An International Monetary Fund (IMF) team, led by Ana Corbacho, visited
Bangkok from February 16–March 1, 2017, for the 2017 Article IV
Consultation discussions. The team exchanged views on recent economic
developments and the outlook with officials in the government, the Bank of
Thailand (BOT), and other public institutions. It also met with
representatives of the private sector and academics. At the conclusion of
the visit, Ms. Corbacho issued the following statement:
“The Thai economy continued to recover in 2016. GDP growth reached 3.2
percent, mainly driven by exports of services and public investment.
Average headline inflation was 0.2 percent, below the target band for the
second year in a row, reflecting low energy prices and persistently weak
core inflation. Amid subdued import growth, the external current account
strengthened further. Financial markets were highly resilient in the face
of external and domestic shocks.
“The recovery is expected to advance at a moderate pace in the near to
medium term. Public investment would remain a key driver, rising over the
next few years in line with the government’s infrastructure plans, and
crowding in private investment. Headline inflation is projected to increase
in 2017 along with higher energy prices, but would remain below the 2.5
percent target for several years, amid subdued core inflation. The current
account surplus is expected to decline gradually, as domestic demand
improves over the medium term.
“The outlook is subject to significant uncertainty and downside risks
remain. On the external
front, a bumpy rebalancing in China may hurt Thai exports. A shift in the
U.S. policy mix to expansionary fiscal policy and tighter monetary policy
could generate capital outflows, raise financing costs, and trigger
heightened global volatility. Trade protectionism could particularly affect
open economies such as Thailand over the medium term. On the other hand,
recent momentum in global growth could be sustained, providing upside risk
through a faster recovery in Thai exports and tourism in the near term. On
the domestic front, weaker crowding-in of private investment would reduce
domestic demand and potential growth. Low inflation could become
entrenched, while the household debt overhang could create
stronger-than-expected headwinds to consumption and growth.
“Thailand’s policy space and ample buffers can be deployed to minimize the
risk of a low-inflation, low-growth trap. While cyclical conditions are
improving, Thailand is afflicted by features of the “new mediocre” facing
some advanced economies. Structural bottlenecks are holding back employment
and investment, reinforcing weak expectations of domestic demand. The team
recommends a mutually reinforcing policy mix of fiscal and monetary
stimulus, coupled with structural reforms, to support domestic demand in
the short run and boost potential growth over the long run. Such a strategy
would also help reduce the high current account surplus over the medium
term, helping to ensure that the needed real exchange rate appreciation
takes place through a growth-driven process boosting real incomes. The
exchange rate should remain the first line of defense against external
shocks, with foreign exchange intervention limited to avoiding disorderly
market conditions.
“The team recommends monetary policy easing together with enhanced
communication to improve the balance of risks and steer inflation back to
the target. Monetary easing, as part of a broader expansionary policy mix,
would counteract risks of low inflation becoming entrenched and prevent a
further rise in real interest rates and the real debt burden. Moreover, a
faster convergence to the target would allow a faster exit from the low
interest rate environment, strengthening both macroeconomic and financial
stability. Enhanced communication of the strong determination to meet the
inflation target would reinforce monetary policy transmission and the
effectiveness of policy easing through the expectations channel.
“Financial stability risks remain contained. Macroprudential policy and
regulatory reform can address emerging pockets of financial fragility.
Concerns that policy rates cuts could exacerbate systemic risks can be
addressed by tailoring macroprudential policies to close loopholes for
regulatory arbitrage. Also important is strengthening the macroprudential
policy framework across different types of financial institutions to ensure
that monetary easing does not inadvertently give rise to excessive leverage
and financial stability risks. Continuing to upgrade the financial
stability framework will reinforce stability.
“The team supports the use of fiscal space to accommodate higher public
investment. Large infrastructure projects remain macro-critical to
stimulate domestic demand and inflation, crowd-in private investment and
imports, and support potential growth and external rebalancing. Fiscal
space should not be used for short-term measures that are untargeted and
poorly aligned with long-term goals. A gradual increase in domestic fiscal
revenues, focused on growth-friendly taxes, is needed to finance growing
social protection needs and ensure debt sustainability over the longer
term. A comprehensive pension reform should tackle design shortcomings and
population aging, with due consideration for equity, efficiency, and
sustainability. Articulating a medium-term fiscal strategy would enhance
fiscal management, credibility, and transparency.
“The team agrees on the need for structural reforms to anchor sustained,
inclusive growth. Concerted reforms should address all drivers of potential
growth, with priority placed on the challenges brought about by the fast
pace of population aging. Promoting labor force participation (including by
closing gender gaps and increasing the retirement age), facilitating
skilled migration, and improving the quality of education would help raise
labor productivity and mitigate the drag from demographics. There is also
scope to enhance private investment capital accumulation and total factor
productivity. Developing a robust mechanism to identify poor and vulnerable
households would help to improve the targeting of social assistance and to
address any adverse impact of structural reforms on income distribution.
“The team would like to thank the authorities and private sector
counterparts for their support, hospitality, and constructive dialogue. The
IMF’s Executive Board is tentatively scheduled to discuss the Staff Report
in May.”
