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Thailand: Staff Report for the 2016 Article IV Consultation

International Monetary Fund. Asia and Pacific Dept
Published Date:
June 2016
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1. Thailand remains resilient in the face of external and internal challenges. A flexible exchange rate, high international reserves, and relatively low foreign debt provide buffers against external shocks. Moderate public debt, a wide investor base, well-capitalized commercial banks, and strong policymaking institutions are additional layers of protection. As a result, Thailand weathered relatively well repeated episodes of global financial volatility. Moreover, strong fundamentals provide policy space to maneuver if downside risks materialize.

2. However, political uncertainty and structural bottlenecks cloud long-term prospects. Once one of the most dynamic Asian economies, Thailand has trailed regional peers for almost a decade. Political uncertainty has undermined policy planning and implementation, while polarization casts a shadow over the transition to civilian rule. Long-term prospects are also weighed down by structural bottlenecks, including rapid population aging, relatively low education quality and skill sets, and overdue structural transformation. On a positive note, poverty and inequality have consistently declined since the mid-2000s.

Real GDP

(Index, 2007=100)

Sources: World Economic Outlook; and IMF staff calculations.

3. Against a subdued outlook and downside risks, discussions focused on strategies to anchor a long-lasting recovery and lift growth potential. Economic policies were broadly in line with Fund advice in 2015, but macroeconomic stimulus and structural reforms were less ambitious than recommended by staff (Appendix 1). In this consultation, staff advocated a three-pronged approach to: (i) deploy an expansionary macroeconomic policy mix that aligns short- and long-term goals; (ii) safeguard financial stability; and (iii) enhance potential growth.

Recent Developments

4. The economy recovered in 2015 after a slowdown induced by political uncertainty. Output grew by 2.8 percent—close to its current estimated potential growth rate but still below most other ASEAN economies and Thailand’s past record. Growth accelerated in the second half of the year, on the strength of government spending, a pickup in private consumption, and soaring tourism. Net exports made a modest positive contribution to growth, while private investment declined for the third year in a row.

5. Public investment supported economic activity, particularly through community-based infrastructure projects. Notwithstanding higher investment, the cyclically-adjusted public sector primary balance improved from 0.2 to 0.8 percent of GDP in FY2014/15, helped by fuel subsidy reform and the abolition of the rice-pledging scheme. Public sector debt stayed stable at about 43 percent of GDP.

6. Monetary policy was eased in the face of below-target inflation. Headline inflation was negative during 2015, undershooting the new inflation target (year-average 2.5±1.5 percent) by 3.4 percentage points. Negative headline inflation was primarily driven by lower energy prices, although core inflation also drifted down to 0.7 percent in December 2015. Inflationary pressures remained low in early 2016. The Bank of Thailand (BOT) cut the policy rate by 50 basis points in the spring of 2015, citing the need to foster the recovery and maintain well-anchored inflation expectations. It has kept the policy rate at 1.5 percent since then to preserve room for maneuver amid global financial volatility.

Headline and Core CPI Inflation

(In percent, year-on-year)

Sources: CEIC Data Co. Ltd.; and IMF staff calculations.

7. The credit cycle moderated, but household debt reached a historic high. Credit demand from Small and Medium-Sized Enterprises (SMEs) and households picked up at end-2015, but depository corporations tightened credit standards given concerns over credit quality (except for large firms). As a result, overall credit growth by depository corporations slowed to 4.9 percent (y/y) in December 2015. Non-depository institutions also tightened credit standards for households, but increased credit to nonfinancial corporations mainly through bond and equity finance. Amid weak income growth, the household debt-to-GDP ratio reached 82 percent of GDP in the fourth quarter of 2015, roughly double its level a decade ago. In turn, corporate debt has been broadly stable yet high at 81.1 percent of GDP in the third quarter of 2015.

Thailand: Total Household and Corporate Debt, 2007–15

Sources: Bank of Thailand, Datastream; and IMF staff calculations

Thailand: Credit Growth to the Private Sector by Depository Corporations, 2007–15

8. A strong external position helped cushion repeated episodes of global financial volatility.

  • In 2015, the current account surplus climbed to 8 percent of GDP, thanks to improving terms-of-trade, recovering tourism, and contracting imports. In U.S. dollars, goods exports and imports declined by 5.6 percent and 11.3 percent, respectively.
  • The capital and financial account registered a deficit of 4.6 percent of GDP in 2015. Portfolio outflows persisted driven by shifts in global risk appetite. The equity market sustained larger outflows than the bond market, in line with regional developments. FDI inflows remained subdued against investors’ wait-and-see attitude given political uncertainty and changes to investment promotion regimes. At the same time, residents’ outward investment continued aided by the authorities’ policies to liberalize outflows and diversify investment opportunities. Capital inflows resumed in early 2016, and reserves increased by US$16 billion in Jan-Mar, more than compensating the US$12 billion loss in 2015.
  • Thai asset markets were generally less affected by global turbulence than regional peers. In 2015, the baht depreciated by 9 percent against the U.S. dollar, but appreciated slightly in real effective terms. Stock prices declined by 14 percent in 2015, among the worst regional performers, but recuperated much of the lost ground by March 2016. Government bond yields were broadly stable throughout 2015 and trended down in the first quarter of 2016.

Tourist Arrivals

(Index sa, Jan-2013=100)

Sources: Haver Data Analytics; and IMF staff calculations.

Selected Asian Countries: 10Y Government Bond Yields

(In percent, May 22 2013 = 0)

Sources: Bloomberg LP; and IMF staff calculations.

Outlook and Risks

9. The modest recovery is expected to continue in 2016 and the medium term. A slight improvement in confidence and lower energy prices foreshadow a pickup in private consumption, though high debt and low agricultural prices will continue to adversely impact rural households. Public investment would remain a key driver, rising over the next few years and crowding in private investment. As a result, GDP growth is projected to rise to 3 percent in 2016 and 3.2 percent in 2017 and then decline toward its 3 percent potential rate over the medium term as the fiscal impulse fades and population aging reduces labor input. The output gap would close gradually by end-2018. Headline inflation is projected to turn positive in 2016, but would take time to converge to the midpoint of the target band. With household and corporate debt at relatively high levels, credit expansion would remain subdued and stay broadly in line with nominal GDP growth, as it did in previous recoveries under political uncertainty. The current account surplus is projected to narrow over the medium term, as positive terms-of-trade shocks partially reverse and imports strengthen on account of higher investment. Tourism would remain a bright spot.

10. Risks to the outlook are tilted to the downside, though strong fundamentals enhance Thailand’s resilience (Appendix 2). Rebalancing in China may result in a faster slowdown or larger spillovers. A bout of global financial volatility may accelerate capital outflows and tighten financial conditions. On the domestic front, slower-than-expected execution of infrastructure projects would reduce domestic demand. Further delays in general elections could exacerbate political tensions, denting confidence and investment. Deflation could become entrenched, resulting in higher real interest rates and rising real debt burden. Debt overhang in the household sector could create a stronger-than-expected headwind to consumption and, in an adverse scenario, affect financial institutions’ balance sheets. If downside risks materialize, Thailand’s strong fundamentals provide policy space to maneuver.

Thailand: Staff’s Macroeconomic Framework, 2013–21
Real GDP growth (percent)
Contribution to growth
Domestic private demand0.
Public investment0.0−
Net exports0.83.60.3−0.9−0.7−0.6−0.5−0.5−0.5
Output gap (percent of potential output)−0.1−2.1−1.8−1.4−0.8−
Headline CPI inflation (period average, percent)2.21.9−
Headline CPI inflation (end of period, percent)1.70.6−
Core inflation (period average, percent)
Core inflation (end of period, percent)
Public sector balance (percent of GDP, fiscal year basis)−0.3−0.7−0.8−0.7−0.20.0
Total public sector debt (end-period)42.243.643.143.744.545.345.945.945.6
Current account balance (percent of GDP)−
Terms of trade (percent change)−2.0−1.2−1.3−0.8−0.7
External debt (percent of GDP)33.834.732.732.331.831.630.930.129.3
Credit to the private sector by depository corporations (end of period, percent)
Sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections.
Sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections.

Thailand: Spillovers from China

Sources: OECD, TiVA database; and IMF staff estimates.

11. The authorities broadly shared staff’s assessment of the outlook and risks. They concurred that the recovery would be gradual, supported mainly by public spending and tourism. The authorities were slightly more optimistic on short-term prospects and expected core inflation to pick up somewhat faster than in staff’s baseline scenario. They also assessed that potential growth could be higher than estimated by staff. In their view, the most significant downside risks stemmed from the external environment, in particular from weak foreign demand, China’s economic transition, shifts in global trade, and the slump in commodity prices.

Policies for a Long-Lasting Recovery

A. Implementing High Quality Fiscal Stimulus

12. The fiscal stance is expected to turn moderately expansionary in coming years. The central government’s FY2015/16 budget foresees a deficit of 3 percent of GDP if fully executed, with infrastructure rising to 20 percent of total expenditure. The authorities are also implementing short-term quasi-fiscal measures to support farmers and SMEs, and a multi-year transport infrastructure plan worth 13 percent of GDP to be carried out primarily by state-owned enterprises (SOEs) (Box 1). Staff’s baseline scenario assumes a 60 percent execution of the infrastructure plan, in line with historical record. This translates to annual fiscal stimulus by the consolidated public sector of ½ percent of GDP on average between FY2014/15 and FY2017/18.

Thailand: Fiscal Developments, 2012/13-20/21 1/(In percent of fiscal year GDP, unless otherwise stated)
General government 2/
Tax revenue18.817.317.917.917.918.
Non-tax revenue3.
Net acquisition of non-financial assets3.
Net lending/borrowing0.4−0.80.3−0.4−0.5−0.5−0.5−0.5−0.5
Cyclically-adjusted primary balance1.
Memorandum items:
Budgetary central government net
Central government debt-to-GDP ratio29.431.631.
Public sector
Public sector investment5.
Overall balance0.80.00.5−0.3−0.7−0.8−0.7−0.20.0
Cyclically-adjusted primary balance0.−0.1−0.4−0.4−0.1−0.1
Debt-to-GDP ratio42.243.643.143.744.545.345.945.945.6
Sources: Thai authorities and IMF staff projections.

Fiscal year runs from October to September. For example, FY2015/16 starts in October 2015 and ends in September 2016.

General government comprises budgetary central government, extrabudgetary and social security funds and local authorities.

Sources: Thai authorities and IMF staff projections.

Fiscal year runs from October to September. For example, FY2015/16 starts in October 2015 and ends in September 2016.

General government comprises budgetary central government, extrabudgetary and social security funds and local authorities.

