somewhat declined since January 2015. - Thailand needs to upgrade its infrastructure (Global Competitiveness rankings for infrastructure shown). - Corporate income tax rates were cut to enhance competitiveness and growth; VAT rate is in the lower range in the region. - Public debt and balances: General Government and Public Sector Balance and Public Debt presented (fiscal year basis, visual figures). - ASEAN–5 general government gross debt comparison and nonresident holdings of public debt charts provided. ### Monetary policy and liquidity - The policy rate has been on hold since April 2015. - Money market rates have steered close to the policy rate. - Money supply and credit growth have slowed significantly (broad money and credit to private sector: year-on-year 3-month moving averages). - International reserves remain ample; the BOT continues to mop up liquidity via BOT bills, Repos, Forex swaps. - Commercial banks are liquid, with large holdings of repo-eligible securities, but excess liquidity has come down. - ASEAN-4 policy rates and domestic interest rate structure shown (policy rate, lending facility, deposit facility, interbank overnight). ### External sector and exchange rates - The REER has gradually appreciated, with periodic interruptions amid global and domestic volatility (2010=100 series). - Thailand’s export share in global markets has stagnated since early this decade. - Thailand’s current account surplus has been rising given weak trade and low oil prices. - The financial account balance turned negative amid portfolio outflows and subdued FDI inflows. - Portfolio outflows persisted over 2015, following regional patterns. - Tourist arrivals are recovering after a sharp dip during the political unrest in 2014. - Key series and charts: Real Effective Exchange Rate, Export Market Share in ASEAN-5, Current Account Balance (percent of GDP), Financial Account Balance (composition), Equity and Bonds Net Flows (Q1/2010–pQ3/2015), Tourist Arrivals (Thousands). ### Financial sector developments and risks - Private sector credit in Thailand has risen sharply since the Global Financial Crisis, driven mostly by household loans from both depository (ODCs) and financial corporations (OFCs). - Growth in credit to households has been moderating as financial institutions have tightened credit standards. - Overall borrowing by commercial banks has been declining, but with greater reliance on foreign loans. - The net foreign asset position of the whole financial system remains strong. - Charts and indicators: Domestic Credit to Private Sector (percent of GDP), Cumulative growth since 2007 by sector/origin, Growth in credit to households by origination, Credit Standards: Consumer Loans (Easing(+) / Tightening(−)), Loans to Commercial Banks (composition), Net Foreign Assets of ODCs and OFCs (percent of GDP). ### Financial soundness of commercial banks - Capital buffers are strong: Regulatory Tier 1 capital to risk-weighted assets and Regulatory capital ratios shown across countries and time. - Liquid assets to short-term liabilities can be increased to mitigate liquidity risks on the liability side. - Thailand’s loan-to-deposit ratio is the highest among ASEAN–5. - Nonperforming loan ratios are still contained. - Profitability metrics: Return on Equity and Return on Assets indicate Thai commercial banks are profitable (cross-country comparisons provided). - Financial Soundness Indicators (2009–2015, table): - Regulatory capital to risk-weighted assets: 15.8, 16.1, 14.8, 16.2, 15.5, 16.5, 17.1 (2009–2015 series). - Regulatory Tier 1 capital to risk-weighted assets: 11.7, 11.9, 11.0, 11.0, 11.9, 13.0, 13.9. - Nonperforming loans to total gross loans: 5.2, 3.9, 2.9, 2.4, 2.3, 2.3, 2.7. - Return on assets: 1.3, 1.6, 1.6, 1.6, 1.8, 1.7, 1.4. - Return on equity: 12.1, 14.1, 14.4, 14.9, 15.9, 14.7, 11.3. - Liquid assets to total assets: 20.8, 18.3, 17.4, 19.0, 17.7, 19.4, 17.9. - Loan-deposit ratio (all commercial banks): 94.4, 100.0, 107.8, 96.4, 97.9, 96.2, 97.6. ### Asset prices, household debt, and housing market - The Thai stock market lost momentum in mid-2015, declining faster than other regional markets (S&P 500, Thailand (SET), Malaysia indices). - The BOT cut its policy rate twice in 2015; yields of short-term government bonds declined. - Low borrowing costs fuel issuance of debt instruments and stocks and raised demand for mortgages; housing loans continue to grow rapidly. - Condominium prices have been outpacing prices for single-detached homes in Thailand. - Rising home equity could further promote demand for loans by the highly-indebted household sector. - Key series: Stock Market Index (Jan 2011=100), Government Bond Yields (selected tenors), Private Securities and External Debt Outstanding (percent of GDP), Housing loan growth and Housing Loans to Households (percent of GDP), House Price Index (2009:Q1=100), Household Debt (percent of GDP, Asia comparators). ### Structural challenges and demographics - Thailand’s working age population is projected to decline (Selected Asian Countries: Working Age (15–64) Population Index, 2015=100). - Thailand’s electronics exports may have lost competitiveness to lower-cost producers (Thailand vs Vietnam electronics exports, 3mma USD). - A large share of Thailand’s labor force is employed in low-productivity agriculture; agriculture share in employment and GDP illustrated. - Quality of education lags behind many other Asian countries (PISA mean scores: Science, Reading, Math). - Thailand has a favorable regulatory environment on certain Doing Business indicators but ranks lower than higher-income ASEAN countries on most structural indicators (Ease of Doing Business, Global Competitiveness pillars). ### Key macroeconomic indicators and projections (selected) - Main exports (percent of total 2014): machinery (43), food (13) - GDP per capita (2014): US$5,889 - Unemployment rate (2014): 0.8 percent - Poverty headcount ratio at national poverty line (2012): 12.6 percent - Net FDI (2014): US$-0.56 billion - Population (2014): 65.1 million - Estimated/Projected headline series (2011–2016, selected): - Real GDP growth (percent) 2011–2016: 0.8, 7.2, 2.7, 0.8, 2.8, 3.0 (as listed in Table 1). - Headline CPI (end period, percent): 3.5, 3.6, 1.7, 0.6, -0.9, 1.6. - Core CPI (end period, percent): 2.7, 1.8, 0.9, 1.7, 0.7, 0.9. - Gross domestic investment (excl. stocks) as percent of GDP: 25.9, 27.0, 25.4, 24.8, 24.9, 25.3 (2011–2016). - Gross national saving (percent of GDP): 29.2, 27.7, 26.3, 27.9, 32.1, 33.3. - Current account balance (billions of U.S. dollars): 8.9, -1.5, -5.2, 15.4, 31.6, 32.0 (2011–2016). - Public sector debt (percent of GDP): 39.1, 41.9, 42.2, 43.6, 43.1, 43.7 (2011–2016). - Broad money growth (end-period, percent): 15.1, 10.4, 7.3, 4.7, 4.4, 4.9 (2010–2015 series). - Credit to the private sector by depository corporations (end-period, percent): 17.0, 14.6, 9.6, 5.1, 4.9, 4.9 (2010–2015 series). - Balance of payments projections and tables provided for 2012–21 (trade and current account balances, exports/imports, capital and financial account composition). ### Fiscal framework and medium-term scenario - Central government budgetary balance (fiscal year basis) projected around -2.4 percent of GDP in 2016/17, remaining near -2.5 percent in later years (Table 5). - General government net lending/borrowing projected at -0.5 percent of GDP in outer years; public sector debt projected to be 45.9 percent of GDP by 2020/21 (Table 5). - Fiscal year defined: runs from October 1 to September 30. *International Monetary Fund staff report: Thailand country chapter (figures, tables and data as presented).* ### Appendix I. Thailand—Staff Policy Advice from the ### Appendix I. Thailand—Staff Policy Advice from the 2015 Article IV Consultation ### Staff advice and reported policy actions - Allow exchange rate flexibility to be the first line of defense against external shocks, with judicious intervention to avoid excessive volatility and overshooting. - The BOT has adhered to its policy of intervening in foreign exchange markets only to prevent excessive volatility. - Consider further monetary easing if fiscal stimulus is weaker than expected and the economy remains sluggish. - The BOT cut the policy rate by 50 basis points in the spring of 2015. - Set indicative inflation targets beyond a one-year horizon. - The BOT announced a medium-term inflation target. - Continue strengthening the regulatory and supervisory framework, following the transfer of SFIs prudential supervision to the BOT. - The BOT has conducted onsite examinations of all SFIs. Revamping their prudential regulation and resolution framework is moving forward, in consultation with the Ministry of Finance. - Strengthen the oversight of the fast-growing credit cooperative sector. - The BOT is helping strengthen the supervision of credit cooperatives, including through technical assistance to the Ministry of Agriculture. - Support economic recovery with expansionary fiscal policy while framing it in a medium-term framework. - A series of fiscal stimulus measures have been rolled out while expediting the disbursement of local infrastructure projects. The fiscal responsibility law was approved by the Cabinet and submitted to the Council of State. - Undertake an evaluation of the public investment process, including projects implemented by SOEs. - At the request of the authorities, the Fund provided TA in early 2016 on public investment, covering both the government and SOEs. A comprehensive public investment plan is being prepared for the 12th development plan. - Consider a gradual rise of the VAT rate to 10 percent, from the current 7 percent, once the recovery is firmly entrenched. - Priority is given to broadening the tax base while enhancing tax collection, in the context of a modest economic recovery. - Augment labor supply by increasing mandatory retirement age in the civil service and regularizing