1. On behalf of the Thai authorities, we would like to express our appreciation to staff for the 2013 Article IV Consultation. This year’s discussion focused on various policy approaches to support economic growth, and various measures to secure a sustained recovery back to growth potential. Nonetheless, there have been several developments since the mission concluded, and thus, we would like to provide the Board a summary of the authorities’ view on recent economic developments as well as our responses to the staff assessment, additional information of the Thai economy and the various challenges.
Updates on the Thai Economy and Near-Term Outlook
2. The authorities echo the staff’s assessment on the resilience of Thai economy in the last few years despite being exposed to various shocks including global financial crisis (GFC), supply disruption from natural disaster in Japan and the historical flood of the country in 2011. The government has successfully adjusted its macroeconomic policies to focus on stimulating domestic demand while at the same time supporting exports. As a result, the Thai economy recorded a sharp recovery in 2012 with real GDP growth at 6.5 percent.
3. Nevertheless, the Thai economy in the first half of 2013 decelerated from the latter half of the previous year. Sources of the slowdown can be traced to various temporal factors; the expiration of fiscal stimulus packages, and the slower-than-expected export growth together with some supply-side constraints. In this light, the upcoming official growth forecasts for the year are likely to be adjusted in accordance with these developments.
4. Growth in the second half of 2013, however, is expected to gradually recover on the back of exports in tandem with the positive trajectory of G3 economies and improved private sector sentiments from greater clarity in the government’s large-scale investment plans. This infrastructure spending would not only provide an additional boost to the recovery, but also induce the crowding-in of private investments. Additionally, these key drivers will continue to be underpinned by accommodative financial conditions as well as favorable employment conditions and income of non-agricultural sectors.
5. That being said, the authorities are especially mindful of several downside risks to Thailand’s economic outlook. These include (i) the supply constraints in some industries that may hinder exporters’ competitiveness and limit Thailand’s ability to reap the full benefit of the ongoing global recovery, (ii) the delayed implementation of government infrastructure projects, and (iii) the increasing household debt that may dampen private consumption. The authorities will continue to closely monitor these risks and remain vigilant to take necessary actions where appropriate.
6. While my authorities broadly share the staff’s assessment on the set of risk factors to the economy, they have a slightly more optimistic view on the prospect of the government’s infrastructure investment plans that could support the growth momentum going forward. Given such differences in the underlying assumptions, downward revision of official growth figures for 2013 may differ from the staff’s latest projection.
7. With regard to monetary policy, my authorities share the staff’s view that the current accommodative stance is appropriate and supportive of a stable growth path. The interest rate cut in May 2013 was intended to cushion against downside risks of domestic demand as both inflation and inflation expectations remain subdued and well-anchored, with core inflation projected to remain close to the lower bound of the target range of 0.5 to 3.0 percent throughout 2013. This condition allows monetary policy to be able to complement fiscal policies in supporting domestic spending and safeguarding growth, while at the same time maintaining price and financial stability.
8. Given the current growth momentum, the policy path towards normalization could be less steep. Any change in policy stance would have to be state-contingent and warranted by an optimal balance between the policy’s effectiveness and cost of financial instability as well as the need to maintain policy space for future uncertainties.
Capital Flows and Exchange Rate Policy
9. Thailand continues to witness volatile capital flows with several periods of large influx and rapid outflows from portfolio investment. The recent episode of capital flow reversals could be attributed to a temporary reaction to the uncertainties surrounding the Fed’s QE tapering. As a result, Thailand’s portfolio investment has turned from net inflows with large influx during the first quarter of 2013, to net outflows at the end of August.
10. The excessive exchange rate volatilities were caused by sharp swings in global financial market sentiment despite sound economic fundamentals. Although the appreciation trend of the Thai baht was in line with the economic fundamental and would actually encourage local businesses to adjust, excessive short-term fluctuation could threaten businesses’ viability and complicate policy decision. Although corrections in the market have generally been observed, the risk of temporary disorderly movements in the future caused by global uncertainties cannot be ruled out and may prompt the authorities to respond as necessary.
11. During the period of large capital inflows, the Bank of Thailand (BOT) has managed market volatilities by deploying various measures, mainly through exchange rate flexibility as well as verbal and limited actual interventions. At this current juncture however, the authorities’ attention has shifted to containing the adverse impacts of potentially sharp capital reversals. The stock of international reserves, which currently stands at 168.8 billion USD1, would serve as an important buffer. This, in combination with sound economic fundamentals and flexibility in the authorities’ policy framework, would help to cushion the economy from adverse external shocks.