13. Staff supported the expansionary fiscal stance, in particular through infrastructure investment, which is consistent with debt sustainability. Upgrading infrastructure would provide multi-year stimulus to domestic demand, crowd in private investment, and help close the lingering negative output gap. It would also help narrow the current account gap and enhance potential growth.1 On short-term stimulus, staff acknowledged the need for temporary relief to farmers affected by low commodity prices and drought conditions. However, staff noted these measures may exacerbate contingent liabilities from SFIs and provide incentives to remain in the large, low-productivity agricultural sector. Going forward, staff recommended developing social safety nets better aligned with structural challenges, including on-budget cash transfers for poor households and skill-upgrading programs to facilitate entry into higher productivity sectors. The authorities should also disclose the cost of quasi-fiscal measures and ensure timely compensation to SFIs.

14. The success of the investment program will depend on its effective management and implementation. Staff welcomed the authorities’ plan to restructure transport SOEs and encouraged a review of tariff setting and compensation agreements of public sector obligations to ensure financial sustainability, contain contingent liabilities, and increase transparency. Staff also highlighted the need to formulate a comprehensive national investment plan, expand the budget coverage, enhance the transparency of investment execution, and improve project selection.

Thailand: Public Investment Trends and Processes

15. An MTFF would further strengthen policy formulation and transparency. Staff advised that the fiscal responsibility law focus on procedural rules and mandate the formulation of an MTFF, comprising a fiscal policy statement with multi-year macro-fiscal forecasts; a fiscal risk statement; and a debt sustainability analysis. The MTFF should specify indicative rolling ceilings for the deficit ratio consistent with the debt ceiling of 60 percent of GDP endorsed by the Cabinet, which continues to be appropriate.

16. The MTFF should underpin a strategy to build fiscal buffers over time and prepare for the fiscal implications of the aging population. Staff welcomed the recent introduction of the inheritance tax and the forthcoming review of the tax system, including property taxes and the personal income tax. Staff recommended a gradual return of the VAT rate to 10 percent, from the current 7 percent, once growth is on sound footing and the output gap closes, while mitigating the impact on vulnerable groups. A single-rate structure should be maintained to preserve good policy design and ease of compliance.

Working Age Population

(Percent of total population)

Sources: UN; and IMF staff calculations.

17. A reform of social security should strengthen long-term sustainability, equity, and efficiency. Thailand has made considerable strides in expanding the social safety net, with universal health coverage since 2002. However, the decline in working-age population will have implications for social security and potential growth that require immediate attention. Inequity in benefits is also exacerbated by widespread informality, accounting for over half of employment. In this context, staff advised a comprehensive review of the fragmented health and pension schemes (Selected Issues Paper, Chapter 2). Parametric reforms may be needed with due attention to equity, sustainability, and efficiency.

Selected Asian Countries: Public Health and Pension Expenditures, 2010–50

Thailand: Options for Reforms in the Public Health and Pension Systems1
Overall reviewUndertake a comprehensive review of the fragmented schemes (major schemes include those for civil servants, pensioners, and their dependents; formal private sector employees; and others including informal workers such as farmers).

Formulate a long-term cost projection across the schemes.
Undertake a comprehensive review of the fragmented schemes (major schemes include those for civil servants, formal private sector employees, and informal workers such as farmers).

Formulate long-term cost projections across all schemes.
Institutional setupEstablish a central unit within the Ministry of Finance (MOF) to monitor public health expenditures across all schemes.Establish a central unit within MOF to monitor public pension expenditures across all schemes.
EfficiencyEnhance coordination across the different schemes, e.g. collective purchase of medicines and medical devices. Minimize the fee-for-service payment that tends to be prone to overutilization.

Increase the use of the capitation payment and close-ended budget.
Enhance coordination across the different schemes.
Long-term sustainabilityReview contributions with due consideration to social equity (under the private sector scheme, the ceiling on assessed contribution has been kept at B15,000/month since 1991 while the minimum wage has increased from B100/day to B300/day).

Consider alternative revenue sources, including an increase of VAT, which is less distortionary and more growth friendly.
Extend pensionable age and review pension benefits/contributions with due consideration to social equity. Review parameters so that pensions adequately respond to macroeconomic and demographic changes.

Consider alternative revenue sources, including an increase of VAT, which is less distortionary and more growth friendly.

These options are not meant to be comprehensive and should be revisited once an overall review of the whole systems is completed.

These options are not meant to be comprehensive and should be revisited once an overall review of the whole systems is completed.

18. The authorities generally concurred with staff’s recommendations.

  • They emphasized that public spending would play a crucial role in supporting growth, shoring up confidence, and crowding in private investment. They stressed their commitment to execute the infrastructure plan, while noting challenges arising from the complexities of the mega projects. They stated that the 12th National Economic and Social Development Plan (NESDP, 2017–21) would contain a comprehensive investment plan and agreed that SOE reform should strengthen governance and investment management. On short-term stimulus measures, the authorities clarified that technical assistance on alternative crops was provided in parallel with the stimulus loan program to encourage innovation and structural transformation.
  • The authorities also reiterated the high priority attached to enacting the fiscal responsibility law, currently under consideration of the Council of State. They agreed on the need to increase tax revenues over time, with their priorities set on broadening the tax base by streamlining tax expenditures and enhancing collection efficiency through a national e-payment system. On social security, the authorities highlighted that the ongoing review of the health system addressed sustainability, adequacy, fairness and efficiency considerations. They also noted that the National Savings Fund, established in 2015 as a voluntary saving scheme for informal workers, would help support retirees.

B. Easing Monetary Policy

19. Staff argued there is scope for further monetary easing. In staff’s view, the lingering negative output gap, negative headline inflation through Q1 2016, low core inflation, falling inflation expectations, and downside risks warranted additional monetary accommodation. Without further easing, inflation is expected to remain below target for several years. Tighter macroprudential policies can safeguard financial stability in a low interest-rate environment, particularly in the highly indebted household sector (see below).

20. As policy rates approach the zero lower bound, anchoring expectations through clear and credible communication is critical. Protracted slides in oil prices or sizable negative demand shocks could entrench deflationary pressures and de-anchor inflation expectations, depressing demand by raising real interest rates and increasing the real debt burden (Appendix 4). In such a scenario, policy actions supported by clear communication should decisively shape expectations of low policy rates for an appropriately long period of time, to help strengthen the response of lending rates and the exchange rate and improve monetary policy transmission.

21. Thailand’s monetary policy framework has achieved a high standard of transparency. Staff welcomed the recent adoption of an explicit medium-term inflation target and suggested that it feature more prominently in BOT messages. Staff also noted that conveying forward-looking monetary policy decisions would be facilitated by targeting monthly year-on-year (not year-average) inflation, in line with global practice.

22. Exchange rate flexibility should remain the first line of defense against external shocks. Amid uncertain global conditions, the authorities should give priority to maintaining exchange rate flexibility, supported by judicious intervention to mitigate excessive volatility.

23. The authorities assessed monetary policy as sufficiently accommodative. In their view, fiscal stimulus in the pipeline would be more effective in supporting the economy than an interest rate cut. The authorities also stated the advantages of preserving policy space in light of uncertain external conditions, as well as concerns about triggering excessive search for yield behavior, which could lead to the buildup of risks to financial stability if interest rates dropped too low. They considered that the current policy framework and communication strategy had been successful in anchoring inflation expectations and projected that inflation would pick up once the base effect of past oil price declines faded away.

C. Safeguarding Financial Sector Stability

24. The Financial Soundness Indicator map suggests a medium rating on financial sector vulnerability, on account of the rapid credit cycle and the buildup of household debt. Staff welcomed the ongoing moderation in credit growth, but highlighted that the continued rise in household debt required vigilance, particularly against weak income prospects (Appendix 5). Corporate balance sheets remain sound overall, despite lower profitability in the SME, natural resource, and manufacturing sectors given developments in commodity markets and global trade.

Thailand: Financial Soundness Indicator Map 1/
Overall Rating of Other Depository Corporations 1/LMMMMM
Credit cycleLHMHMM
Change in credit / GDP ratio (pp, annual)−
Growth of credit / GDP (%, annual)−
Credit-to-GDP gap (st. dev)0.42.3−1.3−0.3−0.8−1.1
Balance Sheet SoundnessLLLLLL
Balance Sheet Structural RiskLLLLLL
Deposit-to-loan ratio 2/100.092.8103.7102.1104.0102.5
FX liabilities % (of total liabilities)
FX loans % (of total loans)
Balance Sheet BuffersLLLLLL
Leverage ratio (%)11.510.611.411.111.712.3
Asset qualityLLLLLM
NPL ratio3.
NPL ratio change (%, annual)−25.5−24.6−17.1−

The latest data is based on 2015Q4 data, except the credit cycle ratios that are based on 2015Q3 data. Due to data availability, credit cycle analysis is based on Other Depository Corporations (ODCs), while balance sheet soundness analysis is based on commercial banks that hold about 70 percent of assets in ODCs.

Deposits and loans exclude interbank data and are based on information from commercial banks.

The latest data is based on 2015Q4 data, except the credit cycle ratios that are based on 2015Q3 data. Due to data availability, credit cycle analysis is based on Other Depository Corporations (ODCs), while balance sheet soundness analysis is based on commercial banks that hold about 70 percent of assets in ODCs.

Deposits and loans exclude interbank data and are based on information from commercial banks.

25. Commercial banks seem well positioned to face the turning of the credit cycle, but SFIs and credit cooperatives are more exposed to strained credit segments. Among commercial banks, foreign exchange liabilities are contained and risks of currency mismatches are relatively low. Buffers are also strong on average, with high capital, liquidity, and profitability ratios, notwithstanding an uptick in NPLs and leverage ratios from a low base (Selected Issues Paper, Chapter 3). On SFIs, staff welcomed the recently completed onsite inspections by the BOT, which revealed relatively strong capital adequacy and provisioning (except for two smaller institutions). At the same time, average NPLs are higher than for commercial banks at 5.9 percent, and as high as 9.2 percent for corporate loans. Staff recognized efforts by SFIs and credit cooperatives to extend loan maturities for households under pressure and prevent a buildup in NPLs, but cautioned against evergreening of loans. Staff also emphasized the importance of closely monitoring payment delinquency and implementing complete stress tests to assess any need for higher buffers.

26. Tighter macroprudential policies would safeguard financial stability in a low interest-rate environment. At the moment, overall financial stability risks appear contained. However, active search for yield by domestic and foreign investors may drive financial investments to the real estate sector and to less-regulated and increasingly interconnected nonbank institutions. In addition, some developers have issued nonrated bonds, fueling housing supply. The authorities should stand ready to tighten macroprudential policies to address risks in specific sectors. In particular, lower loan-to-value (LTV) and debt-to-income (DTI) ratios and stricter mortgage lending standards, such as for multiple investment properties, could help contain the still rapid growth in housing loans and in land and condominium prices.2 Staff also cautioned that systemic risks from interconnectivity and the operations of financial conglomerates should be monitored closely, particularly against the increased supply of nonrated products to high net worth investors by securities companies.

