Thailand: Staff Report for the 2015 Article IV Consultation
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International Monetary Fund. Asia and Pacific Dept
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Publication Date:
07 May 2015
eISBN:
9781475519679
Language:
English
Keywords:
ISCR; CR; headline inflation; fuel price reform; U.S. dollar; government; food price inflation; oil price; fiscal year; broad money; Oil prices; Global
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Thailand’s economy is undergoing a modest recovery after a sharp contraction in early 2014, when domestic demand was adversely affected by political unrest.

Abstract

Thailand’s economy is undergoing a modest recovery after a sharp contraction in early 2014, when domestic demand was adversely affected by political unrest.

Overview

1. Political context. Thailand is going through a political transition. A decade of intermittent political conflict and a succession of exogenous shocks have hampered policymaking and weakened economic performance. A military coup in May 2014 ended large-scale social protests in Bangkok and pacified the country, and a modest recovery has taken place. Nonetheless, there is still some uncertainty as to how the polarization in the political system will be resolved even as the authorities indicate that a new constitution will be approved this year and new elections will take place in 2016.

2. Slower growth. Thailand’s growth rate since the global financial crisis has fallen behind those of its neighbors and below its pre-crisis performance.1 The reasons include Thailand’s high openness to trade, which exposed it to the global slowdown; large negative supply shocks, in particular, devastating floods in 2011 and the impact of Japan’s Tohoku disaster;2 slow technological upgrading, with considerable capacity in industries with flagging global demand; the apparent interruption in the flow of workers from agriculture into more productive sectors of the economy; and political instability. Looking forward, a rapidly aging population will generate headwinds to growth.

A01ufig1

Real GDP

(Index, 2007=100)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Sources: World Economic Outlook; and IMF staff calculations.

3. Resilience. Despite a series of large shocks, solid fundamentals have helped maintain macrofinancial stability. Thailand has ample international reserves, and the flexible exchange rate has been an effective buffer against balance-of-payments shocks. The fiscal position is prudent and public debt is moderate. Economic institutions are credible. The banking system is well capitalized, profitable and liquid.

A01ufig2

International Reserves, 2014

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Sources: Haver Data Analytics; and IMF staff calculations.

4. Way forward. The country’s challenge is to reignite growth both in the short run and in the medium term while maintaining stability. While monetary and fiscal stimulus should support economic recovery in the near term, a medium-term strategy is needed to tackle structural challenges and reinvigorate inclusive growth. To address these issues, the government has embarked on a comprehensive reform agenda that cuts across many areas, including education, healthcare, social inequalities, infrastructure investment, and other policies to enhance growth, regional integration, and governance (Appendix I).

Economic Context

A. Macroeconomic Developments

5. Growth. While political instability has affected growth, a tentative recovery has started in recent months. Following the intensification of political unrest starting in November 2013, the economy contracted sharply in the first quarter of 2014. The end of large-scale street protests following the military coup in May 2014 has contributed to an improvement in private sector confidence and a modest recovery. The economy grew by 1.5 percent (yoy) in the second half, with real GDP growth averaging 0.7 percent for the year. With flat final domestic demand and exports and a switch from large inventory accumulation in 2013 to a drawdown in 2014, it was a dramatic import compression (-4.8 percent) that allowed positive GDP growth for the year (Figure 1).

A01ufig3

Quarterly GDP Growth

(Percent change)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Sources: Haver Data Analytics; and IMF staff calculations.

6. Inflation. Core inflation has been stable since April 2014, moving within a very narrow range (Figure 2). However, energy prices declined precipitously starting in the second half of last year, even though the pass-through of lower global oil prices has been offset to a considerable extent by ongoing energy price reform (see ¶17). Food price inflation also slowed dramatically. As a result, headline CPI inflation fell sharply in the last few months and turned negative (-0.4 percent) in January 2015.

A01ufig4

Thailand CPI and Oil Prices

(In percent change, year-on-year)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Sources: CEIC Data Co. Ltd.; and Bloomberg LP.

7. External balance. In recent months, the baht/USD exchange rate has been relatively stable in the face of considerable volatility in global financial markets, while the nominal and real effective exchange rates have appreciated noticeably. The current account balance improved significantly to 3.8 percent of GDP in 2014 from a deficit of 0.6 percent in 2013. The main reason is the sharp drop in the price of oil,3 which more than offset the impact of declines in the prices of Thailand’s export commodities, notably rice and rubber. Import compression was another contributing factor, with real net exports increasing despite a lackluster export performance and a fall in tourist arrivals as a result of the political situation. A financial account deficit roughly offset the current account surplus, and international reserves declined by US$10 billion to US$157 billion over the course of 2014, primarily due to valuation changes.

A01ufig5

Thai Baht Exchange Rates

(Index, 2013=100, increase=appreciation)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Sources: Haver Data Analytics; and IMF staff calculations.

B. Outlook and Risks

8. Outlook. A moderate rebound from a low base is expected for 2015. Private consumption will be supported by pent-up demand and lower fuel prices. Investment should rebound after two years of decline as various government agencies have cleared the backlog of project approvals. Tourism is expected to continue the recovery started in recent months. However, the recovery of domestic demand is expected to be moderate since private investment is hampered by low capacity utilization, weak demand prospects, and political uncertainty, while consumption is held back by high household debt and tighter credit conditions. Moreover, ramping up public investment is taking longer than anticipated. With the economy lacking a strong engine, staff forecast growth of 3.7 percent in 2015. Inflation will largely be driven by oil price dynamics and the government’s energy price policy. In the baseline, headline inflation is expected to pick up by end 2015, but year-average is projected at 0.1 percent.

9. Risks. Risks to the outlook are tilted somewhat to the downside (Appendix II). Domestic risks to the economy come from possible policy slippages, weaker-than-expected private demand, and political uncertainty. External risks include a surge in global financial volatility and protracted slow growth in advanced and emerging economies. On the upside, consumption, investment and exports may experience a stronger boost from lower oil prices.

10. Authorities’ views. The authorities broadly agreed with staff on the outlook. However, they viewed risks to growth as roughly balanced, with downside risks—coming mostly from the external front, particularly from the increased economic and policy divergence across key economies—offset by an upside from faster-than-expected government spending boosting confidence and low oil prices stimulating domestic demand. They also noted that Thailand has sufficient buffers to deal with any potential global financial volatility.

Regaining Momentum while Safeguarding Stability

A. Fiscal Policy—Boosting Potential Growth in a Sustainable Way

11. Recent developments. In 2014, the fiscal position weakened in response to the sluggish economy, earlier-approved tax cuts and other measures. The corporate income tax was reduced from 30 to 23 percent in January 2012 and again to 20 percent in January 2013. Together with the slowdown of the economy, the general government revenue decreased from 24.1 percent of GDP in FY2012/13 to 22.5 percent in FY2013/14.4 At the same time, general government expenditures remained at 24.3 percent of GDP, even as infrastructure spending dropped significantly on account of political unrest. The debt-to-GDP ratio of the overall public sector, including state-owned enterprises (SOEs) reached 45.5 percent in FY2013/14, well below the government’s ceiling of 60 percent. (Figure 3).

Thailand: Fiscal Developments, 2009/10-15/16 1/

(In percent of fiscal year GDP, unless otherwise stated)

article image
Sources: Thai authorities; and IMF staff projections.

Fiscal year runs from October to September

Central Government

12. The FY2014/15 budget. The new government formulated a prudent budget, which gives priority to restoring confidence while keeping the deficit largely unchanged at 2 percent of GDP. Furthermore, with the fiscal stimulus package of about 3 percent of GDP announced in October 2014, the authorities intended to boost spending in the first half of the year, in particular on infrastructure projects, supplemented by carry-over of unspent funds from previous years. Preliminary data suggest that budget execution in the first quarter did not meet the authorities’ expectations.

13. Fiscal strategy. In the current juncture, fiscal policies should support the economic recovery in the context of a medium-term fiscal framework that clearly signals the commitment by the authorities to fiscal discipline. Higher public spending now, in particular on high-return infrastructure, training and other areas that will boost potential growth, should be framed in a multi-year setting that comes along with credible plans for reforms on both the revenue and expenditure side.