12. For fiscal policy, the key message shared by both the authorities and staff is that the large-scale public investment projects are key to unlock supply constraints and shore up confidence. These projects have shifted the focus of earlier consumption-led initiatives towards longer-term investments. The multi-year investment expenditure of 2 trillion baht, almost 20 percent of GDP, in infrastructure projects would not only play an important role in supporting domestic demand in the next seven years, but also crowd-in private investments which would elevate the economy’s growth path in the long run.
13. The authorities are also mindful of the potential build-up of public debt from the large-scale infrastructure investments in addition to other possible fiscal measures down the road. The authorities recognize the importance of fiscal discipline and the need to preserve fiscal space for economic uncertainties in the period ahead. On this note, the fiscal agencies aim to achieve a balanced budget by Fiscal Year 2017 and maintain public debt at a level not exceeding 50 percent of GDP.
14. In this regard, the efficiency of revenue collection and expenditure measures has been prioritized. On expenditure, the authorities have been more conservative in their formulation and implementation of fiscal measures as exemplified by the gradual removal of energy subsidies. Fiscal spending would also be shifted towards specific sectors, such as social security and public health programmes, to better target individuals in need. For the rice pledging scheme, the authorities are carefully reviewing its operational design. The latest development was to cap the maximum value of rice pledged by each household to help limit fiscal costs. Meanwhile, a tax reform, which includes a plan to expand the tax base and the recent revision of personal income tax structure, would broaden the coverage of tax payers in the long run.
15. In conjunction with the recent slowdown, the government has recently announced an additional policy package to help boost private sector confidence. With long-run fiscal sustainability in mind, the package therefore contains mostly measures aimed at facilitating investments such as tax incentives for the tourism industry as well as measures to support investment in agricultural product processing and eco-car industries.
16. Regarding the financial sector, my authorities share staff’s continued concerns over the potential risks emanating from SFIs especially given their growing importance in domestic financing. The current institutional arrangement allows the Ministry of Finance (MOF) and the BOT to concertedly address the issue by stepping up the supervision of these institutions. The MOF has been on track in steering SFIs’ operation to serve their intended objectives and improve their corporate governance and accounting standards. Nonetheless, the authorities see the need to appropriately pace the strengthening of prudential regulations and supervisions of SFIs in order to retain their ability to operate as the government’s arm in promoting financial access and growth inclusiveness.
17. The authorities also acknowledge staff’s concern on the increase in interconnectedness of nonbank financial institutions, especially credit cooperatives, to the financial sector. Despite their moderate share in the total assets of the financial system, the authorities and their respective supervisory bodies are watchful on potential risks stemming from these institutions. The process has been underway for the relevant authorities to enhance their overall regulatory standard and risk management.
18. In terms of toolkit for addressing financial stability concerns, the BOT has previously made use of prudential measures ranging from LTV to debt service ratios and the tightening of credit underwriting standards. Recently, the BOT has also initiated a targeted examination on housing loans and has used moral suasion to encourage more cautious lending behavior by commercial banks. The authorities acknowledge the staff’s position on the potential merits of levies on foreign borrowing as an additional liquidity buffer against sudden withdrawals. However, its practical benefits are limited in the context of Thailand as the share of foreign borrowings constitutes a mere 8.8 percent of commercial banks’ total liabilities and its use may impair investors’ confidence in the long run.
Policies for Promoting Potential Growth and Income Distribution
19. The authorities view that the structural reform policies underway will play a pivotal role to overcome the country’s middle income trap. Significant progress has been made in the large-scale investment plans to uplift the country’s potential growth through enhanced trade linkages and logistics upgrades. In addition, the authorities are in the process of redesigning the generalized subsidy schemes to better serve specific target groups and lessen the degree of price distortion in the market.
20. The authorities appreciate staff’s commitment to further investigate the ongoing issues in the Thai labor market, and share the view that labor productivity enhancement remains a critical component of the government’s overall policy mix. To alleviate the skill mismatch and shortages in the labor market, the government has put in place various measures, including tax incentives, to encourage the private sector to train and develop workers’ skills. The implementation of the nationwide minimum wage hikes could continue to induce the enhancement of labor productivity and firms’ production process.
21. To conclude, my authorities are committed to safeguarding the Thai economy and financial system against short-term shocks while maintaining monetary and fiscal prudence. In parallel, the implementation of structural reform measures is essential in securing growth momentum in the longer run. The authorities also see the necessity in nurturing a favorable environment for the private sector. Their sustained investments would bring about broad-based productivity enhancements and unlock supply constraints to allow Thailand to maximize benefits from prospective global recovery.
22. Finally, the authorities would like to thank staff for their effort in producing this comprehensive assessment on the recent economic and financial developments in Thailand as well as policy recommendations. Looking ahead, the authorities deem that maintaining a two-way communication and collaboration between the authorities and the Fund remains a vital part of improving the Fund’s effectiveness in its surveillance role.
Gross reserve as of end-August 2013