27. Staff recommended several measures to develop the financial stability framework:

  • Strengthening supervision and oversight, including by completing the transfer of SFIs to the prudential supervision of the BOT and fostering effective coordination between the BOT and other regulators.
  • Upgrading the macroprudential policy framework. There is considerable scope to deepen systemic risk analysis. Priorities include tracking the strength of the credit cycle, leverage ratios and unhedged exposures in specific sectors, and systemic risks from interconnectivity. The macroprudential toolkit can be expanded to include counter-cyclical prudential requirements, special weights on riskier loans, and capital surcharges for systemic institutions. The recently established Financial Stability Unit in the BOT is a stepping stone to a stronger institutional setup and should be followed by pending legal and administrative changes.
  • Improving crisis prevention and resolution by granting the BOT resolution authority over SFIs and developing contingency plans for bank resolution and systemic crises. Ongoing efforts to clearly define the roles and responsibilities of the BOT and the Ministry of Finance are welcome.
  • Addressing risks from high household indebtedness, with the BOT establishing a contingency plan for a tail event comprising self-reinforcing cycles of household defaults, deleveraging, and output contraction. If needed, voluntary out-of-court or government-sponsored debt restructuring programs could help restore borrowers’ ability to service their debt.

28. The authorities emphasized that Thailand’s overall financial system remained robust. They noted that the onsite inspections had found that most SFIs were financially sound, while the transfer of SFI prudential supervision to the BOT, to be completed by end-2016, would strengthen the regulatory and supervisory framework. They acknowledged that additional work was needed to fill regulatory gaps in the still small cooperatives’ sector and noted ongoing close cooperation with cooperatives’ regulators. The authorities agreed on the need to remain vigilant and preempt a further buildup in household debt, especially among lower income households, though they saw limited risks to financial stability at the current juncture. They noted the merits of upgrading the macroprudential policy framework by enhancing data quality and risk monitoring tools.

D. Advancing Trade Integration

29. Staff assessed Thailand’s external position as stronger than levels consistent with medium-term fundamentals and desired policies. Based on the External Balance Assessment (EBA) model, and taking into account Thailand-specific factors, staff estimated that the current account balance in 2015 was about 1.5 to 3.5 percent of GDP higher and the REER was 2.5 to 6 percent weaker than warranted by medium-term fundamentals and desired policy settings. International reserves exceeded the range of Fund’s composite adequacy metrics and stood at 180 percent of the metric unadjusted for capital controls at end-2015. Developments in early 2016 are unlikely to change the assessment (Appendix 6). The current account gap is expected to narrow over the medium term, as policy stimulus is deployed, political uncertainty dissipates, and domestic demand recovers. External debt is projected to remain relatively low under various shocks (Appendix 7).

30. Weak goods exports and deteriorating competitiveness are a concern. Goods exports have fallen across all destinations, except to CLMV countries, and across most products, except for automobiles. The decline can be attributed to weak demand abroad, low commodity prices, and a slide in competitiveness.3 Trade with ASEAN-5 countries declined more than trade with China, whose rebalancing toward services boosted tourism. As in other countries, Thailand experienced a significant drop in the income elasticity of trade in recent years (Box 2).

31. A clear strategy for trade integration remains an important priority. Thailand would benefit from active participation in global and regional integration initiatives given its high openness and advanced regulatory framework. It should take advantage of opportunities within the ASEAN Economic Community (AEC) and review the benefits of joining the Trans-Pacific Partnership (TPP), which would include expanding access to major export markets, developing service sectors, and catalyzing structural reforms.

32. The authorities concurred on the strength of Thailand’s external sector. In their view, the sharp decline in oil prices explained a large part of the unexpected rise in the current account surplus. They also projected the current account surplus to decline over the medium term, driven by a pickup in domestic demand supported by expansionary policies and the partial reversal of shocks to terms of trade. The authorities also agreed on the potential benefits from further trade integration and are assessing the pros and cons of joining the TPP.

Thailand: Export Values by Destination and Sector, 2013–2015

E. Boosting Potential Growth

33. Thailand is a middle-income country facing numerous structural challenges. It is an aging society with relatively low educational attainment and an oversized agricultural sector. Its industry has been losing competitiveness, with some products becoming obsolete. R&D investment and innovation are low.

34. Escaping the middle-income trap will require concerted action on several fronts. Enhancing potential growth calls for investing in infrastructure and human capital, addressing the rapid population aging, and facilitating structural transformation (Box 3). Achieving the potential growth target of 5 percent set in the 12th NESDP would require ambitious structural reforms to lift Total Factor Productivity (TFP) growth to 3.5 percent (from 1.8 percent in staff’s baseline).

  • Infrastructure. Improving investment execution and management would crowd in private investment and boost capital accumulation and productivity. Structural fiscal reforms should build fiscal space over time.
  • Human capital. Higher quality of education, greater focus on Science, Technology, Engineering, and Math subjects, and better alignment of vocational training with employers’ needs would help raise labor productivity.
  • Population aging. Thailand’s rapid population aging is depressing the growth in the labor force and in potential output. The effective retirement age needs to be better aligned with life expectancy. In addition, a more open policy toward foreign workers would help alleviate labor shortages in skilled and unskilled occupations.
  • Structural transformation.
    • The government seeks to encourage higher-value-added activities via revised Board of Investment incentives and to take advantage of Thailand’s geographic location via Special Economic Zones in neighboring countries with lower labor costs. Investment incentives need careful coordination and clear communication to enhance their cost-effectiveness. Moreover, appropriate design, evaluation and disclosure are essential for their success.
    • With agricultural income under pressure from low prices and drought conditions, the government’s initiatives to facilitate transition to higher-yield crops and to agri-business, while providing interim support to farmers, are welcome. This agenda could be expanded to provide education, information, and incentives for rural workers to shift to other sectors, where labor shortages have been cited as an obstacle to growth, and to take steps to raise agricultural productivity.

Most of these measures—e.g., public investment, greater competition in the service sector, incentives to hire agricultural workers in modern sectors—would also stimulate domestic demand and thus are particularly beneficial in the current conjuncture.

35. The authorities agreed that structural reforms were critical for Thailand to live up to its potential. They broadly shared staff’s diagnosis and emphasized their multi-faceted strategy to upgrade the economy and boost productivity. They noted programs underway to enhance competitiveness, including incentives for super-clusters, high value-added activities, and R&D investment. On immigration, the authorities were of the view that Thailand was sufficiently open to foreign workers.

Staff Appraisal

36. Thailand remains resilient in the face of external and internal challenges, but the ongoing recovery is modest and subject to downside risks. Headwinds arise from the weak and volatile global environment as well as from political uncertainty and structural bottlenecks. Core inflation will continue to be depressed by tepid demand. Headline inflation is expected to recover somewhat along with oil prices but will likely undershoot the BOT’s target again this year.

37. The expansionary fiscal stance is welcome and should be placed within an MTFF. The government’s investment plan should be implemented without delay, with due attention to good governance and transparency. Short-term stimulus measures should give way to social safety nets that are better aligned with structural challenges. Embedding the expansionary fiscal plans in an MTFF would strengthen policy formulation and transparency. The MTFF should underpin a strategy to increase tax revenues over time and prepare for the fiscal implications of the aging population. Social security reform should aim to strengthen equity, sustainability, and efficiency.

38. There is room for further monetary easing. With output below potential, headline inflation in negative territory through Q1 2016, and low core inflation, there is scope for further monetary easing. Its effectiveness could be enhanced by communicating the BOT’s determination to fight off deflationary pressures and steer inflation toward the medium-term target.

39. Tighter macroprudential policies can help maintain financial stability in a low-interest-rate environment. The authorities should stand ready to tighten macroprudential policies to curb lending to highly indebted households and certain segments of the real estate sector. Systemic risks from interconnectivity and the operations of financial conglomerates should also be monitored closely. Ongoing efforts to improve supervision of SFIs, foster coordination among regulators, upgrade the macroprudential policy framework, and improve crisis prevention and resolution would further strengthen the financial stability framework.

40. Thailand’s external position is strong, supported by high foreign reserves, low foreign debt, and an elevated current account surplus. Thanks to its strong external position, the baht appreciated modestly in real effective terms in 2015 despite persistent capital outflows. The large current account surplus is expected to narrow over time as domestic demand strengthens and shocks to terms-of-trade partially reverse. Thailand’s gross reserves exceed the Fund’s adequacy metrics and there is no need to build up reserves for precautionary purposes. In response to external shocks, the exchange rate should continue to move flexibly and serve as the first line of defense.

41. Escaping the middle-income trap requires concerted action to lift productivity and potential growth. The adverse impact of aging on potential growth and the fiscal position can be mitigated by reforming pensions, improving productivity, and facilitating migration. Improving the quality of education and aligning it with the needs of the modern economy would help raise labor productivity. Infrastructure investment would help crowd in private investment and increase capital accumulation. Periodic evaluation, careful coordination, and clear communication may enhance the cost-effectiveness of investment incentives. Further trade integration could boost competitiveness and catalyze structural reforms.

42. It is recommended that the next Article IV consultation with Thailand take place on a standard 12-month cycle.

Box 1.Thailand: Stimulus Measures and the Multi-Year Transport Infrastructure Plan

Short-term fiscal stimulus. Several measures have been announced since September 2015. Focusing on vulnerable segments (farmers and SMEs), these measures aim to support the recovery in the short run. They comprise mainly quasi-fiscal measures (subsidized loans by public and private banks), complemented by some expenditure and tax initiatives. The stimulus measures have helped boost private sector confidence.

Thailand: Major Short-term Fiscal Stimulus Measures Announced since September 2015
Expenditure MeasuresQuasi-fiscal MeasuresTax Measures
Measures for farmers
Community-based infrastructure projects (B 36 billion in total across more than 7,000 villages)X
Acceleration of ongoing small-scale infrastructure projects (B 40 billion)X
Subsidized loans to Village Funds through public banks (B 60 billion)X
Grassroots Economic Empowerment infrastructure projects (B 35 billion)X
Measures for SMEs
Subsidized loans through public and private banks (B 150 billion)X
Credit guarantee for SMEs through a public agency (B 100 billion)1X
Lower corporate income tax rates for SMEs with proper accounting practices (from 15 and 20 percent to 10 percent) in 2015-2016X
5-year tax exemption for start-up SMEs (established by December 2016)X
Venture capital fund for SMEs funded by public and publicly-owned banks (B 6 billion)X
Measures for the property market
Lower housing transfer/mortgage fees (from 2 and 1 percent respectively to 0.01 percent) (effective until April 2016)X
Income tax deduction (20 percent of the house price in total over 5 years) for first-time home buyers who purchase before the end of 2016 (priced below B 3 million)X
Subsidized loans for low-income house buyers through a public bank (B 10 billion)X
Subsidized loans for low-income housing projects (developers and low-income buyers) (B 70 billion)X
Measures to boost consumption
Income tax deduction on purchases of select goods and services made between December 25 and 31, 2015 (B 4 billion)X
Income tax deduction on expenses on hotel and travel between January and December 2016X
Income tax deduction on expenses at restaurants, hotels, and tour packages during the Songkran holiday season (April 9-17)X
Source: Data provided by Thai authorities.

