Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Thailand
IMF News, October 27, 2005
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- Published: October 27, 2005
Background
- On September 7, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Thailand.
- 2004 performance:
- Real GDP increased by 6.1 percent.
- Headline inflation (period average) 2.7 percent.
- Core inflation (period average) 0.4 percent (within Bank of Thailand's target range of 0-3.5 percent for core inflation).
- Early 2005 shock factors and impacts:
- Confluence of higher oil prices, recurring outbreaks of the avian flu, the security situation in the south, slower partner growth, the downward electronic cycle, the devastating tsunami, and a prolonged drought.
- Slowdown in activity and marked deterioration of the current account at the beginning of 2005; recovery signs with strong growth in the second quarter.
- Headline and core inflation rose in August to 5.6 and 2.3 percent, respectively, reflecting rising energy prices.
- Monetary policy:
- BOT policy rate raised from 1.25 percent to 3.25 percent since August 2004, ending a three-year easing cycle.
- Fiscal and public investment:
- FY 2003/04 central government recorded a small surplus of 0.3 percent of GDP due to revenue overperformance.
- FY 2004/05 central government balance projected to be broadly balanced, allowing for a supplementary budget of B 50 billion (or ¾ percent of GDP).
- Authorities announced plans for B 1.7 trillion in infrastructure spending over 2005-09; public investment projected around 9 percent of GDP (below pre-crisis peak of 12 percent of GDP).
- Overall public sector balance projected to record a small deficit due to higher capital spending by nonfinancial state enterprises and a lower balance for extrabudgetary funds (Oil Fund).
- External sector:
- 2004 current account surplus 4.5 percent of GDP; outstanding external debt fell to 31 percent of GDP from 36 percent in 2003.
- First half of 2005 current account deficit US$6.2 billion (about 3.8 percent of GDP); current account improved to a small surplus in July.
- Baht: appreciated around 3 percent (year-on-year) against the dollar in 2004, depreciated slightly in effective terms; weakened between March-August 2005 with the deterioration of the current account.
- Structural vulnerabilities:
- Banks strengthened financial positions but NPLs have yet to come down further.
- Thai Asset Management Corporation resolved 99 percent of total acquired assets in 2004; some approved restructurings or foreclosures remain incomplete.
- Corporates have made de-leveraging progress but more work remains.
Executive Board Assessment — Findings and Risks
- Directors commended:
- Prudent macroeconomic policies supporting strong 2004 growth and relatively low inflation.
- The role of disciplined monetary and fiscal policies and a flexible exchange rate regime in weathering 2005 shocks and enabling stronger-than-expected second quarter growth.
- Near-term risks identified:
- A sharper-than-expected slowdown in partner demand or additional increases in oil prices could delay current account improvement and slow recovery.
- If adverse circumstances materialize, Directors encouraged allowing the market-based exchange rate and automatic fiscal stabilizers to support recovery.
- Balance sheet strength:
- Substantial reduction in public and external debt over recent years places Thailand in a strong position to confront adverse shocks.
- Exchange rate and monetary policy:
- Support for BOT's flexible exchange rate management and limited intervention to smooth excessive volatility.
- Several Directors noted that further market-led currency adjustment may be needed if external shocks persist.
- Directors supported BOT’s early move to tighter monetary conditions and the gradual approach to raising the policy rate from 1.25 percent to 3.25 percent since August 2004.
- Targeted prudential curbs by BOT were seen as appropriate to prevent excessive exuberance in some credit market sectors.
- Fiscal policy stance:
- Projected mild fiscal stimulus in FY 2004/05 viewed as appropriate given contained inflationary pressures and growth uncertainties.
- Broadly neutral draft budget for FY 2005/06, inclusive of planned infrastructure spending, considered appropriate given expected cyclical position.
- Directors welcomed improvements in tax administration and recent gains in revenue collection.
- Megaprojects and fiscal/external sustainability:
- Emphasis that planned megaprojects should be prioritized, appropriately phased, and not jeopardize fiscal and external sustainability.
- Encouragement for transparent financing, minimized contingent liabilities, adequate monitoring mechanisms, containment of current expenditure growth, and sustaining the revenue effort to ensure medium-term fiscal sustainability.
- Structural reform priorities:
- Sustainable medium-term growth hinges on steadfast implementation of structural reforms.
- NPLs remain high; Directors welcomed measures to expedite NPL resolution and encouraged speedy enactment of legislation to replace full guarantee by the Financial Institutions Development Fund with a deposit insurance scheme and to allow state-owned AMC purchases of assets from commercial banks.
- Support for authorities’ actions to deal with the largest state-owned bank and call for continued vigilance.
- Measures to discourage speculative flows may be useful short-term but have long-term drawbacks.
- Governance, legal, and investment-climate reforms:
- Importance of accelerating legal reforms to improve governance in private and public sectors and enhance the investment climate.
- Welcomed measures to improve accounting and governance standards and the forthcoming ROSC on corporate governance.
- Welcomed authorities' request for an FSAP in 2007 and encouraged faster progress with pending legislation in other economic areas.
- Privatization and trade policy:
- Strengthened commitment to privatization welcomed; planned corporatization of Thailand's power company an important first step, with telecom sector next.
- Trade liberalization progress commended; recent bilateral FTAs could help domestic business climate and market access but should complement broad-based trade liberalization and be consistent with multilateral trade goals.