migration from neighboring countries. - The retirement age is being increased in selected professions, while broad policies are under review. ### Risk Assessment Matrix — external risks (likelihood, impact, and policy responses) - Tighter or more volatile global financial conditions — Likelihood: M; Impact: M. - Staff note: high international reserves and sound commercial banks would mitigate the impact, but a surge in global financial market volatility could be disruptive. - Policies to minimize impact: allow exchange rate flexibility, provide liquidity to ensure orderly markets, and accelerate public investment execution if monetary stimulus is constrained. - Significant slowdown in China and/or other major emerging economies — Likelihood: M; Impact: H. - Staff note: Thailand’s integration in regional supply chains and high exports imply severe effects; possible terms-of-trade improvement due to large net imports of oil. - Policies: re-invigorate exports via regional and global trade integration, engage CLMV markets, and enhance competitiveness through structural reforms and infrastructure investment. - Structurally weak growth in key advanced economies — Likelihood: H; Impact: M. - Staff note: EU, Japan, and the United States each account for about 10 percent of Thailand’s exports. - Policies: structural reforms and infrastructure development; greater orientation toward CLMV. ### Risk Assessment Matrix — domestic risks (likelihood, impact, and policy responses) - Delays in infrastructure project implementation — Likelihood: M; Impact: M. - Risk: lower-than-projected public investment reduces domestic demand and long-term productive potential; may weaken confidence and FDI. - Policies: lower the policy rate; use quick-disbursing, well-targeted fiscal measures; focus on vulnerable groups and small shovel-ready projects. - Deflation becoming entrenched — Likelihood: M; Impact: M. - Risk: prolonged negative CPI and falling core inflation could raise real interest rates and the real debt burden, depressing demand. - Policies: lower the policy rate; signal intention to keep it low for long; emphasize commitment to inflation target; use macroprudential policy if necessary. - Household debt overhang boiling over — Likelihood: M; Impact: M. - Risk: highly leveraged households may cut spending; banks may tighten credit. - Policies: use room for additional fiscal and monetary stimulus; explore household debt restructuring options. - Exacerbation of drought conditions — Likelihood: M; Impact: M. - Risk: disruptions to agricultural production and tourism; water shortages. - Policies: provide income support and assist with alternative crops; encourage transition to industry and services. - Renewed political instability — Likelihood: M; Impact: H. - Risk: damaged confidence, reduced private investment and FDI, halted public investment, supply disruptions, possible international sanctions, capital outflows. - Policies: allow automatic stabilizers to work; provide liquidity to banks; let exchange rate be first line of defense and use judicious intervention. ### Public Debt Sustainability Analysis (DSA) — key elements and findings - Background and framework: - DSA for market access countries includes assessment of baseline realism, analysis of risks associated with the debt profile, macrofiscal risks, stochastic debt projections, and a heat map. - Macroeconomic assumptions: - Real growth is projected to average slightly above 3 percent in the medium term, supported in part by public infrastructure investment. - Fiscal assumptions: - In staff’s baseline projections, the public sector primary deficit would worsen from 1.3 to 1.8 percent of GDP between 2016 and 2018 and then improve to 0.8 percent of GDP in 2021. - For the transport sector multi-year infrastructure development plan, staff assumes an implementation rate of 60 percent. - Data coverage: - Public debt coverage includes central government debt, nonfinancial SOEs debt, and SFI debt guaranteed by the government. Local authorities’ debt (under 1 percent of GDP) is excluded. - Realism of baseline assumptions: - The median forecast error for real GDP growth during 2007−2015 is -2.3 percent of GDP. Staff attribute this to unexpected shocks such as the Global Financial Crisis, the flood in 2011, and political uncertainty. - Forecast errors for the primary balance and inflation are comparable to other countries. - Main DSA findings: - Under the baseline, the debt-to-GDP ratio is projected to hover around 45-46 percent, below the government’s ceiling of 60 percent and far below the benchmark of 70 percent for market access countries. - Full execution of the transport sector infrastructure plan (100 percent execution instead of 60 percent) would raise the peak debt-to-GDP ratio by 3 percent to reach 49 percent of GDP by 2019, still below the government’s ceiling of 60 percent. - Historical scenario: debt-to-GDP ratio declines to 41 percent by 2021 on the back of