The public agency will absorb the first 15 percent of NPLs and share the losses of the second 15 percent of NPLs with the lending bank.

Source: Data provided by Thai authorities.

The public agency will absorb the first 15 percent of NPLs and share the losses of the second 15 percent of NPLs with the lending bank.

Multi-year transport infrastructure development plan (2015–2022). Thailand needs to upgrade its infrastructure to keep up with regional competition, lift potential growth, and avoid the middle income trap. Thailand ranks third among ASEAN countries in terms of its overall infrastructure quality; however, its comparative advantage is being lost as other countries are catching up. Thailand’s weakest point is the railroad subsector, while electricity supply and air connectivity are relatively strong. Against this backdrop, the authorities have given priority to transport infrastructure projects worth 13 percent of GDP. These include, in the near term, motorways and projects of mass rapid transportation in Bangkok, and, in the medium term, more complex inter-city rail projects with longer preparation time. Financing would be a mix of government budget (5 percent), borrowing by SOEs with government guarantees (75 percent), and private investment (20 percent).

Thailand: Transport Infrastructure Development Plan (2015–22)
In billions of bahtIn percent of GDP
Inter-city 1-meter gauge double track rail1180.9%
Inter-city standard gauge double track rail1,0668.0%
Mass rapid transportation in Bangkok3963.0%
Airport network development520.4%
Port development40.0%
Source: Data provided by the Thai authorities.
Source: Data provided by the Thai authorities.

Selected ASEAN Countries: Quality of Overall Infrastructure

(1-to-7 scale)

Source: World Economic Forum’s The Global Competitiveness Report 2015-2016.

Thailand: Quality of Infrastructure by Sector

(1-to-7 scale)

Source: World Economic Forum’s The Global Competitiveness Report 2015-2016.

Box 2.TPP—What Does it Mean for Thailand?

Thailand’s trade has slowed down significantly in recent years. Trade peaked in 2012, with exports and imports reaching 57 percent and 55 percent of GDP, respectively, benefiting from integration in global value chains and strong FDI inflows. Since 2012, Thailand has experienced a continuous contraction in trade, including in 2015. On the export side, industrial exports, which account for 80 percent of the total, declined by 5.5 percent, while rice and rubber exports declined by 15 percent. On the import side, oil and non-oil products declined across the board. As in other countries, Thailand’s growth has become less trade-intensive since the Global Financial Crisis.

ASEAN-5: Export-Income Correlation 1/

Source: IMF staff calculations.

1/ 16-quarter rolling-window correlations between real export growth and trade-weighted trading partners’ real GDP growth, controlling for the real effective exchange rate.

Thailand: Income Elasticity of Imports

(Percent change, annual average)

Source: IMF’s World Economic Outlook.

1/ Ratio of real import growth to real GDP growth

The TPP is likely to change the global trade landscape. The TPP is a far-reaching agreement covering about 40 percent of the world GDP. It encompasses not only tariff reductions for goods trade but also lower barriers to investment and services trade. Moreover, it covers other non-tariff trade-related issues such as intellectual property, government procurement, e-commerce, environmental protection, and labor standards, transcending the scope of most existing FTAs among Asian countries. Some changes in regional production networks are also expected from its rule of origin cumulation provision, which—in certain sectors such as textiles—give strong incentives to developing cross-border value chains within TPP countries. Meanwhile, in other sectors, including automobiles, TPP rules of origin are more liberal and should continue to allow participation of nonmembers.

Export Share to TPP Countries, 2014

(In percent)

Source: UN Comtrade.

The TPP could have important implications for Thailand. The 12 TPP countries account for roughly 40 percent of Thailand’s total exports and 45 percent of FDI inflows, though Thailand has FTAs with most TPP countries except for the United States, Canada, and Mexico. Thailand would face greater competition in the U.S. market, which accounts for 10 percent of total exports, with major exports such as garments, agricultural goods and automobiles currently subject to tariffs ranging from 3 to 22 percent. Competition from TPP signatories (in particular, Malaysia and Vietnam) will likely increase, notably in commodities (rice, rubber and wood) and manufacturing products. Investment flows could also be diverted away from Thailand toward TPP members seeking greater access to the United States and other TPP markets. In this regard, U.S. investment, which accounts for 8 percent of FDI inflows into Thailand, and Japanese and Korean investment in the manufacturing industry could be at risk. According to Petri and Plummer (2016),1 Thailand would be one of the most negatively impacted countries in terms of income and export losses, given its large share of exports destined to TPP countries, strong competition from TPP members, and high tariffs on main exports.

Thailand should carefully assess the potential benefits from joining the TPP. The TPP could help offset Thailand’s recent sluggish trade performance and deteriorating competitiveness. Specifically, Thailand’s automobile industry is among potential winners, as it exports nearly 60 percent of its overall production as a regional base for the world’s top carmakers. Other beneficiaries may include garment and textile industries, where TPP member countries are currently among Thailand’s largest destinations and immediate tariff reductions are implemented under the TPP. More than just boosting trade and investment, the TPP could catalyze momentum for structural reforms and industrial transformation. Implications for the Regional Comprehensive Economic Partnership (RCEP), the AEC, and other existing and ongoing trade agreements also need to be thought through to maximize synergies and minimize overlap.

1 P. Petri and M. Plummer, “The Economic Effects of the Trans-Pacific Partnership: New Estimates” Working Paper (Washington: Peterson Institute for International Economics, 2016).

Box 3.Thailand: Lifting Potential Growth

Thailand’s potential growth slowed from 5 percent in the mid-2000s to 3 percent in the last five years. The slowdown was much more pronounced in Thailand than in other emerging markets, driven by a sharp fall in TFP growth and lower employment growth. Low TFP growth in Thailand reflects a slow reallocation of labor from low-productivity agriculture to more productive sectors and a decline in FDI in manufacturing.1 In turn, the growth of the working-age population (15–64) declined from 1 percent in 2003-07 to less than 0.4 percent in 2011–15.

Thailand: Contributions to Potential GDP Growth

(Percentage points)

Source: IMF staff estimates.

1/ Illustrative scenario.

Emerging Markets: Contributions to Potential GDP Growth

(Percentage points)

Source: IMF’s World Economic Outlook.

Staff estimates potential growth of 3 percent in absolute and per capita terms over the medium-term—a pace clearly insufficient to pull Thailand out of the middle-income trap. Over 2019–21, labor input is forecast to decline in line with the working age population (UN, 2015, World Population Prospects).2 Capital input is forecast to increase in line with staff’s baseline scenario, with private investment following on the coattails of the partially implemented government’s infrastructure plan. A slight pickup in TFP growth is also envisaged.

How can the growth in the standard of living be accelerated? Efforts to increase the participation rate of older workers (in particular, increasing the mandatory retirement age) and to facilitate migration of workers from neighboring countries could stem the decline in labor supply, at least in the medium to long term. Investment growth could be higher if public investment execution is improved. Gradually increasing the VAT rate to its statutory rate, broadening the tax base, and strengthening tax administration should create fiscal room for additional public investment. These plans and improvements in the business climate could crowd in private investment. With constant (rather than declining) labor input over 2019–21 and fixed investment growth of 5.5 percent per year (the forecast for 2018, rather than the drop to 4.6 percent in staff’s baseline), factor inputs would contribute 1.5 percentage points to growth (from 1.2 percentage points in the baseline). To increase potential growth to 4 percent (from 3 percent in the baseline), TFP growth would need to accelerate to 2.5 percent (from 1.8 percent in the baseline), supported by structural reforms. Such an increase is within reach, allowing a slow yet steady convergence to per capita income levels in advanced economies. Further lifting potential growth to 5 percent, the target in the 12th NESDP, would require a very substantial acceleration in TFP growth to 3.5 percent and an urgent push to ambitious structural reforms.

The following steps could significantly increase TFP:3

  • Improving the quality and relevance of education and vocational training;
  • Facilitating the hiring of skilled foreign workers;
  • Improving public investment management processes;
  • Providing incentives, information and training to facilitate transition into higher-productivity occupations;
  • Increasing agricultural productivity, including by scaling up average farm size;4
  • Increasing competition, particularly in the service sector; and
  • Advancing trade integration.
1 V. Klyuev, “Structural Transformation—How Does Thailand Compare?” IMF Working Paper 15/51 (Washington: International Monetary Fund, 2015).2 United Nations, “World Population Prospects” (New York, 2015)3 These country-specific priorities are aligned with broad advice and estimates from IMF, “Structural Reforms and Macroeconomic Performance: Initial Considerations for the Fund,” 2015.4 Research shows that economy-wide TFP increases by 20 percent in 8 years following significant agricultural reform. (E. Dabla-Norris and others, “Anchoring Growth: The Importance of Productivity-Enhancing Reforms in Emerging Market and Developing Economies,” IMF Staff Discussion Note 13/08 (Washington: International Monetary Fund, 2015).