14. Medium-term fiscal framework. The mission strongly supports the authorities’ plan to prepare a new fiscal responsibility law (Public Finance Act). The new law should require the formulation of a medium-term fiscal framework by the Cabinet that would show the expected path of public debt as percent of GDP—in staff’s views, the current debt ceiling of 60 percent of GDP prescribed in the Cabinet-approved fiscal Sustainability Framework is appropriate. The framework is also expected to include a fiscal policy statement with a multi-year macroeconomic outlook, fiscal objectives and targets, fiscal risk statement, debt sustainability analysis (see Appendix IV for staff’s DSA) and long-term fiscal projections.

15. Infrastructure projects. Staff welcomes the formulation of a multi-year public investment plan for large infrastructure projects that aim at significantly enhancing connectivity with neighboring countries and reducing logistic costs. Moreover, moving the projects to the budget, both by the government and SOEs, is a welcome development that contributes to enhancing transparency and accountability. The formulation of a medium-term fiscal framework will help strengthen the link between budget and infrastructure investments, which are expected to increase only gradually in the coming years. Given past unsuccessful attempts of ramping up public investments, the authorities should consider carrying out an evaluation of the public investment process with a view to identifying bottlenecks and potential efficiency gains.5

Infrastructure Investment Plans for FY2015–2022

article image
Source: Thai authorities.

16. State-owned enterprise reform. Staff welcomes the authorities’ plan to strengthen transparency and governance of SOEs, and to carry out a strategic review of all SOEs. SOEs play a large role in service delivery, in particular in the transport and energy sectors. Their debt amounts to 9 percent of GDP and 19 percent of total public debt. The authorities’ plan to restructure state enterprises such as the State Railway of Thailand and the Bangkok Mass Transit Authority are opportune, as these entities play an important role in transport infrastructure.

17. Subsidy reform. Staff welcomes the subsidy reforms by the authorities, which have contributed to rationalizing public expenditures while enhancing fiscal transparency.

  • Fuel subsidies. The authorities are implementing an energy pricing reform to reduce large price cross-subsidies between energy sources, while ensuring that the vulnerable population is protected through means-testing procedures (Appendix III). In addition, excises on diesel are being gradually reinstated while LPG subsidies are reduced. The retail price of gasoline has been reduced by passing through the lower international price. Staff welcomes the ongoing energy price reform. The authorities should take advantage of the lower international oil prices to fully reinstate excises, which would generate an additional 0.5 percent of GDP starting in 2015, while continuing to protect vulnerable groups with transfers that are means-tested.

  • Rice scheme. The authorities have abolished the rice pledging scheme that allowed farmers to sell rice at above-market prices to the government, and introduced a new scheme that provides direct cash transfers to small-scale farmers only. This is expected to result in savings of about % percent of GDP per year.

  • Public obligation services. Government transfers to SOEs amount to about 0.8 percent of GDP in the FY2014/15 budget and support the provision of public obligation services at below-cost prices. As part of an effort to enhance fiscal transparency, the authorities should improve the disclosure of public service obligations of SOEs, which could be included in an annual consolidated report that covers fiscal risks.

18. Tax policy. Staff welcomes the authorities’ plan to introduce an inheritance tax while strengthening property taxes, with a view to enhancing the progressivity of the tax system. While these taxes and energy reform are the priorities for now, the authorities should consider, under the medium-term fiscal framework, the gradual increase of the VAT rate to 10 percent, from the current 7 percent, starting only when the economic recovery is well entrenched, while introducing programs to mitigate the impact on vulnerable groups. Higher VAT is critical to bring the fiscal balance back towards equilibrium over the next few years, by offsetting the revenue loss from the recent reduction in personal and corporate income taxes. It would also allow for higher infrastructure spending and for the needs of an aging population in the coming years.

19. Tax administration and tax expenditures. The authorities are undertaking a strategic review of the tax administration, in particular the Revenue Department, and have initiated a technical dialogue on this issue with the Fund. In the face of a changing environment, there are opportunities to improve the core tax administration processes, including those for registering taxpayers, filing and processing tax returns and payments, and collecting tax arrears.

20. Authorities’ views. The authorities broadly agreed with the staff view of the overall strategy.

  • The authorities emphasized that the short-term priority is to stimulate the domestic economy through expansionary fiscal policy, while committing to fiscal discipline by adopting new legislation on fiscal responsibility, drawing on international best practices. They noted that the FY2015/16 budget, which is currently under consideration, envisages an increase in the allocation of funds for capital expenditures. At the same time, the authorities reiterated the importance of striking the right balance between speedy spending and the need to ensure high transparency. The review of the governance of state enterprises is also underway, with the “The State Enterprises Policy Committee6” taking the lead in proposing the restructuring of some entities.

  • The authorities noted the sensitivity in raising the VAT rate, while recognizing the need to enhance tax revenue in a medium-term setting. They agreed that a sustained economic recovery is necessary before increasing the VAT rate.

B. Monetary Policy—Supporting Growth in a Low-Inflation Environment

21. Policy stance. While the current monetary stance is accommodative, there is scope for further easing if the recovery is weaker than anticipated. The Bank of Thailand (BOT) cut the policy rate by 25 basis points in November 2013 and March 2014 to support the economy during the period of heightened political unrest, and has maintained the rate at 2 percent since then (Figure 4). Under current policies, the large negative output gap (estimated at -2.8 percent in 2014) is projected to close only gradually. With negative headline inflation, moderate core inflation, and noticeable slowdown in credit growth, further easing may be justified if fiscal stimulus is slow to materialize or if private sector response disappoints. In light of the banks’ tightening of lending standards, in staff’s views a lower policy rate would not exacerbate financial stability risks, including from a rapid acceleration in consumer loan growth.

A01ufig6

Thailand’s Policy Rate

(In percent)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Sources: Haver Data Analytics; and IMF staff calculations.

22. Inflation target. The Cabinet has approved the use of headline inflation instead of core inflation and has set the target for the year-average CPI inflation at 2.5±1.5 percent for 2015. If inflation falls outside the band, the BOT is to provide an explanation for the deviation, its expectation regarding the timing of returning inflation to the target band, and contemplated monetary policy response in an open letter to the Minister of Finance. In fact, as headline inflation turned negative in January, BOT issued a letter in which it ascribed the negative inflation to a sharp one-off fall in oil prices and sought to dispel concerns about generalized deflation by emphasizing the stability of inflation expectations. It also highlighted the positive impact of the terms-of-trade improvement on the economy and the long lags in monetary policy transmission and concluded that its current accommodative stance should help lift headline inflation back within the target band by year-end. Staff welcomes the switch to using headline inflation target, which is likely to facilitate communication with the public by focusing on the most relevant and best understood measure. On the other hand, the focus on the year-average measure of inflation may present communication challenges. In addition, given the lags in monetary policy transmission and the importance of anchoring expectations, setting indicative targets beyond the one-year horizon could be considered.

23. Authorities’ views. The authorities viewed the current monetary policy stance as sufficiently accommodative given the steady path of economic recovery in 2015. They agreed that the cyclical stance of the economy suggested a need for stimulus, but believed that fiscal measures would be the main factor supporting the economic recovery, while the effectiveness of monetary policy transmission may be weakened in the current environment of low interest rate. They were also concerned about unintended consequences of lower rates on financial stability. The authorities explained that setting headline inflation as the monetary policy target would help facilitate central bank communication and therefore anchor public inflation expectations more effectively. In addition, targeting annual average inflation would provide them additional flexibility in dealing with temporary shock, but does not preclude monitoring and, if warranted, reacting to monthly inflation numbers.

C. Maintaining External Resilience

24. Current account. The current account surplus is expected to rise somewhat in 2015 due to lower oil prices, and then decline in the medium term.

  • Export growth has slowed significantly since 2012 on account of weaker global demand, government’s intervention in the rice market, and lower commodity prices. Thailand’s export share in global markets has declined slightly since early this decade, indicating emerging competitiveness problems. These problems can be partially observed in a declining share of electronic products in total exports, which was not fully offset by an increase in automotive exports. Looking forward, exports are projected to grow only modestly on account of weak global demand.

