Press Information Notice: IMF Concludes Article IV Consultation with Thailand
IMF News, June 25, 1998
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- Published: June 25, 1998
Background
- Thailand experienced more than a decade of rapid growth and low inflation until the early 1990s; from 1993 demand pressures intensified, leading to higher inflation and a sharp widening of the current account deficit.
- A pegged exchange rate combined with an increasingly open capital account produced large capital inflows, rapid credit growth, and rising external debt, especially short-term.
- Shocks and vulnerabilities included: a sharp slowdown in export growth (in part reflecting appreciation of the real exchange rate), difficulties in the overexpanded property sector, large falls in the stock market, and a rapidly weakening financial system.
- Speculative attacks, capital controls, and intervention in the forward exchange market virtually depleted net international reserves and forced abandonment of the exchange rate peg on July 2, 1997; subsequent depreciation increased the real burden of foreign currency denominated debt and non-performing loans.
- In August 1997 the Thai authorities agreed with the IMF on an economic adjustment program as part of an official financing package totaling more than U.S. $17 billion; the program tightened macroeconomic policies and emphasized financial sector restructuring.
- Initial implementation was mixed due to delays, doubts about financial sector resolution, and regional deterioration; after a new coalition government in November 1997 policy implementation improved considerably.
- Key actions taken:
- Monetary policy kept tight; decline in interest rates lagged baht strengthening.
- Fiscal deficit kept within quarterly review targets, with flexible revisions to accommodate increased social expenditures and recession-induced revenue shortfalls.
- Financial sector measures: closed all but two of 58 suspended finance companies and commenced orderly disposal of assets; intervened in four insolvent banks (wiping out shareholder capital while protecting deposit value).
- Strengthened prudential regulations and initiated bank recapitalization to meet international capital adequacy standards by the year 2000.
- Balance of payments and exchange rate developments:
- Through the first three months of 1998, the cumulative current account surplus exceeded U.S. $4 billion; the surplus for the whole year projected to be more than U.S. $8 billion, or close to 7 percent of GDP.
- Bank of Thailand gross international reserves exceed 6 months of imports and more than the entire stock of Thailand’s short-term debt, despite substantially lowered offshore forward foreign exchange market commitments.
- Baht appreciated to around B 40 per U.S. dollar, up by roughly one-third from its B 50–55 trading range at the start of the year.
- Real economy remained weak:
- Manufacturing production in the first quarter was 17 percent lower than a year earlier.
- Real GDP expected to fall by 4–5.5 percent in 1998.
- Unemployment projected to rise from about 3½ percent in mid–1997 to 6 percent by the end of 1998.
- Inflation risen to just over 10 percent.
- Financial and corporate restructuring still incomplete; regional prospects more difficult.
Executive Board Assessment and Policy Recommendations
- Directors commended the authorities for persevering with the economic program, noting marked improvement in the balance of payments outlook, substantially replenished international reserves, and significant exchange rate strengthening.
- Monetary policy:
- Domestic money creation kept under control; increased money demand led to substantial foreign exchange inflows.
- Interest rates lowered only gradually and cautiously to preserve baht strength and stability.
- Directors agreed monetary policy should remain guided primarily by the objective of stabilizing the exchange rate against a basket of currencies rather than the dollar rate.
- With reserves at more comfortable levels, there was room for judicious interest rate reductions, but many Directors urged caution and commitment to raise rates if the exchange rate came under renewed pressure.
- Fiscal policy:
- Wider fiscal deficit for 1997/98 seen as appropriate to accommodate automatic stabilizers and strengthen the social safety net.
- Directors expressed concern that safety net efforts were still at an early stage and urged development, with the World Bank and others, of cost-effective and well-targeted mechanisms to support the unemployed and prepare them for reemployment.
- Directors would support some further increase in the fiscal deficit if conditions worsened further.
- Financial sector restructuring:
- Urged unrelenting commitment to rebuilding the financial system, close monitoring of progress toward international capital adequacy standards by the year 2000, and a strategy for quickly returning intervened banks and finance companies to private ownership.
- Some Directors expressed concern about substantial nonperforming loans of intervened banks and stressed urgency of restructuring.
- Caution urged against relying on directed government credit schemes without strong safeguards; welcomed enhanced financing for small- and medium-sized enterprises focused on trade financing provided on commercial terms.
- Stronger bank supervisory and regulatory capacity recommended to reduce recurrence risk.
- Corporate restructuring and structural reforms:
- Corporate restructuring seen as a key challenge and should be market-based; state intervention only to remove institutional barriers and tax distortions and facilitate debtor-creditor negotiations.
- Accelerated legal and institutional reforms urged, including changes to the bankruptcy law, improved foreclosure procedures, and tax and regulatory reforms.
- Directors urged greater openness of the economy, increased private sector competition (domestic and foreign), revising the framework for foreign direct investment (including amending appropriate laws), and implementation of privatization agenda.
- Risks identified:
- Complex and unfinished tasks of financial and corporate restructuring.
- Need to maintain political consensus for sustained economic reform.
- Possible worsening of the adverse regional economic environment.
- Overall view:
- Directors commended recent progress toward recovery and restructuring but emphasized that many risks remained; sustained policy implementation could set the stage for economic recovery.
