Press Release No.

IMF Executive Board Concludes 2017 Article IV Consultation with Thailand

May 31, 2017

On May 17, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation^[1] with Thailand.

The Thai economy continued to recover in 2016. GDP growth reached 3.2 percent, mainly driven by exports of services and public investment. Amid subdued import growth and soaring tourism, the external current account strengthened further to 11.4 percent of GDP. Average headline inflation was 0.2 percent, below the tolerance band for the second year in a row, reflecting low energy prices and persistently weak core inflation. 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 remain around the low end of the tolerance band in 2017–18, amid subdued core inflation. The current account surplus is expected to decline gradually, as domestic demand improves over the medium term. Headwinds arise from further weakness in the international environment, as well as from political uncertainty and structural bottlenecks. 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.

Policy space and ample buffers can be deployed to minimize the risk of a low-inflation, low growth trap. Structural bottlenecks are holding back employment and investment, reinforcing weak expectations of domestic demand. A mutually reinforcing policy mix of fiscal and monetary stimulus, coupled with structural reforms and a flexible exchange rate, can

support domestic demand in the short run and boost potential growth over the long run. Such strategy would help reduce the high current account surplus over the medium term through a growth-driven process, boosting real incomes.

Executive Board Assessment^[2]

Executive Directors commended the authorities for maintaining macroeconomic stability through challenging domestic and external conditions. However, Directors noted that the ongoing recovery remains modest and faces downside risks, including from global uncertainty and financial volatility. They concurred that existing policy space and buffers should be deployed to curtail risks of a low‑inflation, low‑growth trap.

Directors supported the use of fiscal space through growth‑enhancing public investment. They agreed that large infrastructure projects would help crowd‑in private investment and play an important role in supporting growth and inflation as well as in facilitating external rebalancing. Directors noted that domestic revenue mobilization through growth‑friendly taxes would finance expenditure needs and ensure debt sustainability over the longer term. They welcomed the authorities’ plan for a comprehensive review of the pension system to tackle design shortcomings and population aging, with due consideration for equity, efficiency, and sustainability. Directors emphasized that articulating a medium‑term fiscal strategy would enhance fiscal management and transparency.

Most Directors concurred that monetary easing, within a broader expansionary policy mix, could counteract the risk of low inflation becoming entrenched, while strengthening both macroeconomic and financial stability. They also noted that enhanced communication would improve the effectiveness of monetary policy transmission. A number of Directors supported preserving the monetary policy space at this time, with adjustments to the stance when warranted by new developments. Directors emphasized the importance of maintaining the exchange flexibility, with intervention limited to avoiding disorderly market conditions. A few Directors noted that there was scope for scaling back the overall size of interventions, and allowing the exchange rate to play a greater role as a shock absorber, given substantial external buffers.

Directors viewed financial stability risks as contained and commended the authorities’ ongoing efforts to upgrade the financial stability framework. They agreed that pockets of vulnerability in the shadow banking system should be addressed by tailoring macroprudential policies and closing loopholes for regulatory arbitrage. Similarly, tighter macroprudential measures on highly leveraged households and certain segments of the real estate market could contain any buildup of systemic risk.

Directors welcomed the authorities’ continued progress in poverty alleviation and supported efforts to strengthen the targeting and efficacy of fiscal measures to protect the most vulnerable. They noted that concerted reforms are needed to achieve sustained, inclusive growth and highlighted that priority should be given to mitigating the drag from the demographic transition by promoting labor force participation, facilitating skilled migration, and improving the quality of education.

Directors agreed that Thailand’s external position is stronger than warranted by medium‑term fundamentals and desirable policies, with some Directors citing Thailand‑specific issues as contributing factors. They viewed a policy mix of fiscal and monetary stimulus, coupled with structural reforms and a flexible exchange rate, as instrumental to support domestic demand and help reduce the large current account surplus over time. Directors emphasized that such strategy would facilitate the needed real exchange rate appreciation through a growth‑driven process, boosting real incomes.