sustained fiscal surpluses and higher growth. - Fan chart and stochastic projections: even under the worst quartile case, the debt-to-GDP ratio would remain well under the benchmark of 70 percent. - Stress-test results and shock scenarios: - Of the four macro-fiscal shock scenarios (primary balance, interest rate, growth, exchange rate), the growth shock has the largest impact on debt ratios. - Growth shock specifics: real GDP growth falls by one 10-year historical standard deviation (3 percent) for two consecutive years from 2017, resulting in a deterioration of the primary balance; debt-to-GDP ratio reaches 50 percent in 2018. - Financial sector contingent liability shocks have the largest impact: - A one-time capital injection equivalent to 10 percent of commercial banks’ assets results in a one-off increase in government spending of 13 percent of GDP. - If the shock is augmented to include SFIs, government spending increase jumps to 17 percent of GDP. - Under the commercial-banks-only scenario, the debt-to-GDP ratio reaches 62 percent in 2019. - Under the augmented shock involving SFIs, the debt-to-GDP ratio reaches 67 percent in 2019. - Staff note these scenarios may entail low probability but underscore the importance of managing regulatory frameworks and risks of financial institutions, including SFIs. - Fiscal multiplier and assumptions: - Staff assume a nominal fiscal multiplier of 0.9 (estimated for Thailand taking into account two-way interactions between fiscal policy and economic activity). - Heat map and vulnerability indicators: - External financing requirement: 9 percent (exceeds the lower threshold of early warning benchmarks of 5 percent). Large official foreign reserves of over 40 percent of GDP provide buffers. - Share of public debt held by nonresidents: 16 percent (slightly exceeding the lower threshold of 15 percent). A well functioning domestic bond market and a wide base of investors provide comfort. - Thailand’s public debt-to-GDP ratio projected to hover around 45 percent of GDP, below the government’s ceiling of 60 percent and below the 70 percent framework benchmark. *Source: IMF staff (Appendix I, II and III as provided).* ### Appendix IV. Thailand—Avoiding Dark Corners ### Appendix IV. Thailand—Avoiding Dark Corners ### Monetary policy setting and simulation framework - Inflation Targeting regime increased stability of inflation and inflation expectations over the last decade. - Recent drivers: lower oil prices and relatively low growth pushed headline inflation into negative territory through Q1 2016 and left medium-term inflation expectations at historical lows. - Model: stylized new Keynesian model built along the lines of Clinton and others (2015), with policy reaction guided by Inflation-Forecast Targeting (IFT). - Shock environment: additional disinflationary pressures from weaker global growth and subdued commodity prices that, absent monetary action, would keep headline inflation below the target band and the output gap negative over the simulation horizon (12 quarters). ### Scenarios and key simulation parameters - Current policy rate: 150 basis points. - Two extreme monetary policy reaction scenarios examined: - “Aggressive easing”: - Policy rate hits the zero-lower bound floor from the current 150 basis points in three quarters, and stays there for the rest of the simulation horizon. - Headline inflation would return to the target point in three quarters and fluctuate within the BOT’s target range for the rest of the simulation horizon. - Inflation temporarily overshoots the 2.5 percent target point, allowing recovery to the target in price level terms. - Core inflation remains subdued but a “dark corner” with unanchored inflation expectations is avoided. - By preventing further declines in inflation and inflation expectations, aggressive monetary easing prevents a rise in real interest rates and helps close the output gap by the end of the simulation horizon. - “Delayed” (rates on hold for another five quarters): - Headline inflation path is very subdued, with the inflation rate below the target band and core inflation in negative territory over most of the simulation horizon. - Lack of accommodation in nominal rates leads to further declines in inflation expectations, exerting an increase of around 200 basis points in real rates and contributing to a widening negative output gap. - A (delayed) policy cut of 50 basis points after those first five quarters is not able to close the output gap and inflation undershoots the target band within the simulation horizon. ### Findings and policy implications - Decisive and timely easing is effective at avoiding deflationary “dark corners,” stabilizing inflation expectations, preventing real rate increases, and supporting closure of the output gap within 12 quarters. - Delayed action risks: - Prolonged below-target headline inflation. - Negative core inflation for much of the horizon. - Around 200 basis points rise in real