Figure 1.Thailand: Real Sector Developments

Figure 2.Thailand: Inflation and Capacity Indicators

Figure 3.Thailand: Public Finances

Figure 4.Thailand: Monetary Policy Instruments

Figure 5.Thailand: External Sector

Figure 6.Thailand: Financial Sector Developments

Figure 7.Thailand: Financial Soundness Indicators of Commercial Banks

Figure 8.Thailand: Asset Prices and Household Debt

Figure 9.Thailand: Structural Challenges

Table 1.Thailand: Selected Economic Indicators, 2011–16
Main exports (percent of total 2014): machinery (43), food (13)

GDP per capita (2014): US$5,889

Unemployment rate (2014): 0.8 percent

Poverty headcount ratio at national poverty line (2012): 12.6 percent

Net FDI (2014): US$-0.56 billion

Population (2014): 65.1 million
Real GDP growth (percent) 1/
Gross fixed investment4.910.7−1.0−
Headline CPI (end period, percent)−0.91.6
Headline CPI (period average, percent)−0.90.2
Core CPI (end period, percent)
Core CPI (period average, percent)
Saving and investment (percent of GDP)
Gross domestic investment (excl. stocks)25.927.025.424.824.925.3
Gross national saving29.227.726.327.932.133.3
Private, including statistical discrepancy23.923.120.022.325.626.9
Foreign saving−−3.8−8.0−7.8
Fiscal accounts (percent of GDP) 2/
Central government budgetary balance−1.6−2.3−1.8−2.3−1.7−2.4
Revenue and grants17.718.018.517.718.518.1
Expense and net acquisition of non-financial assets19.320.320.320.020.220.5
Net acquisition of non-financial assets1.
General government balance 3/0.0−0.90.4−0.80.3−0.4
Non-financial public enterprise balance−0.1−
Public sector balance 4/−0.1−−0.3
Public sector debt 4/39.141.942.243.643.143.7
Monetary accounts (end-period, percent)
Broad money growth15.
Narrow money growth8.613.
Credit to the private sector by depository corporations17.
Balance of payments (billions of U.S. dollars)
Current account balance8.9−1.5−5.215.431.632.0
(Percent of GDP)2.4−0.4−
Exports, f.o.b.219.1225.7225.4224.8212.1204.8
Growth rate (in dollar terms)14.33.0−0.1−0.3−5.6−3.5
Growth rate (volume terms)−3.4−2.4
Imports, f.o.b.202.1219.1218.7200.2177.5172.8
Growth rate (in dollar terms)24.98.4−0.1−8.5−11.3−2.7
Growth rate (volume terms)−6.8−0.60.1
Capital and financial account balance 5/−−16.6−25.7−32.0
Overall balance1.25.3−5.0−
Gross official reserves (end-year)206.3205.7190.2180.2168.2168.2
(Months of following year’s imports)11.311.311.412.211.710.9
(In percent of short-term debt) 6/370.4312.2270.1280.1305.4268.0
Forward position of BOT (end year)−31.2−24.1−23.0−23.1−11.7−11.7
Exchange rate (baht/U.S. dollar)30.531.130.732.536.0
NEER appreciation (annual average)−1.6−0.55.5−3.04.4
REER appreciation (annual average)−−3.22.5
External debt
(In percent of GDP)28.232.933.834.732.732.3
(In billions of U.S. dollars)104.3130.7141.9140.1129.5132.5
Public sector 7/
Private sector88.1104.5116.7114.9108.9111.3
Medium- and long-term42.350.556.159.658.059.4
Short-term (including portfolio flows)45.854.060.655.250.852.0
Debt service ratio 8/
Memorandum items:
Nominal GDP (In billions of baht)11,30012,34912,90113,13213,53714,072
(In billions U.S. dollars)370.6397.3419.9404.3395.3409.7
Sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections.

This series reflects the new GDP data based on chain volume measure methodology, which were introduced by the Thai authorities in May 2015.

On a fiscal year basis. The fiscal year ends on September 30.

Includes budgetary central government, extrabudgetary funds, and local governments.

Includes general government and nonfinancial public enterprises. Public sector debt includes guaranteed debt of financial public enterprises as well.

Includes errors and omissions.

With remaining maturity of one year or less.

Excludes debt of state enterprises.

Percent of exports of goods and services.

Sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections.

This series reflects the new GDP data based on chain volume measure methodology, which were introduced by the Thai authorities in May 2015.

On a fiscal year basis. The fiscal year ends on September 30.

Includes budgetary central government, extrabudgetary funds, and local governments.

Includes general government and nonfinancial public enterprises. Public sector debt includes guaranteed debt of financial public enterprises as well.

Includes errors and omissions.

With remaining maturity of one year or less.

Excludes debt of state enterprises.

Percent of exports of goods and services.

Table 2.Thailand: Macroeconomic Framework, 2010–21
Real GDP growth (percent)
Gross fixed investment11.64.910.7−1.0−
Headline CPI inflation (period average, percent)−
Core CPI inflation (period average, percent)
Saving and investment (percent of GDP)
Gross domestic investment (excluding stocks)24.025.927.025.424.824.925.326.327.027.528.028.5
Gross national saving28.329.227.726.327.932.133.332.431.530.830.530.3
Private, including statistical discrepancy24.123.923.120.022.325.626.925.924.924.123.623.2
Foreign saving (- = current account surplus)−2.9−−3.8−8.0−7.8−5.9−4.2−2.9−2.1−1.5
Fiscal accounts (percent of GDP, fiscal year basis)
Central government budgetary balance−2.9−1.6−2.3−1.8−2.3−1.7−2.4−2.4−2.5−2.5−2.5−2.5
General government balance−1.30.0−0.90.4−0.80.3−0.4−0.5−0.5−0.5−0.5−0.5
Revenue and grants20.721.121.322.321.422.622.322.122.222.322.322.4
Expense and net acquisition of nonfinancial assets22.021.122.322.022.222.322.722.622.722.822.822.9
Public sector balance−2.6−0.1−−0.3−0.7−0.8−0.7−0.20.0
Total public sector debt (end-period)39.939.141.942.243.643.143.744.545.345.945.945.6
Monetary accounts (end period, percent)
Broad money10.915.
Narrow money10.98.613.
Credit to the private sector by depository corporations12.317.
Balance of payments (billions of U.S. dollars)
Exports, f.o.b.191.6219.1225.7225.4224.8212.1204.8211.5219.0227.7237.4247.6
(Volume growth)−3.4−
Imports, f.o.b.161.9202.1219.1218.7200.2177.5172.8185.9198.3211.7225.5239.7
(Volume growth)26.713.86.72.0−6.8−
Trade balance29.817.06.76.724.634.632.025.620.815.911.87.9
Services, income, and transfers−19.7−8.1−8.2−11.8−9.2−3.00.0−0.5−2.1−2.3−1.5−0.3
Current account balance10.08.9−1.5−5.215.431.632.025.118.713.610.37.6
(Percent of GDP)2.92.4−0.4−
Financial account balance 1/21.3−−16.6−25.7−32.0−25.1−18.7−13.6−10.3−7.6
Overall balance31.31.25.3−5.0−
Gross official reserves (including net forward position, US$ billions)191.7206.3205.7190.2180.2168.2168.2168.2168.2168.2168.2168.2
(Months of following year’s imports of goods)11.411.311.311.412.211.710.910.
(In percent of short-term debt) 2/340370312270280305268304296288281274
External debt
External debt (billions of US$)100.6104.3130.7141.9140.1129.5132.5136.2139.9143.0146.0149.2
External debt (percent of GDP)29.528.232.933.834.732.732.331.831.630.930.129.3
Debt-service ratio (percent of exports of goods and nonfactor services)
Sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections.

Includes errors and omissions.

With remaining maturity of one year or less.

Sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections.

Includes errors and omissions.

With remaining maturity of one year or less.

Table 3.Thailand: Balance of Payments, 2012–21 1/(In billions of U.S. dollars, unless otherwise specified)
Trade balance (In percent of GDP)
Current account balance−1.5−5.215.431.632.025.118.713.610.37.6
(In percent of GDP)−0.4−
Trade balance6.76.724.634.632.025.620.815.911.87.9
Exports, f.o.b.225.7225.4224.8212.1204.8211.5219.0227.7237.4247.6
(In percent of GDP)56.853.755.653.750.049.349.549.249.048.6
Imports, f.o.b.219.1218.7200.2177.5172.8185.9198.3211.7225.5239.7
(In percent of GDP)
Of which: oil and oil products47.452.047.529.722.628.032.035.939.242.1
Of which: tourism receipts33.941.838.444.646.448.951.153.856.960.0
Income and transfers−4.8−15.6−11.3−13.1−11.5−12.6−14.9−15.6−15.4−14.9
Capital and financial account balance13.0−2.2−16.4−18.1−32.0−25.1−18.7−13.6−10.3−7.6
Foreign direct investment, net−1.43.8−0.6−
in percent of GDP−0.30.9−0.1−
In reporting economy12.915.
Portfolio investment, net3.4−4.8−12.1−17.7−15.9−14.0−11.5−10.4−9.5−9.3
Financial derivatives, net0.5−
Other investment, net10.2−1.2−4.31.2−17.3−13.0−9.2−5.9−4.3−2.0
Errors and omissions−6.32.3−0.2−
(In percent of GDP)−1.60.6−0.1−
Overall balance5.3−5.0−
Memorandum items:211.6200.7189.0186.1168.2168.2168.2168.2168.2168.2
Changes in official reserves (increase -)−−
Memorandum items:
Net use of Fund resources0.
Gross official reserves (incl. net forward position)205.7190.2180.2168.2168.2168.2168.2168.2168.2168.2
(In months of following year’s imports)11.311.412.211.710.910.
(In percent of short-term debt) 2/312270280305268304296288281274
(In percent of ARA metrics)267245227211
(In percent of GDP)52454543413938363533
Forward/swap position of BOT−24.1−23.0−23.1−11.7
Export growth (In percent)3.0−0.1−0.3−5.6−
Export volume growth (In percent)−3.4−
Export unit value growth (In percent)0.6−0.5−1.0−2.3−
Import growth (In percent)8.4−0.1−8.5−11.3−
Import volume growth (In percent)6.72.0−6.8−
Import unit value growth (In percent)1.6−2.1−1.8−10.8−
External debt/GDP32.933.834.732.732.331.831.630.930.129.3
(In billions of U.S. dollars)130.7141.9140.1129.4132.5136.2139.9143.0146.0149.2
Debt service ratio (In percent) 3/
GDP (In billions of U.S. dollars)397.3419.9404.3395.3409.7428.8442.8462.8484.6509.6
Sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections.

Includes financing facilities arranged by AsDB and IBRD and disbursements under the Miyazawa Plan.

With remaining maturity of one year or less.

In percent of exports of goods and services.

Sources: Data provided by the Thai authorities; CEIC Data Co. Ltd.; and IMF staff estimates and projections.

Includes financing facilities arranged by AsDB and IBRD and disbursements under the Miyazawa Plan.

With remaining maturity of one year or less.

In percent of exports of goods and services.