Policy Recommendations and Scenarios
- If partner demand weakens sharply or oil prices rise further:
- Allow market-based exchange rate adjustment and automatic fiscal stabilizers to support recovery.
- Fiscal policy:
- Prioritize, phase, and transparently finance megaprojects to avoid jeopardizing fiscal and external sustainability.
- Minimize contingent liabilities and ensure adequate monitoring of project implementation.
- Contain growth of current expenditure and sustain revenue effort to secure medium-term fiscal sustainability.
- Monetary and financial sector policy:
- Continue flexible exchange rate management with limited intervention to smooth excessive volatility.
- Maintain gradual tightening of monetary conditions as warranted by closing output gap and inflationary pressures.
- Use targeted prudential measures to curb excessive credit exuberance where needed.
- Structural and legal reforms:
- Accelerate resolution of NPLs; enact legislation for deposit insurance and asset purchases by state-owned AMCs.
- Strengthen corporate governance, accounting standards, and legal frameworks to improve investment climate.
- Proceed with privatization and corporatization plans to boost investor confidence.
- Trade policy:
- Pursue bilateral and regional FTAs as complements to broad-based trade liberalization and ensure consistency with multilateral trade liberalization objectives.
Selected Economic Indicators, 2000-05 (highlights and exact figures)
- Real GDP growth:
- 2000: 4.8
- 2001: 2.2
- 2002: 5.3
- 2003: 6.9
- 2004: 6.1
- 2005 Est./Proj.: 3.5
- Consumption (series entries shown partially in source): 3.9; 5.8; 6.7
- Inflation (Headline CPI, period average):
- 2000: 1.6
- 2001: 0.7
- 2002: 1.8
- 2003: 2.7
- 2004: 4.2
- Inflation (Core CPI, period average):
- 2000: 1.3
- 2001: 0.4
- 2002: 0.1
- 2003: 1.5
- Fiscal accounts (budgetary central government balance, on a cash and fiscal year basis; fiscal year ends on September 30):
- 2000: -2.0
- 2001: -2.1
- 2002: -2.3
- 2003: 0.3
- 2004: 0.5
- Revenue and grants:
- 2000: 15.5
- 2001: 15.1
- 2002: 15.9
- 2003: 16.6
- 2004: 17.6
- 2005: 17.8
- Expenditure and net lending:
- 2000: 17.5
- 2001: 17.2
- 2002: 18.2
- 2003: 16.2
- 2004: 17.3
- Comprehensive public sector balance:
- 2000: -2.7
- 2001: -0.7
- 2002: -0.4
- 2003: 2.6
- 2004: 1.4
- Public sector debt:
- 2000: 57.8
- 2001: 57.5
- 2002: 57.2
- 2003: 50.6
- 2004: 48.9
- 2005: 49.6
- Monetary accounts (M2A growth, end-period):
- 2000: 4.6
- 2001: -0.1
- 2002: 5.1
- 2003: 6.3
- 2005 figures are percentage changes between March 2005 and December 2004 (as noted in source).
- Balance of payments — Current account balance (in billions of U.S. dollars and percent of GDP):
- Current account balance (US$ billions):
- 2000: 9.3
- 2001: 6.2
- 2002: 7.0
- 2003: 8.0
- 2004: 7.3
- 2005: -4.1
- (Percent of GDP):
- 2000: 7.6
- 2001: 5.4
- 2002: 5.5
- 2003: 5.6
- 2004: 4.5
- 2005: -2.5
- Exports, f.o.b. (US$ billions):
- 2000: 67.9
- 2001: 63.1
- 2002: 66.1
- 2003: 78.1
- 2004: 96.1
- 2005: 106.9
- Imports, c.i.f. (US$ billions):
- 2000: 62.4
- 2001: 60.6
- 2002: 63.4
- 2003: 74.3
- 2004: 94.4
- 2005: 116.3
- Capital and financial account balance:
- 2000: -10.8
- 2001: -3.6
- 2002: -1.4
- 2003: -7.4
- 2004: -1.6
- 2005: 2.5
- Gross official reserves (end-year, US$ billions):
- 2000: 32.7
- 2001: 33.0
- 2002: 38.9
- 2003: 42.1
- 2004: 49.8
- 2005: 48.2
- (Percent of maturing external debt):
- 2000: 119.1
- 2001: 121.2
- 2002: 153.6
- 2003: 221.5
- 2004: 231.2
- 2005: 216.1
- External debt:
- (In percent of GDP)
- 2000: 65.0
- 2001: 58.4
- 2002: 46.9
- 2003: 36.2
- 2004: 30.9
- 2005: 30.1
- (In billions of U.S. dollars)
- 2000: 79.7
- 2001: 67.5
- 2002: 59.5
- 2003: 51.8
- 2004: 50.4
- Public sector share of external debt (US$ billions):
- 2000: 33.9
- 2001: 28.3
- 2002: 23.3
- 2003: 17.0
- 2004: 14.4
- 2005: 11.4
- Private sector share of external debt (US$ billions):
- 2000: 45.8
- 2001: 39.2
- 2002: 34.8
- 2003: 35.7
- 2004: 39.1
- Debt-service ratio (percent of exports of goods and services):
- 2000: 15.8
- 2001: 21.1
- 2002: 20.0
- 2003: 16.3
- 2004: 8.6
- 2005: 9.6
Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Thailand, October 27, 2005.