Thailand’s economy is undergoing a modest recovery after a sharp contraction in early 2014, when domestic demand was adversely affected by political unrest.
1. On behalf of the Thai authorities, I would like to thank the staff for the extensive discussions during the Article IV Consultation and the comprehensive staff report. This year discussions focused on macroeconomic policies to expedite growth, measures to preserve economic and financial stability, and approaches to unlock structural bottlenecks to lift up potential growth. The authorities are in broad agreement with the thrust of staff assessment and would like to provide further details of recent macroeconomic developments and policy efforts to address key challenges.
Updates on the Thai Economy and Near-Term Outlook
2. Last year has witnessed a critical transition for Thailand. The economy had weathered through a period of turbulences on both domestic and external fronts. The economic expansion recorded only 0.7 percent growth in 2014, owing partly to domestic political situations that hampered private sector investment and consumption. External environment became less favorable for exports and the uncertainty in the global economies as well as policy responses also added to the volatility in capital movements.
3. Despite strong headwinds and disappointing growth in 2014, the authorities’ latest growth projection for the Thai economy is at 3.8 percent1 for 2015. While this projection in part reflects a low base, it is anticipated that growth will be driven by the gradual recovery of domestic demand. Given strong economic fundamentals and resilient financial system, the authorities will have policy space to provide needed tailwind for the recovery. Declining fuel prices should partly benefit domestic consumption, while the increased capital spending by government in infrastructure projects and other stimulus packages should gradually crowd in private investment. On the external front, improved prospects of advanced economies and further regional economic integration should also offer better opportunities for Thailand’s export sector.
4. My authorities view that the risks to growth outlook have now shifted slightly to the downside, from the slower-than-expected domestic spending and heightened uncertainty from policy divergence among major economies. Domestic spending, especially the government investment, can also face some delay from the fiscal reform process. It is also noted that the country has been experiencing signs of deteriorating competitiveness due to changes in global trade structure, lagging technological developments and innovations, and stagnant labor productivity.
5. At the latest meeting of the Monetary Policy Committee (MPC) on 11 March 2015, monetary policy was eased further in order to lend additional support to the economy as the recovery has been more sluggish than anticipated. Although lower policy rate may help shore up private sector’s confidence, the steadfast implementation of public investment as part of the planned fiscal stimulus packages is still deemed instrumental to jump start a sustainable growth momentum. On inflation, we see a low probability of deflationary pressure going forward as the declining headline inflation is expected to be transitory due to the lower oil and commodity prices. Core inflation remained stable, reflecting that most of the disinflationary pressure is rather supply driven.
6. We welcome the staff’s position in supporting the recent change in inflation targeting framework of the Bank of Thailand (BOT) by turning from core to headline inflation at the beginning of this year with an annual average target of 2.5 ± 1.5 percent. Such a change is aimed to strengthen policy communication and enhance effectiveness of monetary policy in anchoring long term inflation expectation. The headline inflation should better reflect the cost of living and therefore can be better understood by the general public, thus enhancing the communication effectiveness and policy credibility. Furthermore, the annual average calculation should help provide sufficient flexibility to respond to volatile changes in price levels while the BOT stands ready to take appropriate actions, including proactive communication via open letter and other channels, should the deviation from target is anticipated.
7. We take note of the staff’s assessment that divergent policy paths in major economies and the ensuing global financial market volatility could be the main source of risks in the near term. Against this backdrop, we remain committed to allow the currency to move flexibly to absorb the impact of external shocks, while the adequate level of international reserves will serve as additional buffer to excessive currency fluctuations. We also welcome the staff’s notion that judicious currency intervention should help curb excessive volatility that could be disruptive to financial market conditions and the real sector.
8. The Thai authorities view that accommodative fiscal policy, while committing to fiscal prudence, should be the key engine for reinvigorating economic growth in the near term and elevate the country’s potential in the long run. While there are delays in government budget processes on the account of on-going reforms to enhance transparency and good governance of procurement process, the government has stepped up efforts to expedite budget disbursement and pushed forth necessary infrastructure projects in order to crowd in private investment and remove productivity constraints.