Table 4.Thailand: Monetary Survey, 2008–15(In billions of baht, unless otherwise stated)
Central bank survey
Net foreign assets3,8724,5255,0825,4415,3595,4445,2625,762
Net domestic assets−2,833−3,422−3,839−4,075−3,861−3,863−3,595−4,052
Reserve money - Monetary base (M0)1,0401,1031,2431,3651,4981,5811,6671,710
Depository corporations survey
Net foreign assets4,1324,5704,8845,4264,9435,0074,9915,873
Net domestic assets5,8126,0476,8958,13410,02411,05511,81811,678
Domestic credit9,56810,01411,01512,77914,71915,88916,77817,558
Net credit to central government204292155201352235399420
Credit to local government56181822252219
Credit to nonfinancial public enterprises325366372392354334322291
Credit to financial corporations520625668699846892903955
Total credit to private sector8,5148,7269,80111,46913,14514,40315,13215,873
Credit to other nonfinancial corporations4,1363,8474,1324,8375,3935,8386,0066,187
Credit to other resident sector4,3784,8795,6696,6327,7528,5659,1269,686
Other items (net)−3,756−3,967−4,120−4,645−4,695−4,834−4,960−5,880
Broad money9,94410,61711,77913,56014,96716,06216,80917,551
Narrow money1,0411,1751,3021,4141,5981,6611,6821,778
Currency in circulation7528449371,0361,1361,1891,2001,251
Deposits at depository corporations289331365378462472482527
Memorandum items:
Broad money growth (y/y percent change)9.26.810.915.
Narrow money growth (y/y percent change)4.112.810.98.613.
Credit to private sector growth by depository corporations (y/y percent change)8.82.512.317.
Contribution to broad money growth
Net foreign assets (in percent)−3.60.4−0.15.3
Net domestic assets (in percent)−0.8
Domestic credit (in percent)
Sources: CEIC Data Co. Ltd.; and IMF staff calculations.
Sources: CEIC Data Co. Ltd.; and IMF staff calculations.
Table 5.Thailand: Medium-Term Fiscal Scenario, 2011/12–2020/21 1/(In percent of fiscal year GDP, unless otherwise stated)
A. Central government
Revenue (budgetary)18.018.517.718.518.
Tax revenue15.916.615.415.815.815.815.916.016.016.1
Taxes on income and profits7.
Taxes on goods and services7.
Taxes on international trade1.
Taxes not elsewhere classified0.
Other revenue2.
Total expenditure (budgetary)20.320.320.020.220.520.620.720.720.820.8
Compensation of employees5.
Purchase/use of goods and services3.
Social benefits1.
Expense not elsewhere classified6.
Net acquisition of nonfinancial assets1.
Net lending/borrowing (budgetary)−2.3−1.8−2.3−1.7−2.4−2.4−2.5−2.5−2.5−2.5
Extrabudgetary balance0.
Social security balance0.
Net lending/borrowing (consolidated)−1.20.1−1.00.0−0.6−0.7−0.7−0.7−0.7−0.7
B. Local authorities
Total expenditure3.
Net lending/borrowing0.
C. General government
Tax revenue17.718.817.317.917.917.918.
Taxes on income and profits7.
Taxes on goods and services8.810.
Taxes on international trade1.
Taxes not elsewhere classified0.
Social contributions0.
Other revenue2.
Total expenditure22.322.022.222.322.722.622.722.822.822.9
Compensation of employees6.
Purchase/use of goods and services6.
Social benefits2.
Expense not elsewhere classified3.
Net acquisition of nonfinancial assets3.
General Government net lending/borrowing−0.90.4−0.80.3−0.4−0.5−0.5−0.5−0.5−0.5
General Government cyclically adjusted primary balance0.
Memorandum items:
Central government net lending/borrowing (budgetary)−2.3−1.8−2.3−1.7−2.4−2.4−2.5−2.5−2.5−2.5
Central government net lending/borrowing (consolidated)−1.20.1−1.00.0−0.6−0.7−0.7−0.7−0.7−0.7
Local authorities net lending/borrowing0.
General government net lending/borrowing−0.90.4−0.80.3−0.4−0.5−0.5−0.5−0.5−0.5
General government cyclically adjusted primary balance0.
Public enterprise balance 2/−−0.2−0.3−
Public sector balance−−0.3−0.7−0.8−0.7−0.20.0
Public sector debt 3/41.942.243.643.143.744.545.345.945.945.6
Central government 4/29.929.430.431.
Non-financial public enterprises9.
Specialized Financial Institutions guaranteed debt and autonomous agency debt3.
Public sector consumption 5/21.020.921.
Public sector investment 6/
General government3.
Public enterprises2.
Source: IMF Staff estimates and projections.

Fiscal year runs from October 1 to September 30.

Based on non-financial sector GFS data.

Does not include debt by local authorities.

Includes government debt to fiscalize FIDF loss, which is repaid with contributions from financial institutions, FIDF assets, and others.

Budgetary central government and local authorities.

Based on national accounts.

Source: IMF Staff estimates and projections.

Fiscal year runs from October 1 to September 30.

Based on non-financial sector GFS data.

Does not include debt by local authorities.

Includes government debt to fiscalize FIDF loss, which is repaid with contributions from financial institutions, FIDF assets, and others.

Budgetary central government and local authorities.

Based on national accounts.

Table 6.Thailand: Commercial Banks’ Financial Soundness Indicators, 2009–15 1/
(In percent)
Capital adequacy
Regulatory capital to risk-weighted assets15.816.114.816.215.516.517.1
Regulatory Tier 1 capital to risk-weighted assets11.711.911.011.011.913.013.9
Asset quality
Nonperforming loans net of provisions to capital19.513.810.
Nonperforming loans to total gross loans5.
Earnings and profitability
Return on assets1.
Return on equity12.114.114.414.915.914.711.3
Liquid assets to total assets (liquid asset ratio)20.818.317.419.017.719.417.9
Liquid assets to short term liabilities26.924.922.525.924.026.724.6
Loan-deposit ratio 2/94.4100.0107.896.497.996.197.6
Source: IMF, Financial Soundness Indicators database.

Unless otherwise stated, the Financial Soundness Indicators cover commercial banks registered in Thailand.

This ratio excludes interbank data and covers all commercial banks (commercial banks registered in Thailand and foreign bank branches).

Source: IMF, Financial Soundness Indicators database.

Unless otherwise stated, the Financial Soundness Indicators cover commercial banks registered in Thailand.

This ratio excludes interbank data and covers all commercial banks (commercial banks registered in Thailand and foreign bank branches).

Appendix I. Thailand—Staff Policy Advice from the 2015 Article IV Consultation
Staff AdvicePolicy Actions
Allow exchange rate flexibility to be the first line of defense against external shocks, with judicious intervention to avoid excessive volatility and overshooting.The BOT has adhered to its policy of intervening in foreign exchange markets only to prevent excessive volatility.
Consider further monetary easing if fiscal stimulus is weaker than expected and the economy remains sluggish.The BOT cut the policy rate by 50 basis points in the spring of 2015.
Set indicative inflation targets beyond a one-year horizon.The BOT announced a medium-term inflation target.
Continue strengthening the regulatory and supervisory framework, following the transfer of SFIs prudential supervision to the BOT.The BOT has conducted onsite examinations of all SFIs. Revamping their prudential regulation and resolution framework is moving forward, in consultation with the Ministry of Finance.
Strengthen the oversight of the fast-growing credit cooperative sector.The BOT is helping strengthen the supervision of credit cooperatives, including through technical assistance to the Ministry of Agriculture.
Support economic recovery with expansionary fiscal policy while framing it in a medium-term framework.A series of fiscal stimulus measures have been rolled out while expediting the disbursement of local infrastructure projects. The fiscal responsibility law was approved by the Cabinet and submitted to the Council of State.
Undertake an evaluation of the public investment process, including projects implemented by SOEs.At the request of the authorities, the Fund provided TA in early 2016 on public investment, covering both the government and SOEs. A comprehensive public investment plan is being prepared for the 12th development plan.
Consider a gradual rise of the VAT rate to 10 percent, from the current 7 percent, once the recovery is firmly entrenched.Priority is given to broadening the tax base while enhancing tax collection, in the context of a modest economic recovery.
Augment labor supply by increasing mandatory retirement age in the civil service and regularizing migration from neighboring countries.The retirement age is being increased in selected professions, while broad policies are under review.
Appendix II. Thailand—Risk Assessment Matrix
Nature/Source of ThreatLikelihoodImpactPolicies to Minimize Impact
External Risks
Tighter or more volatile global financial conditionsMM: While high international reserves and sound commercial banks would mitigate the impact, a surge in global financial market volatility could be disruptive, particularly against the backdrop of growing linkages between cross-border financial flows and domestic credit conditions.Allow exchange rate flexibility to be the first line of defense, with judicious currency intervention to avoid excessive volatility. Provide liquidity to ensure orderly markets. If financial volatility and capital outflows affect the real economy and constrain monetary stimulus, redouble efforts to accelerate public investment execution to bolster domestic demand.
Significant slowdown in China and/or other major emerging economiesMH: Given Thailand’s integration in regional supply chains and high exports, a slowdown in major Asian economies would have a severe effect on the country. Likely terms-of-trade improvement—given Thailand’s large net imports of oil—would provide some cushion.Re-invigorate exports by actively participating in regional and global trade integration initiatives, strongly engaging with fast-growing regional markets such as CLMV countries, and enhance competitiveness through structural reforms and infrastructure investment.
Structurally weak growth in key advanced economiesHM: With the EU, Japan, and the United States each accounting for about 10 percent of Thailand’s exports, a deterioration in the advanced countries’ economic outlook would depress demand for Thailand’s products.Structural reforms and infrastructure development would raise returns to private investment and strengthen domestic-demand-led growth. Greater orientation toward CLMV could buttress exports.
Domestic Risks
Delays in infrastructure project implementationMM: Lower-than-projected public investment would reduce domestic demand in the cyclically weak economy and would reduce Thailand’s productive potential in the longer term. It may also weaken confidence in the government’s ability to manage the economy, denting private investment and FDI inflows.Lower the policy rate to offset weaker fiscal stimulus. On the fiscal side, employ alternative quick-disbursing yet well-targeted measures, focusing on vulnerable groups with high marginal propensity to consume and small shovel-ready investment projects.
Deflation becoming entrenchedMM: After more than a year of negative CPI and falling core inflation, with weak domestic demand and low commodity prices, inflation expectations may shift down as BOT repeatedly misses the inflation target. Resulting higher real interest rates and rising real debt burden would further depress domestic demand.Lower the policy rate. Signal the intention to keep it low for long and emphasize the commitment to the inflation target to re-anchor expectations. Use macroprudential policy if necessary to address vulnerabilities exacerbated by low interest rates.
Household debt overhang boiling overMM: Highly leveraged households may hold back spending or banks may tighten credit supply, which would dampen consumption. Furthermore, the debt-servicing capacity of households could be constrained in a vicious cycle of deleveraging and low growth or if the interest rate cycle turns.Use available room for additional fiscal and monetary stimulus. Explore options for household debt restructuring.
Exacerbation of drought conditionsMM: Disruptions to agricultural production and, potentially, tourism and industrial activities would affect output and exports. In addition, water shortage and rationing may intensify rural-urban tensions.Provide income support to affected households while assisting them with farming alternate products. At the same time, transition from agricultural occupations into industry and services should be encouraged and supported.
Renewed political instabilityMH: Consumer and business confidence would be damaged, dampening private investment and FDI inflows. Public investment plans would be put on hold again. Supply-side disruptions and international sanctions are possible. Capital outflows would put pressure on credit and asset markets.Allow automatic stabilizers to work. Provide adequate liquidity to banks to minimize disruptions in the financial system. Let the exchange rate be the first line of defense in case of capital outflows, but use judicious intervention to avoid excessive volatility.
“L”=Low; “M”=Medium; “H”=High. The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.
“L”=Low; “M”=Medium; “H”=High. The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.
Appendix III. Thailand—Public Debt Sustainability Analysis

1. Background. The debt sustainability analysis (DSA) framework for market access countries expands upon the previous DSA to include: (i) an assessment of the realism of baseline assumptions; (ii) an analysis of risks associated with the debt profile; (iii) macrofiscal risks; (iv) stochastic debt projections taking into account past macrofiscal volatility; and (v) a summary of risks in a heat map.