  • The rapid growth of tourism, in particular from China, has been the main driver of service exports, although political unrest adversely affected tourism in 2014. However, tourism appears to be gaining momentum as shown by a strong recovery in tourist arrivals in December 2014.

  • Imports fell sharply in 2014, due to the decline in oil prices, but more importantly to a sharp demand contraction. Going forward, a gradual recovery in imports is expected with the implementation of public infrastructure programs and recovery of oil prices.

Thailand Imports

Percent of GDP

article image

25. Capital and financial account. The capital and financial account balances have deteriorated in the last two years. Overall, the capital and financial account registered a deficit of about US$15 billion in 2014.

  • Foreign direct investment (FDI) remains the largest form of capital inflows. Inward FDI declined from US$13 billion in 2013 to US$12 billion in 2014, while outward FDI remained at US$7 billion in 2013 and 2014. As a result, net FDI turned positive in 2013 and 2014 (from a deficit in 2012). The government has taken steps to encourage inward FDI and liberalize outward FDI. These steps may contribute to more startup of newly approved foreign investment projects and a sustained increase of Thai FDI, especially to China and neighboring countries.

  • Recent trends in portfolio flows to Thailand have been similar to those in other industrialized ASEAN countries, driven mainly by changing risk appetite of investors. Although there were net portfolio outflows in 2014, Thailand’s bond and equity markets remained resilient.

  • The net international investment position (NIIP) deteriorated from -2 percent of GDP in 2009 to -18 percent of GDP in 2013. Given the overall current account surplus during that period, the deterioration likely reflects valuation effects and data revision. Going forward, the NIIP is expected to remain broadly stable in the medium term.

26. External sector assessment. Thailand’s 2014 current account (CA) and real effective exchange rate (REER) are close to levels consistent with medium-term fundamentals and appropriate policies. This assessment is based on the External Balance Assessment (EBA), a regression based model analysis, and incorporates the impact of oil price declines and delayed public investment in 2014 (Appendix VI). While the CA surplus is expected to widen in 2015 on account of lower oil prices, it is expected to narrow to balance in the medium term. The REER is within a range of ±5 percent of the equilibrium level. The international reserves stand at 213 percent of the Fund’s reserve adequacy metric. Thailand’s external debt is projected to remain relatively low over the medium term, gradually declining from 37.9 percent of GDP in 2014 to 33.6 percent of GDP in 2020 (Appendix V).

27. Regional integration. Thailand is increasingly taking advantage of its geographic location by intensifying its integration with Cambodia, Laos, Myanmar, and Vietnam (CLMV) and southern China (Appendix VII). Multilateral infrastructure projects are improving the mobility of goods and labor, while rapid growth in the neighboring economies has already expanded markets for Thai goods and services. Both Thai and foreign companies have relocated some basic processing and assembly activities to Special Economic Zones (SEZs) in the neighboring countries to take advantage of lower labor cost in those countries. Some Thai conglomerates have become globally competitive, and the launch of the ASEAN Economic Community (AEC) in 2015 may provide new opportunities for investment and trade, including the reduction of tariffs for Thai goods in neighboring CLMV countries.

28. Authorities’ views. The authorities project that the current account in 2015-20, while remaining in surplus, will decline gradually toward near-balance. They expected the financial account, especially foreign portfolio flows, to remain volatile mainly due to volatility in global financial markets. However, Thailand’s strong local investor base, both institutional and retail, should enable orderly adjustments. The flexible exchange rate provides an important first line of defense against external shocks. The authorities noted that Thailand’s competitiveness has been deteriorating and Thailand has been losing its share of FDI relative to regional peers. However, the prospects are promising as they are supported by strong fundamentals, planned public infrastructure projects, geographical advantages, and the (Thai) Board of Investment’s (BOI) new approach to investment incentives. The recently established SEZs in five border provinces facilitate regional integration.

Strengthening Financial Stability Framework

29. Financial landscape. Thailand’s financial landscape has changed since the global financial crisis. The financial sector in Thailand is large, with assets near 359 percent of GDP. Commercial banks assets account for 128 percent of GDP, higher than in Indonesia and the Philippines (Appendix VIII). Growth in non-commercial banks financial assets has outpaced that of commercial bank assets since 2008. As a result, while commercial bank credit-to-GDP ratio increased from 99 percent in 2007 to 128 percent in 2013, total financial institution credit rose from 154 percent of GDP to 197 percent in the same period. In particular, non-commercial-banks, including SFIs and non-bank financial institutions (NBFIs), provided almost 60 percent of household loans. Moreover, credit cooperatives, as a whole, have become a non-negligible player, with their assets equal to 13 percent of total credit of commercial bank and SFIs in 2013 (Figure 6).

A01ufig7

Financial Sector Assets and Bank Assets

(In percent of GDP)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Sources: Bankscope; Bloomberg Ltd.; and Bank for International Settlements.Note: All financial institution assets include assets of commercial banks and non-commercial banks; financial sector assets include all financial insitution assets, stock market capitalization, and debt securities.

30. Interconnectedness. The interconnectedness among financial institutions on both the domestic and external fronts has risen. For instance, other depository corporations, including commercial banks, have become net borrowers from other financial corporations and from abroad since early 2008, with total borrowing amounting to about 18 percent of their liabilities at end-2014. Non-commercial-banks, including SFIs and credit cooperatives, are borrowing from the interbank money market, with 17 percent of SFI liabilities and 23 percent of credit cooperatives liabilities being funded by other financial institutions. However, credit cooperatives are less well regulated and supervised, and in general have weaker profitability than commercial banks.

A01ufig8

Credit Standards

(Last 3 months, 0+=easing)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Sources: Bank of Thailand; and Haver Data Analytics.

31. Credit. As noted, total financial institution credit rose from 154 percent of GDP in 2007 to 197 percent in 2013. In the last two years, however, credit growth has slowed considerably, whole Thai corporate foreign currency borrowing has also declined since 2013. Both supply and demand factors have played a role. On the supply side, banks and SFIs have become more cautious in their lending standards to households and small and medium enterprises (SME), while the expiration of tax incentives for car purchase, lower investment and high household debt have dampened credit demand. Market observers have noted that Thai corporates have a cautious approach to borrowing due to the lessons from the Asian financial crisis. In view of the slowing credit growth, low share of real estate loans, and no apparent real estate boom, staff does not see a need to tighten macroprudential policies despite the low-interest-rate environment. Looking forward, credit is expected to provide a smaller contribution to growth given the high leverage of households.

32. Commercial banks. Commercial banks weathered the global financial crisis and political turmoil well. Banks appear to be well capitalized, liquid, and profitable. While nonperforming loans (NPLs) are rising, they remain low, and commercial banks appear well prepared to deal with them. Banks are also expected to be able to handle well even higher NPLs if an economic downturn where to lead to debt repayment problems, including from low income households that appear to be over indebted. Basle III regulations on capital have been implemented. However, liquidity risks have risen as seen in the high loan-to-deposit ratio and higher reliance on wholesale funding. While commercial banks have become more cautious in lending to households and SMEs, they do not face capital or liquidity constraints to expand credit (Figure 7).

33. Household debt. After rising very fast for a number of years, the growth of household debt has moderated. Thailand’s household debt-to-GDP ratio rose from 55 percent in 2007 to 84 percent in 2014. Commercial banks provided only about 40 percent of household loans, while SFIs and NBFIs supplied the rest. More than two thirds of household loans were used for consumption (including purchases of cars and other durables), farming, and business, with the remainder used to buy real estate and land. The authorities should strengthen monitoring the quality of consumption loans, whose collateral value tends to be lower than that of housing. Mirroring the relatively low share of real estate loans, Thailand has not gone through a real estate boom in recent years, except in selected urban locations. Mitigating the risks are strong financial buffers, with household financial assets at about twice the level of household debt. Household savings increasingly go to other forms of financial instruments and vehicles, such as retail bonds and mutual funds (Figure 8).