interest rates. - Failure of later modest cuts (e.g., 50 basis points) to restore inflation and output within the simulation horizon. - Recommendation: careful monitoring of disinflationary forces and readiness to act and communicate in a decisive manner to prevent the entrenchment of deflationary expectations (see Alichi et al., 2015). --- ### Appendix V. Thailand—Tackling Risks from Household Debt ### Key statistics and recent developments - Household debt reached 141 percent of disposable income at end-2014. - Household debt at 82 percent of GDP as of Q4 2015. - Mortgage loans account for a quarter of total debt and grew at 9.5 percent (y/y) on average during 2007–2015. - Growth in household debt excluding mortgage loans slowed sharply since 2013, reaching 4 percent by end-2015. - Mortgage and consumer loans composition: consumer loans account for much of remaining debt; loans for business purposes account for one fifth of the total. ### Drivers and risks - Drivers: quasi-fiscal measures (e.g., first-car buyer program after 2011 floods), expansion of credit card use, sluggish economic growth during 2013–15, declines in commodity prices, severe drought affecting farmers’ income, and low inflation widening gap between real interest rates and real income growth. - Risk channel: further deflationary pressures would increase the real cost of servicing debt, worsening household debt dynamics. ### Financial sector exposure and vulnerabilities - Commercial banks: balance sheets remain sound; commercial banks provided loans to middle- and high-income households; consumer NPLs have recently ticked up but remain relatively low; banks remain well-capitalized and profitable. - SFIs and credit cooperatives: cater more to lower income households including agricultural sector; higher overall exposure to household sector with household loans exceeding household deposits. - Supervisory findings: BOT onsite inspections of all SFIs found no imminent systemic risks; financial soundness indicators vary considerably; two small SFIs are under restructuring. - Some SFIs and cooperatives have seen increases in households facing difficulties remaining current; NPLs contained by active refinancing opportunities but developments warrant close monitoring. ### Policy recommendations - Consider proactive strategies to address risks from high household debt. - Vigilance on housing market developments and risks from search-for-yield behavior. - Improve understanding of financial conglomerates’ interconnectivity and address systemic risks as these conglomerates grow. - Continue transfer of prudential supervision of SFIs to the BOT and enhance coordination among regulators. - Expand data collection and analysis of systemic risks to better inform macroprudential policy decisions. - Strengthen the resolution framework to enhance market discipline and mitigate excessive risk taking. - Overall: proactive policies would help maintain financial stability. --- ### Appendix VI. Thailand—External Assessment ### Net international investment position (NIIP) - NIIP path: improved from -48 percent of GDP in 2000 to -3 percent of GDP in 2009; deteriorated to -23 percent of GDP in 2014; in 2015, NIIP halved to around -11 percent of GDP due to portfolio investment outflows, subdued FDI inflows, and rising outward investment by residents. - Assessment: deterioration during 2010–2014 appears largely due to valuation changes while the current account was on average in surplus; limited risks to external debt sustainability as external debt projected to remain low and net foreign liabilities expected to stabilize; the 2015 NIIP improvement may not be auspicious as driven mainly by portfolio outflows and sluggish FDI. ### Current account (CA) dynamics and gap - CA history: ranged from a 4 percent of GDP deficit in 2005 to a 7¼ percent of GDP surplus in 2009; CA deficit of 1¼ percent of GDP in 2013; CA surplus of 8 percent of GDP in 2015. - Contribution: decline in net oil imports between 2014 and 2015 was 2.6 percent of GDP, explaining more than half of the improvement in the CA. - EBA model estimates for 2015: - Estimated CA: 7.6 percent of GDP. - CA norm: 1.3 percent of GDP. - CA gap: 6.4 percent of GDP, comprising a policy gap of 1.5 percent of GDP (of which 0.7 percent of GDP corresponds to domestic policy gaps) and an unexplained residual of 4.9 percent of GDP. - Staff assessment: considering Thailand-specific factors not well captured by the EBA model, staff assesses the CA gap within 1½ to 3½ percent of GDP of the level consistent with medium-term fundamentals and appropriate policies. - Outlook: CA gap expected to narrow over the medium term as policy stimulus is deployed and private confidence recovers. ### Real exchange rate (REER) - Background: REER has been appreciating since 2005 (excluding global financial crisis); REER weakened mid-2013 then began appreciating mid-2014; REER appreciated by 2.5 percent on average during 2015 while CA surplus