1. The Thai authorities would like to express their sincere appreciation to the IMF mission team for the constructive and candid discussions, which centered on policies towards a more balanced-growth. While the emphases of the authorities differ from staff’s recommendations on a few points, they welcome staff’s assessment of Thailand’s positive economic outlook with sustained growth momentum in the near term and broadly share staff’s view on risks to growth.
Recent Developments and Near-Term Outlook
2. Economic growth continues to gain further traction. The economy grew by 3.9 percent in 2017, higher than staff’s projection of 3.2 percent in the Article IV Staff Report last year, reflecting positive developments in the Thai economy. Going forward, the growth momentum is expected to continue, and be driven by exports of goods and services, while domestic demand will improve gradually. The authorities also expect public investment, especially in infrastructure projects, to continue to support growth. Economic growth is expected to be more balanced and is projected to grow by 4.1 percent in 2018.
3. While the overall risk to growth is expected to be balanced in the near-term, the Thai economy faces downside risks, particularly on the external front. Stronger-than-expected external demand presents an important upside risk to the outlook; however, uncertainties pertaining to economic and foreign trade policies of major economies as well as geopolitical risks could have an adverse impact on the Thai economy. Against this background, structural challenges which hindered domestic demand need to be addressed and the authorities remain committed to undertaking such structural reforms towards a more broad-based, balanced, as well as sustained growth.
4. The views of the authorities differ from staff on the need for further monetary policy easing. The Monetary Policy Committee (MPC) maintains that the policy rate of 1.5 percent is appropriately accommodative. Short-term government bond yields have moved below the policy rate, implying sufficiently accommodative liquidity and credit conditions. Unlike conditions in Advanced Economies during the GFC, economic and financial conditions in EMEs do not warrant abnormally low policy rate or near zero lower bound as the downside risks on saving incentives and financial stability far outweigh the extra push to bring headline inflation to target.
5. Under the current circumstance of weak monetary policy transmission mechanism, the benefits of a policy rate cut would have to be better calibrated against the risks to financial stability. They are particularly concerned that further easing might exacerbate the already-high level of household debt as well as the search-for-yield behaviors that could lead to underpricing of risk which is detrimental to long term sustainable growth.
6. The MPC has continuously communicated their policy intention under the flexible inflation targeting framework, especially the need to balance between achieving the inflation target and limiting financial vulnerabilities. As the ultimate goal of macroeconomic policy is long-run economic welfare, the pursuit of inflation target should be done flexibly, as price stability without financial stability could be counter-productive.
7. While inflation has previously been influenced largely by supply-side factors, medium-term inflation expectations remain well-anchored. Inflation in April edged up to 1.07 percent, reaching the lower bound of the target range. The authorities expect headline inflation to continue to pick up gradually on the back of stronger domestic demand and higher oil prices. In addition, recent Business Sentiment Index survey confirms an inflation expectation of around 2 percent, falling within the target range of 2.5±1.5 percent.
8. On staff’s recommendation to address financial stability concerns through counter-cyclical macroprudential policy, the authorities view that it has proved somewhat challenging in practice due to limited institutional capacity. Targeting macroprudential measures in specific sectors may push financial activities to the areas outside regulatory umbrella. The authorities believe that macroprudential tools should be used to complement rather than offset broad stance of monetary policy.
Foreign Exchange Policy
9. The authorities commit to having a flexible exchange rate as a primary shock absorber and stress that market intervention was never intended to resist trend appreciation. But to avoid disorderly market adjustment that could derail the recovery, intervention is necessary during the episodes of intense capital inflows, resulting from excessive global liquidity. This is partly because Thai Baht has been perceived as a safe haven asset by foreign investors. In 2017, Thai Baht appreciated by 4.4 percent in REER terms and around 10 percent against the U.S. dollars, making Thai Baht one of the best performing currencies in East Asia. In this light, the ongoing policy normalization in advanced economies is welcome as it has presented opportunities for the authorities to downsize the central bank’s balance sheet in the past months.
10. The authorities are concerned that the publication of FX intervention data might induce self-fulfilling speculative activities on Thai Baht and further complicate central bank’s FX operations. The authorities view that their publication of international reserves on a weekly basis already exceeds international standard on data transparency. In addition, they call for staff’s careful interpretation in its analysis of change in reserves, as part of it was valuation change.