34. Corporate sector debt. Nonfinancial corporates appear to have reduced their bank loans in recent years, partly due to the availability of alternative financing—domestic bonds and debentures, as well as external loans and international debt securities. The currency mismatch risk has receded with the declining share of foreign currency borrowing in total debt issuance after 2012. At the same time, some Thai conglomerates have undertaken rapid debt-financed external expansions in recent years. The authorities need to remain vigilant to this trend, mindful that cross-ownership of related firms could result in opaque balance sheets.

A01ufig9

Foreign Currency Borrowings of Non-Financial Corporates

(In percent of total, year-to-date)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: Dealogic.Note: Includes both issuance of syndicated loans and bonds by non-financial corporations.

35. Regulation of non-commercial-banks. SFIs and NBFIs represent a large and growing segment of the Thai financial sector. SFIs are interconnected with commercial banks via interbank loans and exposure to the same customers. Staff welcomes the authorities’ plan to extend the BOT’s supervisory and regulatory mandate to SFIs and encourages them to adopt an operational plan swiftly. At the same time, the authorities should undertake a strategic review of the SFIs, including their mandate, services, and financial operations with a view of clarifying their mandates and focusing their operations in areas not covered by commercial banks. Given that SFIs face different legal frameworks, a separate transitional plan is likely to be needed for each. In addition, credit cooperatives, whose role and interconnectedness within the financial system are on the rise, are regulated by the Ministry of Agriculture (MOA), which appears to have insufficient supervisory resources to oversee large credit cooperatives. Therefore, supervision of credit cooperatives should be strengthened substantially, including through the technical assistance of the BOT to the MOA.

36. Financial stability framework. Staff welcomes the steps that the BOT has taken to strengthen the financial stability framework, including the publication of Financial Stability Reports (FSRs) and the establishment of a Financial Stability Committee. In the latest FSR, the BOT’s stress test of an interest rate shock (amounting to 2 percent) suggested that Thai firms can withstand this shock, even as loan growth would slow down and banks’ nonperforming assets would increase somewhat. Staff encourages the authorities to strengthen data collection to close data gaps in non-commercial banks. In addition, staff urges vigilance regarding financial risks related to household debt and large Thai conglomerates. Finally, the authorities should review the crisis management framework including the modalities for liquidity provision and bank resolution, as well as the protocols for information sharing and policy coordination among various financial regulators.

37. Authorities’ views. The authorities see the main risk as over-indebtedness among low-income households that borrowed from SFIs, while they believe that middle- and upper-middle income groups may still have borrowing space. The authorities have placed high priority on strengthening the work on financial stability as a strategic objective, including monitoring, mitigating, and managing systemic risks. To this end, they have created a Financial Stability Committee within the BOT that is tasked with systemic risk monitoring and mitigation. This committee is composed of high-level executives from relevant departments such as monetary policy, financial markets operations, financial institutions policy, banking supervision, and others. In addition, the two FSRs, which were published in 2013 and 2014, identified credit risks from household and SME loans with domestic consumption-related businesses as the main risks to the financial sector. To strengthen the effectiveness of financial surveillance, the BOT encourages the savings and credit cooperatives to include their clients in the national credit bureau database. By linking with this database, the cooperatives will benefit from information supplied by other financial intermediaries.

Reinvigorating Inclusive Growth

38. Structural challenges. Thailand faces rapid population aging, with the dependency ratio expected to trough this year and then start rising swiftly (Appendix IX). Nearly 40 percent of the labor force is employed in low-productivity agriculture, and the reallocation of resources to higher value-added sectors appears to have stalled (Appendix X). A significant share of Thailand’s export capacity is in electronics, with some products facing low global demand growth (hard disk drives, fax machines, digital cameras). While Thailand’s ranking in overall global competitiveness is strong (31 of 144), it ranks much lower on innovation, technological readiness, and education quality.7

39. Avoiding the middle-income trap. Increasing productivity growth is crucial, and can be achieved through several complementary channels. Implementing the ambitious public infrastructure investment plans will alleviate bottlenecks and boost connectivity within Thailand and with neighboring countries. Putting greater emphasis on practical subjects and cognitive skills in schools, improving teacher standards, and aligning vocational training with labor market demand would prepare the workforce better for the challenges of the modern economy.8 The welcome replacement of rice and rubber price guarantees with targeted transfers should encourage movement of farm workers to higher-productivity sectors.

40. Addressing demographic challenge. There is scope to offset the impact of unfavorable demographics by raising participation rates and by facilitating immigration. Older persons, whose share in the population is rapidly increasing, may be induced to stay employed longer by more flexible and accommodative working arrangements. The mandatory retirement at age 60 for government employees should be reconsidered. In addition, Thailand would benefit from streamlining its immigration system and opening its doors to more migrants.

41. Authorities’ views. The authorities emphasized that Thailand is in the process of laying a more solid foundation to future growth potential through numerous reforms aimed at modernizing the economy. A new 7-year strategic plan launched by the Board of Investment incentivizes R&D and innovation and promotes high value-added manufacturing. The ongoing public infrastructure program will help eliminate logistic bottlenecks. A plan to improve access to finance by SMEs will create an enabling environment to facilitate structural transformation of the economy. SOE reform will improve their efficiency and transparency. The authorities also noted that the mandatory retirement age has already been raised for some categories of civil servants and a broader increase is under discussion.

Staff Appraisal

42. Outlook. The economy is recovering gradually from the disruption inflicted by a series of shocks, including political unrest. A recovery in domestic demand is projected to boost GDP growth by 3.7 percent in 2015, but with public investment projects slow to take off the ground and a weak global environment, the economy is still lacking a strong engine of growth, and risks are to the downside.

43. Policy overview. Both monetary and fiscal stimuli are needed in the near term to support the fledgling economic recovery. Over the medium term, fiscal consolidation and structural reforms are essential to accelerate growth, while maintaining stability.

44. Fiscal policy. Staff welcomes the ongoing energy price reform aimed at eliminating price distortions and replacing price subsidies with targeted income support. In the same vein, replacing price support for rice and rubber with transfers to needy farmers will reduce price distortions and increase fiscal space. Staff endorses the broad strategy of providing fiscal stimulus in the near term, particularly by accelerating infrastructure investment, followed by consolidation within a medium-term framework. Raising the VAT rate once the recovery is firmly entrenched will be essential for strengthening the revenue system and capping the public debt within the government’s ceiling in the face of the ambitious public investment program.

45. Monetary policy. With the economy still below potential, the current accommodative monetary policy stance remains appropriate. However, further easing of the monetary stance may be considered if fiscal stimulus is weaker than expected and the economic recovery remains sluggish. Staff endorses the transition from targeting core to headline inflation, as it will facilitate communication and enhance accountability.

46. External sector. An improvement in the terms of trade has boosted the current account in the short term. The exchange rate reacted flexibly to domestic and external shocks, including volatile capital flows. On the whole, the baht has been broadly stable against the U.S. dollar over the course of 2014, but has appreciated in nominal and real effective terms, particularly since July. Both the current account balance and the real exchange rate are assessed to be close to levels consistent with medium-term fundamentals and appropriate policies.

47. Financial sector. Credit growth has slowed, but the degree of interconnectedness in the financial system has increased and remains a source of vulnerability. Staff welcomes the recent measures to enhance financial stability, including the publication of the Financial Stability Report and the extension of BOT’s regulation and supervision to include SFIs and the formation of the Financial Stability Committee. At the same time, the oversight of the fast-growing credit cooperative sector needs to be strengthened.

48. Structural policies. The government has taken a number of important structural measures to reduce price distortions, enhance public infrastructure, promote high-value-added manufacturing, boost regional integration, and improve education and training that are likely to spur productivity growth and lift inclusive growth over the medium term. In light of the tight labor market, the authorities should consider measures that would offset the impact of population aging on labor supply, including raising the mandatory retirement age for civil servants and regularizing migration from neighboring countries.

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

Figure 1.
Figure 1.

Real Sector Developments

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Figure 2.
Figure 2.

Inflation and Capacity Indicators

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Figure 3.
Figure 3.

