This Selected Issues paper on Thailand reviews public investment and investment recovery from financial crises. Thailand is a country with a moderate tax effort, which indicates that increases in public saving should be achieved through a mixture of tax and expenditure measures. Future budgets should accommodate the megaprojects without putting excessive pressures on public finances, inflation, and the external balance. Least present value of revenue (LPVR) auctions alleviate the demand risk inherent in the fixed-term contracts and thus eliminate a key driver for renegotiations and the provision of minimum income guarantees.
The three papers presented here examine investment in Thailand—from both a regional and country–specific perspective—and recent developments and outstanding challenges in the financial sector. In order to raise growth to potential over the medium term, Thailand needs to broaden the sources of growth away from the external sector and toward domestic demand, especially toward public and private investment. Further strengthening the financial sector would also enhance medium–term growth prospects.
Low investment following the 1997 financial crisis is not restricted to Thailand, but is part of a wider regional pattern. Chapter II documents that the post–crisis Asian investment slump is unusually prolonged and deep compared with other crisis episodes. Cross–country regressions using a panel of 85 countries establish that the Asian investment slump is only partly accounted for by overinvestment in the years preceding the crisis. Three alternative explanations are found to be broadly consistent with the empirical evidence: a riskier post–crisis environment, corporate and financial sector weaknesses, and a sluggish nontradable goods sector.
The public sector needs to play a leading role in investment over the medium term, both because of its own contribution to growth and because of its catalytic role in crowding in private sector investment. Chapter III analyzes the opportunities and challenges of implementing large–scale infrastructure investments by the Thai public sector (the so–called “megaprojects”). It argues that given the need to upgrade infrastructure and relieve transportation bottlenecks, and given the fiscal space provided by several years of public sector surpluses and low public debt, efficiently executed megaprojects are amply justified. The chapter also examines country experiences with Public–Private Partnerships (PPPs), which represent one way of using public infrastructure investment to crowd in the private sector.
A decade after the Asian crisis, Thailand’s financial sector has been significantly strengthened, but further reforms are needed to address remaining vulnerabilities, improve regulatory oversight, and broaden and deepen capital markets. Chapter IV provides an assessment of the progress made to date, including improvements in the efficiency and resilience of financial markets; and operational restructuring, better risk management, and lower NPLs in the banking system. Core challenges going forward include reducing distressed assets in banks, and legal reforms to further strengthen the financial system. Such reforms would enhance medium–term growth by easing the transformation of savings—both domestic and international—into domestic investment.