Thailand: Selected Economic Indicators, 1996-98
- Real GDP growth (percent)
- 1996: 5.5
- 1997 Revised: -0.4
- 1998 Estimate/Projection: -4 to -5.5
- Consumption
- 1996: 6.7
- 1997 Revised: 0.1
- 1998 Estimate/Projection: -8.0
- Gross fixed investment
- 1996: 6.0
- 1997 Revised: -16.0
- 1998 Estimate/Projection: -24.0
- CPI inflation (end period, percent)
- 1996: 4.8
- 1997 Revised: 7.7
- 1998 Estimate/Projection: 10.0
- CPI inflation (period average, percent)
- 1996: 5.9
- 1997 Revised: 5.6
- 1998 Estimate/Projection: 10.5
- Saving and investment (percent of GDP)
- Gross domestic investment
- 1996: 41.7
- 1997 Revised: 35.0
- 1998 Estimate/Projection: 28.2
- Gross national saving
- 1996: 33.7
- 1997 Revised: 32.9
- 1998 Estimate/Projection: (not separately listed)
- Foreign saving
- 1996: 7.9
- 1997 Revised: 2.0
- 1998 Estimate/Projection: -6.9
- Fiscal accounts (percent of GDP)1/
- Central Government balance
- 1996: 2.4
- 1997 Revised: -0.9
- 1998 Estimate/Projection: -2.4
- Revenue and grants
- 1996: 19.5
- 1997 Revised: 18.3
- 1998 Estimate/Projection: 15.5
- Expenditure and net lending
- 1996: 17.1
- 1997 Revised: 19.2
- 1998 Estimate/Projection: 17.9
- Overall public sector balance
- 1996: 2.7
- 1997 Revised: -2.1
- 1998 Estimate/Projection: -3.0
- Monetary accounts (end period, percent)
- M2A growth
- 1996: 12.7
- 1997 Revised: 2.1
- 1998 Estimate/Projection: 9.0
- Reserve money growth
- 1996: 12.0
- 1997 Revised: 4.7
- 1998 Estimate/Projection: 6.6-8.0
- Balance of payments (billions of US$)
- Exports, f.o.b.
- 1996: 54.7
- 1997 Revised: 56.7
- 1998 Estimate/Projection: 57.5
- Growth rate (in dollar terms)
- 1996: -1.9
- 1997 Revised: 3.8
- 1998 Estimate/Projection: 1.4
- Growth rate (volume terms)
- 1996: -5.1
- 1997 Revised: 9.2
- 1998 Estimate/Projection: 8.8
- Imports, c.i.f.
- 1996: 70.8
- 1997 Revised: 61.3
- 1998 Estimate/Projection: 50.5
- Growth rate (in dollar terms) [imports? table entries]
- 1996: 0.6
- 1997 Revised: -13.4
- 1998 Estimate/Projection: -17.7
- Growth rate (volume terms) [imports? table entries]
- 1996: -4.0
- 1997 Revised: -11.8
- 1998 Estimate/Projection: -13.6
- Current account balance (billions of US$)
- 1996: -14.4
- 1997 Revised: 8.5
- 1998 Estimate/Projection: (not separately listed)
- Current account balance (percent of GDP)
- 1996: -7.9
- 1997 Revised: -2.0
- 1998 Estimate/Projection: 6.9
- Capital account balance
- 1996: 16.5
- 1997 Revised: -15.6
- 1998 Estimate/Projection: -14 to -16
- Medium- and long-term capital
- 1996: 11.3
- 1997 Revised: 6.3
- 1998 Estimate/Projection: 4-6
- Short-term capital2/
- 1996: 5.2
- 1997 Revised: -21.9
- 1998 Estimate/Projection: -18 to -20
- Overall balance
- 1996: 2.2
- 1997 Revised: -18.6
- 1998 Estimate/Projection: -6 to -8
- Gross official reserves (end year)
- Billions of US$
- 1996: 38.7
- 1997 Revised: 27.0
- 1998 Estimate/Projection: 26-28
- Months of imports
- 1996: 6.6
- 1997 Revised: 5.3
- 1998 Estimate/Projection: 6.2-6.7
- Percent of short-term external debt
- 1996: 103.0
- 1997 Revised: 90.1
- 1998 Estimate/Projection: 114-123
- Forward position of BOT (end year)3/
- 1996: -4.9
- 1997 Revised: -18.0
- 1998 Estimate/Projection: -9.0
- External debt (percent of GDP)
- 1996: 49.9
- 1997 Revised: 59.6
- 1998 Estimate/Projection: 72.5
- External debt (billions of US$)4/
- 1996: 90.5
- 1997 Revised: 91.8
- 1998 Estimate/Projection: 89.7
- Public sector
- 1996: 16.8
- 1997 Revised: 24.5
- 1998 Estimate/Projection: 32.3
- Private sector
- 1996: 73.7
- 1997 Revised: 67.3
- 1998 Estimate/Projection: 57.4
- Debt service ratio5/
- 1996: 12.1
- 1997 Revised: 15.8
- 1998 Estimate/Projection: (not separately listed)
Notes (as provided in the PIN):
- Sources: Information provided by the Thai authorities; and IMF staff estimates.
- 1/ On a fiscal year basis.
- 2/ Including outflows associated with the closing of swap and forward contracts by the Bank of Thailand, and errors and omissions.
- 3/ Consistent with the elimination of all BOT offshore forward and swap obligations by end-1998.
- 4/ Excludes loans (estimated at around $4 billion at end-1997), proceeds of which were not brought by Thai corporations into Thailand.
- 5/ (Listed without units in the table.)
Press Information Notice: IMF Concludes Article IV Consultation with Thailand, June 25, 1998.