Public Finances

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Figure 4.
Figure 4.

Monetary Policy Instruments

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Figure 5.
Figure 5.

External Sector

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Figure 6.
Figure 6.

Financial Sector Developments

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Figure 7.
Figure 7.

Financial Soundness Indicators

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Figure 8.
Figure 8.

Asset Prices and Private Debt

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Figure 9.
Figure 9.

Structural Challenges

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Table 1.

Thailand: Selected Economic Indicators, 2010–15

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

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.

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, 2009–20

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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, 2010–20 1/

(In billions of U.S. dollars, unless otherwise specified)

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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, 2008–14

(In billions of baht, unless otherwise stated)

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Sources: CEIC Data Co. Ltd.; and IMF staff calculations.
Table 5.

Thailand: Medium-Term Fiscal Scenario, 2010/11–2019/20 1/

(In percent of fiscal year GDP, unless otherwise stated)

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Source: IMF Staff estimates and projections.

The fiscal year runs from October 1 to September 30.

Public enterprise balance has been changed to numbers and projections based on GFS numbers.

Public debt includes any debt incurred by the central government, extrabudgetary funds or autonomous agencies, and state-owned enterprises. Special financial institutions’ debt guaranteed by government is also included.

Fiscal basis; differs from national account.

Table 6.

Thailand: Banks’ Financial Soundness Indicators, 2009–14

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Source: IMF, Financial Soundness Indicators database.

Appendix I. Reform Agenda

Reforms. The authorities are currently working on a broad set of reforms through the national reform council- a deliberate forum created to analyze and prepare reforms to the legislative body called The National Legislative Assembly.

Scope and timeline. The government envisages moving forward in three phases and has identified 11 areas for undertaking policies, some of which would lead to reforms. The first phase, which was completed by the Military leaders that comprise the National Council for Peace and Order before the formation of the current government, aimed at pacifying the country after a period. The second phase began with the promulgation of the interim constitution in July 2014 and the ensuing formation of the National Legislative Assembly and the Council of Ministers. The third stage will see the organization of a general election under a new Constitution. Under this broadly-defined timeline, the government intends to undertake policies and reforms in 11 areas that cut across a large spectrum of issues that Thailand is facing.

11 areas of policies under the new government

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Source: Thai Authorities

Economic agenda. In the area of enhancing economic potential, the government has announced its intentions to push for many of the long-awaited reform agendas that they view as critically important in enhancing Thailand’s competitiveness, while addressing social inequality. Reforms mentioned cover such areas as energy prices (Appendix III), the tax structure, transport infrastructure, management of state enterprises, and promotion of innovation and industries with high value-added sectors.

Appendix II. Thailand—Risk Assessment Matrix

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“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. Energy Price Reform in Thailand

Background. Thailand has a long history of controlling prices for economically or socially important energy products. The oil shock of 1973 resulted in the creation of an Oil Fund to smooth price swings. Socially sensitive fuels, in particular, diesel and Liquefied Petroleum Gas (LPG), have been subsidized through the Oil Fund or exempted from excise taxes. More recently, biofuels such as gasohol have benefited from lower taxes as a means of diversifying the fuel supply and promoting domestically produced energy products.

Impact. Price controls have resulted in distortions in energy consumption, including a shift from gasoline to diesel by automobile users and illegal use of subsidized LPG intended for cooking by the industrial sector. A surge in global oil prices led to the depletion of the Oil Fund balance, which reached a deficit of 9 billion baht end-July 2014. Furthermore, excise taxes were reduced, which led to a significant loss of fiscal revenue. Excise taxes on diesel, for example, were cut from 5.841 baht/liter to 0.0055 baht/liter in 2011, as a means of keeping domestic retail prices relatively stable even as international prices rose. The excise tax exemption on diesel alone is estimated to have cost 100 billion baht (about 1 percent of GDP) per year in terms of revenue shortfall.

Reforms. The previous government started to adjust the LPG price in 2011. While LPG price for low-income household was maintained constant at B 18.13/liter, the price for industry and automotive use was gradually raised over a period of one year by reducing subsidies. In September 2012, LPG price for industry and automobile use had reached B 30.13/liter and B 21.38/liter, respectively.

The current government, as part of its reform agenda, has been pursuing additional reforms in the energy price sector with the objective to eliminate large price cross-subsidies between energy sources, while ensuring that the vulnerable population is protected.

This has been implemented by reducing subsidies and reinstating excises and Oil Fund levies on fuels such as diesel and LPG. Excises and Oil Fund levies on other fuels have been reduced. As a consequence, the deficit of the Oil Fund was eliminated by November 2014. At the same time, lower international prices have been passed through to retail prices to a varying degree. The retail price of gasoline, which was 50 percent higher than that of diesel at the beginning of September 2014, is now 35 percent higher (as of January 30, 2015). LPG prices, which differed according to final use, have been unified with the exception of a subsidized price for vulnerable groups. LPG price for low-income households and street food vendors have been kept constant at B 18.13/liter, subject to means tested measures. In addition, low-income households enjoy free electricity up to 50Wh a month.

Below is a summary of recent developments.

  • Gasoline. The decline in the international price was partially passed through. As the average cost of gasoline declined by B 11/liter (from B 23.65/liter to B 12.89/liter) between September 1, 2014 and January 30, 2015, the retail price also declined by B 11/liter (from B 44.86/liter to B 33.96/liter).

  • Diesel. The lower international oil price was partially passed through to retail prices. While the average cost of diesel declined by B 10/liter between September 1, 2014 and January 30, 2015 (from B 24.46/liter to B 14.22/liter), the retail price declined by B 5/liter (B 29.99/liter to B 24.16/liter). This is due to the partial reinstatement of the excises (from B 0.83/liter to B 3.58/liter) and Oil Fund levies (from B 1.25/liter to 3.60/liter). The current excises (B 3.58/liter) are still below what they used to be before 2011 (B 5.84/liter).

  • Liquefied Petroleum Gas. The differentiation of retail prices according to use (industry, cooking, automobile, and low-income households) is reported to have resulted in the surge of illegal use of subsidized LPG by certain sectors. This has led to the introduction of means-testing that requires low-income households and street food vendors to register with the Ministry of Energy in order to benefit from the subsidized LPG (B 18.13/liter). Furthermore, LPG prices were unified in January 2015 into a single price (B 24.16/liter). While this meant lower LPG price for the industry (from B 29.33/liter to B 24.16/liter), prices went up for the other uses (for cooking, from B 22.63/liter to B 24.16/liter; and for automobiles, from B 21.38/liter to B 24.16/liter). LPG retail prices for all uses are now above the average cost (B 14.48/liter).

Price Structure of Gasoline, Diesel and LPG 1/

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Source: Thai authorities

For gasoline and diesel, prices are in baht/liter. For LPG, prices are in baht/kg.

Include both the state and municipal taxes.

Conclusion. Staff welcomes the energy price reforms by the authorities, which would contribute to rationalizing public expenditures and enhancing fiscal transparency. While the reform is still ongoing, it has already resulted in less price differentiation across different fuels while increasing the fiscal revenue. The Oil Fund balance strengthened by 0.2 percent of GDP between July and December 2014, turning from a deficit of B 7 billion into a surplus of B 15 billion. Excise tax and import duty on petroleum products also increased. If the reform is fully implemented, revenue from the excise tax and import duty on petroleum products is expected to increase by close to 1 percent of GDP (from 0.6 of GDP in 2014).

Appendix IV. Thailand—Public Debt Sustainability Analysis

1. Background. The debt sustainability analysis (DSA) framework for market access countries is used to assess Thailand’s debt sustainability. The new framework 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) a stochastic debt projection taking into account past macrofiscal volatility; and (v) a standardized summary of risks in a heat map.

2. Macroeconomic assumptions. After the slowdown of the economy in 2014 on account mostly of the political instabilities, real growth is projected to average 4 percent in the medium term.

3. Fiscal assumptions. In staff’s baseline projections, overall public sector deficit will gradually increase from 1.9 to 2.6 percent of GDP between FY2015 and 2019 before coming down to 2.5 percent in FY2020. Regarding the planned infrastructure programs, staff assumes an implementation rate of 50 percent compared to the planned disbursement schedules.