2. Macroeconomic assumptions. Real growth is projected to average slightly above 3 percent in the medium term, supported in part by public infrastructure investment.

3. Fiscal assumptions. In staff’s baseline projections, the public sector primary deficit would worsen from 1.3 to 1.8 percent of GDP between 2016 and 2018 and then improve to 0.8 percent of GDP in 2021.1 Regarding the transport sector multi-year infrastructure development plan, staff assumes an implementation rate of 60 percent.

4. Data coverage. The coverage of public debt in Thailand is fairly comprehensive, including central government debt, nonfinancial SOEs debt, and SFI debt guaranteed by the government. Local authorities’ debt (under 1 percent of GDP) is excluded from public debt statistics and this DSA.

5. Realism of baseline assumptions.

  • The median forecast error for real GDP growth during 2007–2015 is -2.3 percent of GDP and may look relatively large at first glance. However, over this period, Thailand went through a series of unexpected shocks that had a significant impact on growth, such as the Global Financial Crisis, the flood in 2011, and political uncertainty.
  • Forecast errors for the primary balance and inflation are comparable to other countries.

6. The DSA framework suggests that Thailand’s public debt would remain sustainable in the medium term under various shocks. However, vigilance is needed to ensure that risks stemming from financial sector contingent liabilities are contained.

Thailand: Public Debt

(In percent of GDP)

Source: IMF staff estimates.

  • Under the baseline, the debt-to-GDP ratio is projected to hover around 45–46 percent, which is below the government’s ceiling of 60 percent and far below the benchmark of 70 percent for market access countries. The full execution of the transport sector infrastructure plan (instead of 60 percent under the baseline) would result in a slightly higher debt trajectory: the peak debt-to-GDP ratio would increase by 3 percent to reach 49 percent of GDP by 2019,2 still below the government’s ceiling of 60 percent. This contrasts with the historical scenario under which the debt-to-GDP ratio declines steadily to 41 percent by 2021 on the back of sustained fiscal surpluses and higher growth.
  • The fan chart, which incorporates feedback effects among macroeconomic variables and relies on historical data to calibrate shocks, illustrates the impact of additional risks to the baseline. Even under the worst quartile case, the debt-to-GDP ratio would remain well under the benchmark of 70 percent, suggesting that Thailand’s debt is likely to remain sustainable in the medium term even in the worst case scenario.
  • Of the four macro-fiscal shock scenarios, namely, primary balance shock, interest rate shock, growth shock and exchange rate shock, the growth shock has the largest impact on debt ratios. In such scenario, real GDP growth falls by one 10-year historical standard deviation (3 percent) for two consecutive years from 2017, resulting in a deterioration of the primary balance. This leads to a higher interest rate and lower inflation (0.25 percentage point per 1 percent of GDP worsening of the deficit). The debt-to-GDP ratio reaches 50 percent in 2018, still below the government’s ceiling (60 percent) and the framework’s benchmark (70 percent).
  • Shocks to financial sector contingent liabilities have by far the largest impact on debt ratios. A one-time capital injection equivalent to 10 percent of commercial banks’ assets results in a one-off increase in government spending of 13 percent of GDP. If the shock is augmented to include SFIs, the government spending increase jumps to 17 percent of GDP. These shocks are combined with an increase in the interest rate (0.25 percentage points per 1 percent of GDP worsening of the deficit) and a one standard-deviation shock to growth. Under the scenario that involves commercial banks only, the debt-to-GDP ratio reaches 62 percent in 2019. Under an augmented shock scenario that involves SFIs in addition to commercial banks, the debt-to-GDP ratio reaches 67 percent. While these scenarios may entail low probability, they underscore the importance of properly managing the regulatory frameworks and risks of financial institutions, including SFIs.

7. Heat map.

  • The heat map suggests moderate risk on the external financing requirement (defined as the current account balance plus amortization of short-term external debt at remaining maturity) and on the share of public debt held by nonresidents (including official lenders such as the World Bank). At 9 percent, the external financing requirement exceeds the lower threshold of early warning benchmarks (5 percent), but large official foreign reserves of over 40 percent of GDP provide comfortable buffers.
  • The share of public debt held by nonresidents is 16 percent of the total, slightly exceeding the lower threshold of early warning benchmarks (15 percent). A well functioning domestic bond market underpinned by a wide base of investors provides some comfort in this regard. Thailand’s government bond yield has been relatively stable, despite volatile global financial markets and political uncertainty. Furthermore, Thailand’s public debt-to-GDP ratio is projected to hover around 45 percent of GDP, which is below the government’s ceiling of 60 percent and far below the benchmark of 70 percent in the framework.

Thailand Public Sector Debt Sustainability Analysis (DSA) - Baseline Scenario

(in percent of GDP unless otherwise indicated)

Source: IMF staff.

1/ Fiscal year basis. For example, 2016 starts from October 2015 and ends in September 2016. Public sector is defined as non-financial public sector.

2/ Bond Spread over U.S. Bonds.

3/ Defined as interest payments divided by debt stock at the end of previous year.

4/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

5/ The real interest rate contribution is derived from the denominator in footnote 4 as r - π (1+g) and the real growth contribution as -g.

6/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

7/ For projections, this line includes exchange rate changes during the projection period.

8/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Thailand Public Sector DSA - Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

1/ Fiscal year basis.

Thailand Public Sector DSA - Realism of Baseline Assumptions

Source: IMF Staff.

1/ Plotted distribution indudes all countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Thailand.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Thailand Public Sector DSA - Stress Tests

Source: IMF staff.

Thailand Public Sector DSA Risk Assessment

Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are:

200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ An average over the last 3 months, 09-1-16 through 08-4-16.

Appendix IV. Thailand—Avoiding Dark Corners

1. The Inflation Targeting regime in Thailand brought higher stability to inflation and inflation expectations over the last decade (Grenville and Ito, 2010). More recently, however, lower oil prices and relatively low growth have pushed headline inflation into negative territory through Q1 2016, and left medium-term inflation expectations at historical lows. Moreover, downside risks stem from the international environment, with disinflationary pressures spreading across the globe.

2. In this context, this appendix explores the scope/power of monetary policy actions to avoid potential “dark corners” of deflation should downside risks materialize. This is illustrated by simulation results based on a stylized new Keynesian model built along the lines of Clinton and others (2015). The policy reaction function is guided by Inflation-Forecast Targeting (IFT) to capture Thailand’s monetary policy institutional setting. Finally, the economy is assumed to face additional disinflationary pressures from weaker global growth and subdued commodity prices that, in the absence of any monetary policy action, would keep headline inflation below the target band and the output gap in negative territory over the simulation horizon (12 quarters).

3. Simulations consider two extreme scenarios for the reaction of monetary policy to disinflationary pressures. Under the “aggressive easing” strategy, the policy rate hits the zero-lower bound floor from the current 150 basis points in three quarters, and stays there for the rest of the simulation horizon (Text figure, red line). Headline inflation would return to the target point in three quarters and fluctuate within the BOT’s target range for the rest of the simulation horizon. In particular, the inflation rate temporarily overshoots the 2.5 percent target point, so that the simulation allows for a recovery to the target in price level terms. Core inflation would remain subdued, though a “dark corner” with unanchored inflation expectations is avoided. Moreover, by preventing further declines in inflation and inflation expectations, aggressive monetary easing can also prevent a rise in real interest rates and help close the output gap by the end of the simulation horizon.

4. The advantages of decisive monetary policy action can be illustrated by an alternative policy reaction that keeps rates on hold for another five quarters. Model simulations suggest that a delayed policy reaction would lead to a very subdued headline inflation path, with the inflation rate below the target band (Text figure, blue line) and core inflation in negative territory over most of the simulation horizon. Moreover, lack of accommodation in nominal rates would lead to further declines in inflation expectations, exerting an increase of around 200 basis points in real rates and contributing to a widening negative output gap. In this scenario, a (delayed) policy cut of 50 basis points after those first five quarters is not able to close the output gap and inflation undershoots the target band within the simulation horizon. In the current subdued inflation environment, careful monitoring of disinflationary forces and readiness to act and communicate in decisive manner (see Alichi et al., 2015) would be fundamental to prevent the entrenchment of deflationary expectations and avoid dark corners.

Thailand: Scenarios for Policy and Inflation Rates


    ClintonK.FreedmanC.JuillardM.KamenikO.LaxtonD. and WangH.2015Inflation-Forecast Targeting: Applying the Principle of TransparencyIMF Working Paper No.15/132 (Washington: International Monetary Fund).

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    GrenvilleS. and ItoT.2010An Independent Evaluation of the Bank of Thailand’s Monetary Policy under the Inflation Targeting Framework 2000-2010” (Thailand: Bank of Thailand).

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    WangH.2015Avoiding Dark Corners: A Robust Monetary Policy Framework for the United StatesIMF Working Paper No.15/134 (Washington: International Monetary Fund).

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Appendix V. Thailand—Tackling Risks from Household Debt

1. Household debt in Thailand increased rapidly over the past decade, reaching 141 percent of disposable income at end-2014. More recent data shows household debt at 82 percent of GDP as of the fourth quarter of 2015, among the highest in emerging markets. Mortgage loans account for a quarter of total debt and grew at a fast 9.5 percent (y/y) on average during 2007–2015. Consumer loans account for much of the remaining debt, while loans for business purposes account for one fifth of the total. The growth in household debt excluding mortgage loans has slowed down sharply since 2013, reaching 4 percent by end-2018. Nonetheless, the fast pace of increase in debt relative to household disposable income raises concern.

Selected Countries: Household Debt to Disposable Income Ratio

(In percent)

Sources: Bank of Thailand; Datastream; and IMF staff calculations.

2. Debt dynamics were influenced by several factors, including quasi-fiscal measures and macroeconomic developments. Following the 2011 floods, the government introduced a first-car buyer program to boost the auto industry, which increased demand for car loans. The use of credit cards to smooth consumption also expanded rapidly and pushed household debt further up. Economic growth was sluggish during 2013–15, and declines in commodity prices, coupled with a severe drought, hit farmers’ income particularly hard. Moreover, low inflation opened a widening gap between real interest rates and real income growth in recent years. Further deflationary pressures would increase the real cost of servicing the debt, leading to even more unfavorable household debt dynamics in the future.

Thailand: Household Debt-to-Income Dynamics

(In percent of household disposable income)

Sources: Bank of Thailand, Datastream; and IMF staff calculations.

Thailand: Inflation-adjusted Per Capita Income and Consumption

(Index; 1990=100)

Sources: Bank of Thailand, Datastream; and IMF staff calculations.