11. On the external balance assessment, the authorities welcome staff’s acknowledgement that the large current account surplus in recent years is attributed to Thailand’s structural factors, which could not be fully explained by the EBA model – e.g. structural rigidities related to developments in tourism sector. Given that structural adjustment would take time to materialize, the authorities stress that external rebalancing should not burden solely on exchange rate adjustment. The appropriate mix of policies and measures must be pursued flexibly in light of changing economic circumstances specific to each country to achieve not only external rebalancing, but also economic and financial stability.
12. The current account surplus has been adjusting in the right direction and will continue to decline over the medium term. The authorities note that the ongoing public investment, including the Eastern Economic Corridor (EEC) and a number of structural reform projects, should strengthen domestic demand and moderate the current account surplus going forward.
Financial Sector Developments
13. The authorities are encouraged by staff’s assessment that the Thai financial system remains sound. While the banking sector has been profitable, with adequate capital buffers and provisions, as reflected by the core financial soundness indicators, the authorities have taken further steps to strengthen the financial stability framework. Importantly, the five largest banks have been defined as Domestically Systemically Important Banks (D-SIBs) requiring them to hold additional capital. In addition, the authorities introduced macroprudential policies to tighten limits on credit card debt and personal loans in September 2017 with an aim to containing risks from high household debt. As rightly pointed out by staff, there has also been greater coordination and cooperation among key financial regulators in jointly addressing the bouts of volatility. Going forward, the authorities will remain vigilant to the change in financial landscape from the development of Financial Technology and potential challenges arising from cybersecurity issues.
14. The authorities are of the view that vulnerabilities in the non-banking sector, if not properly contained, could have adverse impact on economic and financial stability. While household debt data on banks’ balance sheets are benign, real debt obligation-to-income remains high and deleveraging process has been slow. The search-for-yield behavior could lead to the underpricing of risk as witnessed, for instance, in the expanded size of saving cooperatives. The authorities have developed a macro-stress testing exercise that would help improve the overall soundness of Thai financial stability. They will continue to closely monitor pockets of risks in the financial system and look forward to the upcoming FSAP which will help further identify risks in the financial system.
Fiscal Policy and Structural Reforms
15. The authorities will use the fiscal space to achieve the long-term objective of uplifting potential growth through infrastructure improvement. The authorities agree that a large scale of public investment through the implementation of EEC and other logistic projects will crowd-in private investment and help promote external rebalancing. While noting benefits associated with scaling up and frontloading public investment, the authorities underscore that the existing fiscal space must be utilized efficiently and in a well-targeted manner.
16. The authorities are aware of the need to address rising age-related spending over the medium to long term horizon. While recognizing that VAT rate increase could strengthen revenue, they are mindful that such policy action at this juncture might dampen the nascent domestic demand. In this connection, the authorities are cognizant of the need to find an alternative source of revenue, such as the revision to property and inheritance tax, to prepare for demographic shift. Progress has been made towards a comprehensive review of the pension system to enhance adequacy, coverage and sustainability with the establishment of the National Pension Committee.
17. On structural reform agenda, the authorities are determined to enhance economic growth and productivity to help Thailand become a high-income country within two decades. Guided by its National Strategy and National Reform Plans, the authorities intend to improve competitiveness and quality of human resources, as well as promote sustainable and inclusive growth. In this regard, the authorities have stepped up their efforts to improve the business climate. The new Trade Competition Act has become effective since October 2017 to help promote fairer trade and investment including less privilege for state-owned enterprises. Also, the authorities highlight significant improvement in ease of doing business in Thailand in recent years and will continue their endeavor to further reducing regulatory red tape. In addition, progress has also been made in advancing the education reform by reducing inequity and promoting teaching quality. At the same time, the authorities have strengthened the welfare program to be better targeted through a low-income earners registration program with occupational training opportunity to upgrade their labor skill and help achieve better living standards.
18. In principle, childcare provision could facilitate female labor force participation; however, it might be less of a critical issue in the case of Thailand. According to the ILO, Thailand’s estimated female labor force participation rate is standing at 68 percent compared to the OECD average of 63 percent.
19. The Thai authorities would like to express their sincere appreciation to the Fund for its continuing support through policy dialogue and technical assistance to accelerate structural reforms and fortify macroeconomic and financial stability and look forward to continued support from the Fund. They would like to also thank the Fund in facilitating the preparation for the upcoming FSAP.