4. Data coverage. Coverage of public debt in Thailand is fairly large. In addition to the central government, nonfinancial State Owned Enterprises (SOEs) and Specialized Financial Institutions (SFIs) are also covered, with the latter limited to debt with government guarantee. Local authorities’ debt is not included in the public debt and excluded from this DSA.

5. Realism of baseline assumptions.

  • The median forecast error for real GDP growth during 2005-2013 is -2.2 percent of GDP and may look relatively large at first glance. However, this was the period during which Thailand went through a series of unexpected shocks that had significant impact on the growth, such as the Global Financial Crisis, the flood in 2011 and more recent political unrests.

  • Past assumptions on primary balance and inflation are comparable to other countries.

6. The DSA framework suggests that Thailand’s public debt is likely to remain sustainable in the medium term under various sets of macroeconomic and fiscal shocks. However, vigilance is needed to ensure that risks stemming from financial sector contingency liabilities are well contained.

  • Under the baseline1, the debt-to-GDP ratio is projected to hover around 47 percent of GDP, which is below the government’s ceiling of 60 percent and far below the benchmark of 70 percent. This contrasts with the historical scenario under which the debt-to-GDP is reduced steadily to about 38 percent in FY2020 on the back of sustained fiscal surplus and a stronger growth.

  • The fan chart, which incorporates feedback effects between 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 will 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, growth shock has the largest impact on debt ratios. Real GDP growth is reduced by 10-year historical standard deviation (4 percent) for two consecutive years from FY2015, resulting in a deterioration of the primary balance. This leads to higher interest rate and lower inflation (0.25 percentage point per 1 percent of GDP worsening of the deficit). The consequence is that the debt-to-GDP ratio reaches close to 54 percent of GDP in FY2020, but still below the government’s ceiling of 60 percent and far below the benchmark of 70 percent.

  • Financial sector contingent liabilities shocks 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 14 percent of GDP. If the shock is augmented to include SFIs, the government spending increase jumps to 18 percent of GDP. These shocks are combined with an increase in interest rate (0.25 percentage points per 1 percent of GDP worsening of the deficit) and one standard-deviation shock to growth. By 2020, the debt-to-GDP ratio reaches 66 percent. Under an augmented shock scenario that involves SFIs in addition to the commercial banks, the debt-to-GDP ratio reaches 71 percent. While these scenarios may entail low probability, they underscore the importance of enhancing the regulatory frameworks on financial institutions, including SFIs.

7. Heat map.

  • Despite its low share of foreign currency-denominated and short-term debt in the public debt, Thailand faces risks arising from its external financing requirement (defined as current account balance plus amortization of the country’s total short-term external debt at remaining maturity) and large share of public debt held by foreigners. At 17 percent, the external financing requirement exceeds the upper threshold of early warning benchmarks (15 percent) but the large official foreign reserves of more than 40 percent of GDP provides comfortable buffers.

  • The share of the public debt held by foreigners (including official lenders such as the World Bank) is 17 percent of total, slightly exceeding the lower threshold of early warning benchmarks (15 percent). The existence of a well functioning domestic bond market underpinned by a wide group of investor types provides some comfort in this regard.

A01ufig10

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

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: IMF staff.1/ 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.
A01ufig11

Thailand Public DSA - Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: IMF staff.
A01ufig12

Thailand Public DSA - Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: IMF Staff.1/ Plotted distribution includes 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.
A01ufig13

Thailand Public DSA - Stress Tests

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: IMF staff.
A01ufig14

Thailand Public DSA Risk Assessment

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

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, 20-11-14 through 18-2-15.

Appendix V. Thailand—External Debt Sustainability Analysis

Summary. Thailand’s external debt1 is projected to remain relatively low over the medium term, gradually declining from 37 percent of GDP in 2014 to 33 percent of GDP in 2020. Stress tests indicate that external debt would remain stable under various scenarios including weaker GDP growth, a lower current account balance, and a one-time 30 percent depreciation of the baht. Under most of these stress scenarios, the external debt-to-GDP ratio rises somewhat above the baseline over the projection period. In the case of the exchange rate depreciation scenario, the debt ratio would rise to about 56 percent of GDP. However, this scenario does not take into account the adjustment that trade flows would have if such a depreciation were to occur, i.e. a sharp improvement in the current account that would significantly bring down the debt ratio.

Figure B1.
Figure B1.

Thailand: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

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 2015.

Appendix VI. Thailand—External Assessment

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Appendix VII. Thailand’s Regional Integration

Regional integration between Thailand and the Cambodia, Laos, Myanmar, and Vietnam (CLMV countries) has proceeded at a fast pace in the last decade. This dynamic integration process can be seen from various perspectives, including trade, investment, migration, and the ASEAN Economic Community (AEC).

Trade. Trade integration between Thailand and CLMV countries has proceeded at a fast pace. Although demand for Thailand’s exports from China, Japan, and ASEAN-4 fell, Thailand’s exports to CLMV expanded in 2014. As a result, the shares of Thailand exports to CLMV countries continued to rise. In particular, Thailand’s exports to Cambodia and Laos as a share of total Thai exports have almost tripled in the last decade and have increased more than 70 percent in the last four years. At the same time, Thailand’s imports from CLMV countries as a share of total Thai imports have also been rising steadily, albeit at a slower pace than exports. In particular, both Laos and Myanmar’s exports to Thailand as a share of total Laos and Myanmar’s exports reached more than 33 percent in 2013.

FDI. Thailand and the CLMV countries have also witnessed rapid growth in bilateral direct investment. More than 10 percent of Thailand outward FDI is destined to CLMV. Moreover, after receiving inward FDI from CLMV countries during 2009-10, Thailand inward FDI from CLMV countries turned negative, indicating CLMV’s investment flowing from Thailand back to CLMV. These developments show that Thailand has been playing an increasingly active role in promoting investment integration with CLMV countries.

Migration. CLMV countries are the main source of foreign workers in Thailand, with Myanmar accounting for two thirds of all immigrants. In turn, Thailand has become a major migration destination for Cambodia, Laos, and Myanmar. For instance, there were 1.8 million registered immigrants (mostly from Myanmar) and approximately 1 million unregistered immigrants.

AEC. The ASEAN Economic Community will further promote integration between Thailand and CLMV countries. Bold steps forward in regional integration, especially further cuts in tariffs and elimination of behind-the-border barriers, could reap substantial dividends for Thailand and CLMV countries, including upgrading of the service sector. Progress with integration can also help unlock structural reforms yielding further gains. Looking forward, the AEC is expected to help transform ASEAN into a region with free movement of goods, services, investment, skilled labor, and freer flow of capital.

A01ufig15

Integration with CLMV countries

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Appendix VIII. Global Liquidity Transmission and the Changing Financial Landscapes in the ASEAN-5 Countries

The transmission of global liquidity has changed the financial landscapes in the ASEAN-5 countries (Thailand, Indonesia, Philippines, Indonesia, and Singapore, ASEAN-5) in the last decade, which in turn, has led to changes in financial stability risks. Policymakers should strengthen liquidity management, enlarge regulatory perimeters to include non-commercial-banks, and establish a formal and transparent financial stability framework.

Global liquidity expansion. Global liquidity has been expanding since early 2000s, and the strong post-crisis monetary policy easing by major central banks spurred a further surge. The money supply of the G4 (the United States, the United Kingdom, Euro Area, and Japan) - a proxy for global liquidity—rose from US$ 15 trillion in 2000 to US$ 36 trillion in 2014. Foreign exchange reserves, a proxy for official liquidity, increased six-fold from US$ 2 trillion in 2000 to over US$ 12 trillion in 2014. International debt security issuance by emerging market economies, a proxy for private liquidity, increased four-fold from US$ 554 billion in 2000 to US$ 2.6 trillion in 2014. External loans to emerging markets, another proxy for private liquidity, increased four-fold from US$ 777 billion in 2000 to US$ 3.1 trillion in 2014.