3. While balance sheets of commercial banks remain sound, other financial institutions are more exposed to vulnerable households. The balance sheets of depository corporations and other financial corporations expanded rapidly during 2007–2015. Among depository corporations, commercial banks played an important role in providing loans to middle- and high-income households. Although consumer NPLs have recently ticked up, they remain relatively low, and commercial banks continue to be well-capitalized and profitable. In turn, SFIs and credit cooperatives have catered more to lower income households, including households in the agricultural sector, in line with their mandate. These institutions also have higher overall exposure to the household sector, with household loans exceeding household deposits. The BOT has recently conducted onsite inspections of all SFIs and found no imminent systemic risks. However, financial soundness indicators in these institutions vary considerably, and two small SFIs are under restructuring. Some SFIs and cooperatives have also seen an increase in households facing difficulties to remain current on loan payments. Although their NPLs have been relatively contained by active refinancing opportunities, developments should be monitored closely.

Thailand: Exposure to Household Sector 1/

(In percent of GDP or otherwise indicated)

Sources: Authorities’ data; and IMF staff calculations.

1/ Total is based on OFCs and ODCs. The latter includes commercial banks (C.B.), DSFIs, and other depository institutions (Other).

4. Against this background, the authorities should consider proactive strategies to address risks form high household debt. Recent developments in the housing market, and risks from search for yield behavior, call for vigilance. As financial conglomerates increase their role in the financial landscape, understanding interconnectivity of financial institutions and addressing systemic risks would help guard against risks to financial stability. Ongoing efforts to transfer the prudential supervision of SFIs to the BOT and enhance coordination among regulators are steps in the right direction. Similarly, expanding data collection and analysis of systemic risks would help better inform any need for tighter macroprudential policies. Moreover, strengthening the resolution framework would help enhance market discipline and mitigate excessive risk taking. Proactive policies would help maintain financial stability.

Appendix VI. Thailand—External Assessment
ThailandOverall Assessment
Foreign asset and liability position and trajectoryBackground. The net international investment position (NIIP) improved steadily from -48 percent of GDP in 2000 to -3 percent of GDP in 2009. Subsequently, higher foreign liabilities raised the NIIP to -23 percent of GDP in 2014. In 2015, the NIIP halved to around -11 percent of GDP due to portfolio investment outflows and subdued FDI inflows amid steadily rising outward investment by residents.

Assessment. The deterioration of the NIIP during 2010–2014 appears to be largely due to valuation changes as, on average, the current account was in surplus. There are limited risks to external debt sustainability as Thailand’s external debt is projected to remain low and net foreign liabilities (as a percent of GDP) are expected to stabilize. The improvement of the 2015 NIIP may not be auspicious as it was mainly driven by portfolio outflows and sluggish FDI. 1/
Overall Assessment:

The external position in 2015 was stronger than warranted by medium-term fundamentals and desirable policy settings.

However, the overall assessment and the size of the 2015 CA gap are subject to a wide margin of error reflecting Thailand specific factors not sufficiently captured in the EBA model, such as political uncertainty and underdeveloped social safety nets. Developments in early-2016, including a continued surplus in the current account amid capital inflows, are not likely to change the overall assessment.

Potential policy responses:

Accommodative macroeconomic policies and the planned boost to public infrastructure will support domestic demand and help lower, the current account gap.

The authorities should continue to allow the exchange rate to move flexibly as a first line of defense against external shocks. Intervention should be limited to smoothing excessive market volatility.

Reserves exceed all adequacy metrics, thus there is no need to –build up reserves for precautionary purposes.

The authorities should reform social safety nets, notably the fragmented health insurance and pension schemes compounded by widespread informality.
Current accountBackground. Thailand’s current account (CA) has been volatile over the last decade, ranging from a 4 percent of GDP deficit in 2005 to a 7¼ percent of GDP surplus in 2009, against a broadly stable trend real appreciation. The current account surplus came down from its peak in 2009 to a deficit of 1¼ percent of GDP in 2013 and rose back to a surplus of 8 percent of GDP in 2015, with imports declining faster than exports amid record low oil prices. The decline in net oil imports between 2014 and 2015 was 2.6 percent of GDP, explaining more than half of the improvement in the CA.

Assessment. In cyclically-adjusted terms, the EBA CA model estimated the 2015 CA at 7.6 percent of GDP and the CA norm at 1.3 percent of GDP. The CA gap of 6.4 percent of GDP consists of a policy gap of 1.5 percent of GDP, of which 0.7 percent of GDP corresponds to domestic policy gaps, and an unexplained residual of 4.9 percent of GDP. The large unexplained residual is likely due to Thailand-specific factors not well captured by the EBA model, including political uncertainty weighing on domestic demand and underdeveloped social safety nets, particularly pensions for informal workers. Considering these factors, staff assesses the CA gap within 1½ to 3½ percent of GDP of the level consistent with medium-term fundamentals and appropriate policies. 2/ The CA gap is expected to narrow over the medium term, as policy stimulus is deployed and private confidence recovers.
Real exchange rateBackground. Barring the global financial crisis, the Thai baht has been appreciating in real effective terms since 2005. The real effective exchange rate (REER) weakened during the Fed’s tapering talk in mid-2013 and started to appreciate from mid-2014. During 2015, the REER appreciated by 2.5 percent on average, while the CA surplus increased. The null contribution of REER appreciation to narrowing the CA gap was likely due to the Thailand-specific factors outlined above, weak domestic demand and imports, the build-up of global value chains, and volatile capital flows.

Assessment. The EBA index REER gap in 2015 is estimated at -2.8 percent; the EBA level REER gap is estimated at -11.2 percent, but with a large unexplained residual. Using an elasticity of 0.6, staff assesses the 2015 REER to be 2.5-6 percent below levels consistent with medium-term fundamentals and appropriate policies.
Capital and financial accounts: flows and policy measuresBackground. The capital and financial account balance has been negative since 2013. In 2015, the negative balance increased to $18 billion due to portfolio outflows in both equity and bond markets and subdued FDI inflows. The authorities continued with financial account liberalization, encouraging outward investment by residents.

Assessment. Up to 2013, Thailand enjoyed overall portfolio inflows benefiting from its strong fundamentals. But from 2013, Thailand has faced headwinds, including the Fed’s interest rate lift-off, China’s slowdown, and political uncertainty. Capital outflows are manageable considering the resilience of the external sector and the flexibility of the baht, partially offsetting the large current account surplus.
FX intervention and reserves levelBackground. The exchange rate is floating with intervention limited to mitigating excessive volatility. International reserves gradually declined from 52 percent of GDP in 2012 to 43 percent of GDP in 2015, but stand at over three times short-term debt, 180 percent of the IMF’s reserve metric unadjusted for capital controls, and 211 percent of the metric adjusted for capital controls.3/ During 2015, reserves declined by around $12 billion, mostly from the net forward position amid persistent depreciation pressures against the U.S. dollar.

Assessment. The decline in reserves suggests possible intervention to mitigate market volatility, but there is no clear evidence of one-sided intervention considering valuation effects from the strong U.S. dollar. Thailand’s gross reserves are higher than the range of IMF’s adequacy metrics and there is no need to build up reserves for precautionary purposes. The exchange rate should continue to move flexibly to serve as a first line of defense against adverse shocks.
Technical Background Notes1/ The valuation effect results from the difference in returns between foreign assets and liabilities. On the one hand, large capital inflows in most years in the period 2005-2012 contributed to the growth of asset prices and baht appreciation. As a result, investment returns accruing to foreign investors increased. On the other hand, a large proportion of Thailand international investment assets consist of foreign exchange reserves, which were mainly invested in foreign government bonds with lower return.

2/ The EBA model has a large (and rising since 2013) unexplained residual for Thailand, likely driven by political uncertainty not captured by available institutional quality indices and measures of global risk aversion. During 2015, political uncertainty and associated weak private sector confidence weighed on domestic demand against the backdrop of high household debt and a cautious adjustment to the sizable oil windfall. Political uncertainty, compounded by prolonged discussions with potential investors, also led to delays in the execution of large public investment projects, with public investment picking up by year-end through shovel-ready projects with relatively low import content. Moreover, the public health expenditure variable may not capture still underdeveloped social safety nets, in particular low minimum pensions accruing to the large informal sector (which accounts for over 50 percent of employment). These factors may increase private sector precautionary savings.

3/ The adjusted metric relies on de jure measures of capital controls. Using these measures to classify Thailand’s capital account openness is problematic, as such de jure indices are not granular enough to measure the extent of capital account liberalization in Thailand and do not capture whether outflow controls are binding. Moreover, recent actions to further liberalize capital outflows are not incorporated in this adjusted metric. Staff considers the unadjusted adequacy metric to be more appropriate.
Appendix VII. Thailand—External Debt Sustainability Analysis

1. Thailand’s external debt is projected to remain relatively low over the medium term, declining from about 33 percent of GDP in 2015 to about 29 percent of GDP in 2021 under the baseline scenario. Stress tests indicate that external debt would remain stable under various shocks, such as a higher interest rate, weaker GDP growth, a lower current account balance, and a one-time 30 percent depreciation of the baht. Under these shocks, the external debt-to-GDP ratio rises somewhat above the baseline over the projection period. In the case of the exchange rate depreciation shock, the debt ratio would rise to about 54 percent of GDP. However, this scenario does not take into account the adjustment in trade flows that would take place if such depreciation were to occur, i.e. a sharp improvement in the current account that would significantly bring down the debt-to-GDP ratio.

Thailand: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data; and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks.

Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

3/ One-time real depreciation of 30 percent occurs in 2016.

1The investment plan would be consistent with debt sustainability even assuming full execution and no payoff in growth. Considering a fiscal multiplier of 0.9, estimated for Thailand integrating the two-way linkages between fiscal policy and economic activity, public debt would peak at 49 percent of GDP in 2019, still below the government’s ceiling of 60 percent of GDP (Appendix 3). If domestic demand were to recover much faster than in the baseline scenario, tax reform and public expenditure prioritization should create space for the infrastructure plan.
2The BOT has successfully used macroprudential tools in the past, including ceilings on LTV ratios on residential properties and varying risk weights on high value loans (B. Nijathaworn, “Macroprudential Policies and Capital Flows: Managing under the new Globalization,” 2010).
3Thailand’s rankings in the World Bank’s Doing Business and the World Economic Forum’s Global Competitiveness indexes slipped in 2015.
1Excludes balances of local authorities, extrabudgetary funds and social security that are all running surpluses.
2Staff assumes a nominal fiscal multiplier of 0.9, estimated for Thailand taking into account the two-way interactions between fiscal policy and economic activity. For details on the methodology, see S. Dodzin and X. Ba, “Estimating Fiscal Multipliers using a Simplified General Equilibrium Model” (forthcoming).

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