increased. - EBA estimates: - EBA index REER gap in 2015: -2.8 percent. - EBA level REER gap in 2015: -11.2 percent (with a large unexplained residual). - Staff assessment: using an elasticity of 0.6, staff assesses the 2015 REER to be 2.5-6 percent below levels consistent with medium-term fundamentals and appropriate policies. ### Capital and financial accounts - Capital and financial account balance: negative since 2013. - 2015: negative balance increased to $18 billion due to portfolio outflows in equity and bond markets and subdued FDI inflows. - Assessment: capital outflows manageable given external sector resilience and baht flexibility; headwinds since 2013 include Fed lift-off, China slowdown, and political uncertainty. ### FX intervention and reserves - Reserves trajectory: declined from 52 percent of GDP in 2012 to 43 percent of GDP in 2015. - Reserve adequacy: reserves stand at over three times short-term debt, 180 percent of the IMF’s reserve metric unadjusted for capital controls, and 211 percent of the metric adjusted for capital controls. - 2015 movement: reserves declined by around $12 billion, mostly from the net forward position amid persistent depreciation pressures against the U.S. dollar. - Assessment: decline suggests possible intervention to mitigate market volatility but no clear evidence of one-sided intervention given valuation effects from the strong U.S. dollar; gross reserves are higher than IMF adequacy metrics and there is no need to build up reserves for precautionary purposes. - Policy recommendation: continue to allow the exchange rate to move flexibly as a first line of defense; limit intervention to smoothing excessive market volatility. *Source: IMF staff appendices titled "Appendix IV. Thailand—Avoiding Dark Corners", "Appendix V. Thailand—Tackling Risks from Household Debt", and "Appendix VI. Thailand—External Assessment."* ### 1. Thailand’s external debt is projected to remain relatively low over the medium term, ### 1. Thailand’s external debt is projected to remain relatively low over the medium term, ### External debt projections and stress tests - External debt is projected to decline from about 33 percent of GDP in 2015 to about 29 percent of GDP in 2021 under the baseline scenario. - Stress tests indicate external debt would remain stable under various shocks: - Higher interest rate shock (permanent one-half standard deviation). - Weaker GDP growth shock (permanent one-half standard deviation). - Lower current account balance shock (permanent one-half standard deviation / non-interest current account shock). - One-time 30 percent real depreciation of the baht (occurs in 2016). - Under the exchange rate depreciation shock (one-time 30 percent depreciation), the external debt-to-GDP ratio would rise to about 54 percent of GDP. - The real-depreciation scenario does not incorporate the trade-flow adjustment that would likely follow such a depreciation—specifically, a sharp improvement in the current account that would significantly reduce the debt-to-GDP ratio. ### Baseline versus scenario outcomes (key scenario features) - Baseline path: external debt falls from about 33 percent of GDP (2015) to about 29 percent of GDP (2021). - Exchange-rate shock scenario: one-time 30 percent real depreciation in 2016 → external debt-to-GDP ratio rises to about 54 percent of GDP. - Individual shocks are modeled as permanent one-half standard deviation shocks; some combined scenarios use permanent 1/4 standard deviation shocks. - Figures and shaded areas in the original analysis represent historical data and average projections for respective variables in baseline and scenarios. ### Recent macroeconomic and financial developments (supplementary information) - Real GDP growth: 3.2 percent year-on-year in Q1 2016, up from 2.8 percent in Q4 2015. - Drivers: public expenditure (including double-digit growth in public investment) and net exports; private consumption growth moderated. - Supply side: non-agricultural sector led the recovery, supported by strong tourism and construction. - Inflation: - Headline inflation: 0.1 percent year-on-year in April (turned positive). - Core inflation: 0.8 percent. - Financial indicators: - Thailand’s ten-year government bond yield declined 57 bps year-to-date. - Equity market index up by 9.2 percent. - Thai baht appreciated by 1.4 percent against the US dollar; relatively stable in nominal and real effective terms. - Monetary policy: - On May 11, the Bank of Thailand kept the policy interest rate unchanged at 1.5 percent (MPC voted unanimously). - Rationale: preserve policy space amid downside risks and continued monitoring of financial stability risks from search-for-yield behavior. ### Policy implications and authorities’ stance - Staff recommendation emphasized a three-pronged policy approach: implement an expansionary macroeconomic policy mix, safeguard financial stability, and boost long-term potential growth. - Authorities’ view: - Broad agreement with staff’s analysis and recommendations. - Growth projection for 2016: slightly above 3 percent (authorities’ projection). - Authorities recognize downside risks from external and domestic factors (weak global growth, China’s rebalancing, changes in global trade structure, commodity price collapse, drought impact on agricultural incomes, capital flow and exchange rate volatility). - Authorities highlight Thailand’s strong external position, robust banking system, flexible exchange rate, and preparation of policy toolkits to counter unexpected shocks. *Source: IMF staff report excerpts from the 2016 Article IV Consultation—supplementary information and external debt sustainability analysis.