Global liquidity transmission to the ASEAN-5. Global liquidity has transmitted to ASEAN-5 through various channels, including portfolio inflows, international debt security issuance, and external bank loans and deposits. Between December 2000 and June 2014, ASEAN-5 saw a rapid increase in international debt security issuance (by nationality), which from US$70 billion in 2000 to US$ 288 billion,1 while external loans and deposits, increased from US$ 272 billion to US$ 787 billion.

Figure 1.
Figure 1.

International Debt Security Issuance to the ASEAN-5

(In billions of U.S. dollars)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: BIS Debt Securities Statistics, Table 11A and 12A.
Figure 2.
Figure 2.

External Loans and Deposits to the ASEAN-5 (In billions of U.S. dollars)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Sources: BIS Locational Banking Statistics Table 7A and 7B; IMF staff estimates.

Changing financial landscapes. Near-zero policy rates and large asset purchases by the Federal Reserve and other major central banks have boosted asset prices and fuelled investor appetite for risk. Large cross-border financial inflows have amplified domestic financial expansion in ASEAN-5, leading to changes in the financial landscapes in the ASEAN-5.

Non-commercial-banks. A feature of the changing financial landscapes in the ASEAN-5 is the growth of non-commercial-banks, though at different paces in different countries.

  • In Indonesia, they grew steadily with asset-to-GDP ratio increasing from less than three percent in 2006 to five percent in 2013. And non-commercial-bank assets as a share of total assets of all financial institutions grew from six percent in 2006 to nine percent in 2013.

  • In Malaysia, they developed at a slower pace than its peers recently, with their asset-to-GDP ratio remaining high around 26-28 percent during 2011 and 2013.

  • In the Philippines, they developed steadily, with their asset-to-GDP ratio remaining around 10 percent during 2006 and 2013.

  • Non-commercial-banks in Singapore developed to a higher stage, with asset-to-GDP ratio increasing from less than 100 percent in 2006 to 120 percent in 2013. The non-commercial-bank short-term funding as a share of total funding of all financial institutions grew from 22 percent in 2006 to almost 24 percent in 2013.

  • In Thailand, these institutions developed rapidly. Excluding SFIs, non-commercial-banks’ asset-to-GDP ratio increased from 13 percent in 2006 to 21 percent in 2013, and non-commercial-bank assets as a share of total assets of all financial institutions grew from 10 percent in 2006 to 14 percent in 2013.

Figure 3.
Figure 3.

Non-commercial bank Development in the ASEAN-5: Ratios of Assets, Credit, and Liquidity to GDP

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Sources: BankScope; Haver Analytics; IMF staff estimates.

Risks to financial stability. There is a risk that protracted monetary accommodation and resulting search for yield could be fueling credit mispricing and buildup of systemic liquidity risk, especially in the nonbank sector. Therefore, ASEAN-5 should closely monitor potential risks to financial stability, such as credit, liquidity, and exchange rate risks. These risks could be nontrivial given the weak global economic recovery and lingering uncertainties about the full ramifications of the China slowdown and rebalancing.

Policies implications for Thailand. The changing financial landscapes and the resulting challenges point to the need for the authorities in the ASEAN-5 to consider measures to maintain financial stability.

  • Regulation on non-commercial-banks. The authorities should enlarge financial regulatory perimeters to non-commercial-banks, including SFIs, and contain the rapid growth of leverage.

  • Liquidity management. The authorities should prepare for the possible liquidity tightening arising from the expected U.S. monetary policy normalization. Useful measures include encouraging greater exchange rate flexibility and taking macroprudential and cooperative measures to provide liquidity when global liquidity shortages actually materialize.

  • Financial stability framework. The authorities should continue to strengthen a formal and transparent financial stability framework. Useful measures include giving the central banks a more formal mandate to ensure financial stability in bringing both expertise and incentives to the task of mitigating systemic risk; strengthening data collection to cover data gap and monitor the buildup of financial stability risks; enhancing coordination and information sharing among regulators across jurisdictions.

Appendix IX. Thailand’s Demographic Challenge

Thailand is undergoing one of the fastest demographic transitions in the world. This poses severe challenges to growth, old-age security, and public finances. To address these challenges, Thailand needs higher productivity growth, increased labor force participation (particularly by the elderly), and a more open immigration system.

Population trends. Thailand is undergoing a steep demographic transition. According to UN population projections,1 Thailand’s total population will peak in 2023, while its working age population (age 15-64) will start declining this year as a share of total population and in 2018 in absolute numbers.

Regional context. The challenge Thailand is facing is unusually severe. The pace of demographic transition is similar to that in Korea and Singapore, but those countries are experiencing it at much higher levels of income. Among emerging economies in the region, only China’s transition is almost as rapid, but China is developing considerably faster than Thailand. In contrast, under every conceivable scenario, Thailand will grow old before growing rich. Emerging ASEAN economies other than Thailand are facing a noticeably slower transition.

A01ufig16

UN Population Projections for Thailand

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: United Nations, World Population Prospects.
A01ufig17

Working Age Population in Selected Asian Countries

(Percent of Total Population)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: United Nations, World Population Prospects.
A01ufig18

Working Age Population in Selected ASEAN Countries

(Percent of Total Population)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: United Nations, World Population Prospects.

Drivers. The main reason is a sharp drop in fertility. In Thailand, the total fertility rate fell from 5.2 to 2.2 in just 20 years between 1970 and 1990 (one of the steepest declines in history), and currently stands at 1.4, which is considerably below the replacement rate. The usual factors associated with development, such as increasing income, education and urbanization, undoubtedly played a role. At the same time, a switch from pro-natalist policies of the post-war period to anti-natalism in the 1970s and 1980s likely contributed to the sharpness of the decline.2 An increase in longevity (life expectancy went up from 64 in 1980 to 74 in 2012) is another important driver of aging.

A01ufig19

Fertility Rates

(Children per Woman)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: United Nations, World Population Prospects.

Implications. Population aging presents a number of challenges. Up until now, Thailand has benefited from a demographic dividend, with labor force growing faster than population for several decades. The dependency ratio is at its trough, and is among the lowest in ASEAN. Going forward, the ratio will start climbing, driven by old-age dependency, with negative implications for growth, old-age security, and public finances.

Impact on growth. Contraction in working age population will reduce Thailand’s potential growth rate. Assuming employment shrinks in proportion to working age population, the labor input will decline by 0.3 percent in 2020 and at even faster rates going forward.3 A more precise calculation needs to take into account age- and gender-specific labor force participation rates. Within working age population, the share of youths will decrease while the share of older people will go up. Both of these groups have lower participation rates than prime age adults, and the net effect of this shift is ambiguous a priori. If we assume that going forward the age- and gender-specific participation rates will remain at their average levels of the last five years, employment projections will look slightly less pessimistic, with labor input declining by 0.1 percent in 2020 and 0.3 percent in 2023. Still, this correction only pushes the negative trend back a couple of years.

A01ufig20

Thailand’s Dependency Ratio

(Percent)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: United Nations, World Population Prospects.
A01ufig21

Thailand: Labor Force Participation Rate

(Percent, average 2009-13)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: International Labor Organization.

Impact on public finances. As elsewhere, aging will lead to higher health care spending, particularly in the public sector given Thailand’s universal coverage. In contrast to health care, Thailand’s large informal sector is not covered by the public pension scheme and receives only minimal assistance from the non-contributory old-age allowance. With increased longevity and evolving cultural norms, traditional networks might not be able to provide adequate support to the elderly coming out of the informal sector. As a result, the public sector may have to step in with additional support. At the same time, the existing formal sector social security scheme may not be sustainable, given low contribution rates and low retirement age.

Addressing the challenge. A multifaceted approach is required to deal with the demographic challenge. In very broad terms, the impact of population aging on labor supply could be counteracted by increasing labor productivity and by measures aimed at augmenting labor supply. In Thailand, key to enhancing productivity is implementing the government’s infrastructure investment plans, improving the quality of education and training, and reallocating resources toward higher-value-added activities.

Augmenting labor supply. Two key reservoirs are the elderly and migrant workers. The share of hexagenarians in Thailand’s population is rising sharply, and engaging them in productive work is essential to cushion the effects of aging. That would be facilitated by accommodating work environment (including flexible hours and part-time arrangements), improved health care, and targeted training and by removing institutional obstacles such as mandatory retirement of government employees at age 60. Many of these measures are already being implemented or considered by the government. Some of them, as well as improved quality of daycare and more generous maternity benefits, may also boost fertility and increase female labor force participation, even though the latter is already quite high by regional standards. Finally, regularizing the inflow of migrants from neighboring labor-rich countries as well as making it easier to employ high-skill foreigners would help Thailand complement the supply of native-born workers.4

A01ufig22

Thailand: Share of People in Their Sixties in Total Population

(Percent)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: United Nations, World Population Prospects.

Appendix X. Thailand’s Structural Transformation in Regional Perspective1

Thailand stands out in international comparison as a country with a high dispersion of productivity across sectors. It has especially low labor productivity in agriculture—the sector that employs a much larger share of the population than is typical for a country at Thailand’s level of income. This suggests large potential productivity gains from labor reallocation across sectors, but that process—which made a significant contribution to Thailand’s growth in the past—appears to have stalled lately. The reasons include a gap between the skills possessed by rural workers and those required in the modern sectors; the government’s price support programs for several agricultural commodities, particularly rice; and the uniform minimum wage.

Snapshot. While in most economies labor productivity in agriculture is lower than in other sectors, in Thailand, the difference is particularly pronounced. At the same time, the share of agricultural employment in Thailand, at nearly 40 percent, is considerably higher than what would be expected for a country at its level of income. This combination of low productivity and high employment in agriculture depresses the country’s overall productivity and standard of living.

Dynamics. Reallocating workers from agriculture into manufacturing and modern services could boost productivity. Indeed, in the past, this inter-sectoral shift, reflecting structural transformation, accounted for a considerable share of productivity growth in Thailand (as well as in many other Asian economies). However, over the last few years this process has stalled, with both agricultural employment and agricultural productivity nearly stagnant.

Explanation. There are several reasons why Thailand’s agricultural employment has been exceptionally high for several decades, including culture and tradition as well as educational gaps. The leveling of the share in the last few years, after trend decline, has likely been caused by a pickup in global food prices, intensified government support for agriculture (particularly the rice pledging scheme), and an increase in the minimum wage, which discourage employment in the formal sector.

Way forward. To accelerate Thailand’s path toward advanced economy status, it is important to provide appropriate incentives and opportunities to its population. The government took the right step in replacing the rice pledging scheme and price support for rubber with targeted income transfers. Modernization of curriculum and increased support for rural schools would help equip future generations of Thais with appropriate skills. Better information dissemination would help direct people toward gainful employment in the formal sector. At the same time, incentives to hire newcomers to the formal labor market may be enhanced by temporary tax breaks or minimum wage waivers. Finally, various measures, including more efficient water management, enhanced agricultural research and knowledge transfer, and reformed land tenure laws (which would facilitate consolidation to take advantage of economies of scale), could help increase productivity and the standard of living of those remaining in agriculture.

A01ufig23

Value Added per Worker Relative to Economy-Wide Average, 2012

(Percent)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: World Bank, World Development Indicators
A01ufig24

Employment in Agriculture and GDP per Capita in Emerging Market and Developing Economies

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: World Bank, World Development Indicators.
A01ufig25

Employment Shares, 2012

(Percent)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: World Bank, World Development Indicators
A01ufig26

Thailand: Employment Shares

(Percent)

Citation: IMF Staff Country Reports 2015, 114; 10.5089/9781475519679.002.A001

Source: National Statistical Office of Thailand.

Appendix XI. Thailand—Staff Policy Advice from the 2013 Article IV Consultation

article image
1

This issue is discussed at length in Isnawangsih and others, 2013, The Big Split: Why Did Output Trajectories, in the ASEAN-4 Diverge After the Global Financial Crisis? IMF WP/13/222.

2

The impact on Thailand was particularly strong because of the dependence of Thailand’s car industry on critical components supplied by Japanese manufacturers.

3

Thailand’s net imports of oil are around 800 thousand barrels per day.

4

Fiscal year starts October 1.

5

The staff’s baseline fiscal projections are consistent with the budget approved for 2014/15 but assume a lower implementation rate for public investment projects (50 percent) for subsequent years.

6

Also known as the Super Board and chaired by the Prime Minister, this committee was established in June 2014, to recommend policies, management, and development plans for all SOEs.

7

World Economic Forum, Global Competitiveness Indicators.

8

World Bank, 2012, Leading with Ideas: Skills for Growth and Equity in Thailand.

1

The baseline scenario assumes current policies and an implementation rate of 50 percent of infrastructure projects.

1

Does not include domestic debt held by non-residents.

1

Nationality is determined by the location of the reporting entity’s controlling parent institution. Residence is determined by the location of the reporting entity.

1

United Nations, 2013, World Population Prospects: The 2012 Revision.

2

United Nations Population Fund, 2011, The Impact of Demographic Change in Thailand.

3

With the unemployment rate below one percent, in Thailand there is essentially no difference between labor force and employment, and no margin to raise the employment rate for a given labor force participation rate.

4

Thailand hosts over one million registered economic migrants, primarily from Myanmar, Cambodia and Laos. However, the total number, including undocumented workers, is estimated to be around 4 million—about 10 percent of the country’s labor force.

1

This appendix is based on Vladimir Klyuev, 2015, Structural Transformation: How Does Thailand Compare? IMF WP/15/51.

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Cover IMF Staff Country Reports
Thailand: Staff Report for the 2015 Article IV Consultation
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2015: Issue 114
Publisher:
International Monetary Fund
ISBN:
9781475519679
ISSN:
1934-7685
Pages:
77
DOI:
https://doi.org/10.5089/9781475519679.002

Real GDP

(Index, 2007=100)

International Reserves, 2014

(In percent of GDP)

Quarterly GDP Growth

(Percent change)

Thailand CPI and Oil Prices

(In percent change, year-on-year)

Thai Baht Exchange Rates

(Index, 2013=100, increase=appreciation)

Thailand’s Policy Rate

(In percent)

Financial Sector Assets and Bank Assets

(In percent of GDP)

Credit Standards

(Last 3 months, 0+=easing)

Foreign Currency Borrowings of Non-Financial Corporates

(In percent of total, year-to-date)
Figure 1.

Real Sector Developments
Figure 2.

Inflation and Capacity Indicators
Figure 3.

Public Finances
Figure 4.

Monetary Policy Instruments
Figure 5.

External Sector
Figure 6.

Financial Sector Developments
Figure 7.

Financial Soundness Indicators
Figure 8.

Asset Prices and Private Debt
Figure 9.

Structural Challenges

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

(in percent of GDP unless otherwise indicated)

Thailand Public DSA - Composition of Public Debt and Alternative Scenarios

Thailand Public DSA - Realism of Baseline Assumptions

Thailand Public DSA - Stress Tests

Thailand Public DSA Risk Assessment
Figure B1.

Thailand: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Integration with CLMV countries
Figure 1.

International Debt Security Issuance to the ASEAN-5

(In billions of U.S. dollars)
Figure 2.

External Loans and Deposits to the ASEAN-5 (In billions of U.S. dollars)
Figure 3.

Non-commercial bank Development in the ASEAN-5: Ratios of Assets, Credit, and Liquidity to GDP

UN Population Projections for Thailand

Working Age Population in Selected Asian Countries

(Percent of Total Population)

Working Age Population in Selected ASEAN Countries

(Percent of Total Population)

Fertility Rates

(Children per Woman)

Thailand’s Dependency Ratio

(Percent)

Thailand: Labor Force Participation Rate

(Percent, average 2009-13)

Thailand: Share of People in Their Sixties in Total Population

(Percent)

Value Added per Worker Relative to Economy-Wide Average, 2012

(Percent)

Employment in Agriculture and GDP per Capita in Emerging Market and Developing Economies

Employment Shares, 2012

(Percent)

Thailand: Employment Shares

(Percent)