* ### 5. On fiscal policy, the authorities view that public spending will continue to play a ### _cr16139 - 5. On fiscal policy, the authorities view that public spending will continue to play a ### Fiscal policy and public investment - Public spending will continue to play a crucial role in driving growth in 2016 and beyond, with emphasis on investment expenditure to crowd-in private investments. - Government committed to pressing ahead with implementation of key infrastructure projects to get the economy back on a sustainable growth path. - Recent public investment growth: - 12.4 percent in the first quarter of this year - 41.2 percent growth in the fourth quarter of 2015 - Authorities are optimistic that investment plan execution will progress at a higher rate compared to historical average and staff’s assumption, and that this will help shore up private confidence and market sentiment. ### Fiscal governance, SOEs, and debt sustainability - Ministry of Finance prioritizes expediting enactment of the Fiscal Responsibility Act to enhance public finance management, fiscal prudence, and transparency. - Draft Act approved by the Cabinet in March 2016 and submitted for consideration of the Council of State. - Ongoing reforms of State Owned Enterprises (SOEs) and establishment of a Holding Company for SOEs intended to enhance governance, transparency, and efficient implementation of government projects. - Authorities cite staff’s public debt sustainability analysis indicating Thailand’s public debt would remain on a sustainable path in the medium term despite various shock scenarios. ### Monetary policy and inflation outlook - Authorities maintain an accommodative monetary stance to provide favorable liquidity and credit conditions, complementing expansionary fiscal policy while preserving financial stability. - Authorities note staff’s concern over risk of deflation from negative headline inflation and falling inflation expectations in 2015, but regard staff’s assessment as too pessimistic. - Country-specific sensitivity of headline inflation to global oil price movements attributed to smaller tax cushion in retail fuel prices. - Headline inflation developments: - Latest figures show headline inflation returning to positive territory in April 2016. - Latest medium-term consensus forecast for headline inflation (April 2016) stands close to the inflation target at 2.5 percent. - Authorities anticipate headline inflation will gradually rise in 2016 and 2017 due to continued positive base effect and gradual closing of output gap, while noting uncertainty from global oil price movements and domestic demand recovery. ### Policy space, monetary easing scenario, and financial stability concerns - Authorities stress importance of preserving policy space amid potential policy spillovers from major economies and bouts of volatility. - Staff’s simplified-model simulation: aggressive monetary policy easing (assuming 150 bps policy rate cut to zero percent) might help prevent a downward spiral of inflation expectations. - Authorities caution that further easing must consider: - Effectiveness of monetary policy transmission under low interest environment - Potential side effects on search-for-yield behavior and financial stability - Monetary Policy Committee will remain vigilant and stands ready to use available policy space if significant risks materialize. ### Exchange rate flexibility, capital flows, and capital account measures - Thailand has experienced capital flows and financial market volatilities driven by policy divergence of major central banks and foreign investors’ search-for-yield behavior. - Flexible exchange rate has acted as a shock absorber. - Bank of Thailand (BOT) occasionally uses foreign exchange intervention to mitigate excessive exchange rate volatility to prevent adverse effects on domestic financial conditions. - BOT announced additional measures to relax foreign exchange regulations under the Capital Account Liberalization Master Plan to deepen financial markets and encourage outward investment by residents to balance capital flow movements. ### Financial sector stability and supervisory actions - Financial system remains resilient amidst global market volatility; banking sector performing well with comfortable capital buffers, liquidity and profitability ratios. - Pockets of vulnerabilities identified among Specialized Financial Institutions (SFIs) and less regulated intermediaries (saving/credit cooperatives and non-bank financial institutions) whose exposure to commercial banks has increased. - Supervisory priorities and actions: - High priority on strengthening supervision and oversight of SFIs; most SFIs financially healthy. - Transfer of supervisory authority over SFIs to the BOT expected to be completed by the end of this year. - BOT preparing to carry out on-site and off-site examinations of SFIs for compliance and risk management. - Cooperatives: - Exposure of cooperatives to commercial banks has increased but remains small in absolute terms; deterioration likely to be contained with limited spillovers to overall banking sector. - Supervisory agency in close consultation with BOT on applying banking standards to savings cooperatives and on cooperatives’ participation in the national credit bureau database to improve credit analysis and risk monitoring. ### Household debt and macroprudential stance - High household debt remains an issue, partly due to deteriorating debt-service capabilities of agricultural and low-income households. - Authorities acknowledge debt overhang could weigh on consumption and hinder recovery. - Recent figures suggest household debt has somewhat leveled-off following more stringent credit standards and subsiding legacy effects from government consumption stimulus measures. - Authorities working on policy measures to facilitate banks in household debt restructuring. - On macroprudential policies: - Authorities note staff’s recommendation to tighten macroprudential policies but consider current measures sufficient at this juncture. - Current toolkit includes regulations (LTVs, loan-loss provisioning, specific risk weights, capital surcharges, etc.) and moral suasion. - Authorities view further tightening requires caution given sluggish growth; degree and timing of adjustments are critical. - Studies underway on new measures such as Debt-to-Income Ratio; efforts to enhance data quality and risk monitoring tools to improve policy implementation effectiveness. - Authorities appreciate the Fund’s technical assistance in strengthening Thailand’s financial stability framework. ### Structural reforms, regional integration, and trade partnerships - Structural reforms underway to promote high value-added industries, transform to digital economy, and deepen regional integration to strengthen competitiveness. - Infrastructure upgrades intended to facilitate more effective transfer of factors of production domestically and to neighboring countries, leveraging Thailand’s geographic position in ASEAN. - Steps taken to improve ease of doing business: collaboration with private sector to streamline business incorporation, reduce red tape and documentation requirements. - Regional integration and trade partnerships: - Thailand continues to benefit from the ASEAN Economic Community (AEC). - CLMV countries within ASEAN are important trading partners and their robust growth expected to contribute to Thailand’s recovery. - Authorities studying costs and benefits of the Trans-Pacific Partnership (TPP) and consulting national stakeholders on economic and social implications of joining. - Authorities also working on other partnerships such as the Regional Comprehensive Economic Partnership (RCEP). ### Aging population, labor policy, and pensions - Authorities recognize aging population implications for labor productivity, social safety nets, and contingent fiscal burden. - On staff’s recommendation for a more open policy toward foreign workers, authorities consider labor policy adequately flexible and prioritize migration management to address illegal workers and limit public health expenditure impacts. - Authorities’ actions on labor and productivity: - Upgrading labor skills in collaboration with private sector - Reforming the education system - Promoting use of technology to increase productivity - Pension and savings initiatives: - Ministry of Finance has set up a committee to undertake pension system reforms (details yet to be released). - Authorities aim to enhance individual savings through National Savings Fund that will cover 25 million people aged between 15-60 years in the informal sector to encourage accumulation of savings for retirement. ### Final remarks - Authorities believe Thailand’s strong fundamentals and resilience provide a solid foundation to meet future challenges. - Steadfast implementation of reforms expected to foster sustainable private investment and enhance long-term potential and competitiveness. - Authorities look forward to continued Fund support through technical assistance in their reform endeavors. *Source: IMF country authorities’ statement as presented in the provided content unit.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16139.pdf_