9. The Public Finance Act, a fiscal responsibility legislation, is being finalized with an aim to promote more transparent budget process and prudent medium-term fiscal framework. The formulation of fiscal policy will ultimately be guided by the principles of efficiency, effectiveness, transparency, and accountability. In this connection, the conduct of fiscal policy in the forthcoming period should ensure prudent management of public resources while effectively serving the purpose of inducing the sustained and inclusive economic growth.
10. We recognize that improving tax administration should help increase fiscal space necessary for achieving the medium-term fiscal sustainability goals and overcoming country’s long-term structural challenges. In view of revenue mobilization, the authorities will press ahead with plans to improve tax compliance and public finance management, as well as to broaden revenue bases. To compensate for decrease in tax revenue partly due to reduction of personal and corporate income tax rates, the authorities consider it plausible to gradually increase VAT rate from the current 7 percent to 10 percent if economic recovery is strongly entrenched. On the expenditure side, the authorities are exploring options to reduce tax expenditures through scaling down exemptions, while alleviating the burden of most vulnerable groups with direct transfers and targeted subsidies. The authorities also take advantage of low oil prices to reform the domestic fuel pricing structure and energy subsidy programs. On this note, the authorities also appreciate the Fund’s technical assistance on tax administration and trust that it will be helpful in formulating strategy to enhance fiscal management, transparency, and accountability.
Financial Sector and Financial Stability
11. We welcome the staff’s acknowledgement of Thailand’s financial sector soundness and the well-safeguarded financial stability. Commercial banks remain highly capitalized, liquidity is ample, and NPL ratio remains low. The higher reliance on wholesale funding of commercial banks has been mostly due to the rise in wholesale deposits from corporates that are considered more stable than those from wholesale borrowing. In addition, risks from household debt have moderated somewhat from the slowdown of credit growth in recent period. Under this circumstance, the timely implementation of Basel III and other prudential regulations in accordance with international regulatory standards also helps further reinforce financial stability. Nonetheless, my authorities remain vigilant and continue to pursue effort to enhance financial surveillance mechanism. Among others are the regular joint meetings between the Monetary Policy Committee and Financial Institutions Policy Committee and the formation of internal committees for financial stability.
12. The expansion of the BOT’s mandate to supervise Specialized Financial Institutions (SFIs) should help prevent potential risks emerging from greater inter-linkages between commercial banks and non-bank financial institutions. In doing so, it is important to strike a right balance between allowing the SFIs to serve their legislative mandate, while staying commercially viable under more stringent regulatory standards. In this regard, the Fund technical assistance on SFIs reform provides valuable inputs for the authorities to contemplate appropriate SFIs governance and regulatory reform agenda.
13. We take note of staff’s concern over the rapid expansion of saving cooperatives’ share in financial system that might add risks to financial vulnerability. Nonetheless, loans of saving cooperatives have relatively been restrictive in nature as credit would be mostly extended to shareholders and the loan installments are tied to monthly salary. The current NPL ratio stands at a very low level (less than 0.5% of total loans in 2013). They are also exploring ways to strengthen their operational and supervisory framework towards international standards.
14. The recent success of ASEAN nations in reaching agreement on Qualified ASEAN Bank is a key milestone for advancing financial integration to support the broader agenda of ASEAN Economic Community. This will gradually liberalize financial services as well as facilitate greater regional trade and investment, thus mutually benefit consumers and better mobilize regional resources to finance economic activities. Moreover, the achievement under the BOT’s second phase of Financial Sector Master Plan (2010-2014) has helped enhance the efficiency and soundness of Thai banking system in terms of preparing them for greater competition, developing financial architecture conducive to growth, and strengthening supervisory capacity. Meanwhile, the third phase of Financial Sector Master Plan (2015-2019) also aims to further promote connectivity and financial inclusion, enter the new era of digital banking, as well as preserve financial system stability.
15. We are in agreement with the staff that implementing much-needed structural reforms in a well prioritized manner is crucial for removing supply-side bottlenecks and enhancing the potential growth. In fact, the current government has spearheaded the reform plan not only to prepare the country for the long-term challenges but also to improve good governance of public sector entities.
16. On the large-scale investment projects, the authorities have laid out multi-year plans to upgrade infrastructure and quality of logistics services to facilitate economic growth in the long run. Better transportation networks will go a long way in promoting intra-regional trade and connectivity. While pioneered by the government, these projects are expected to significantly induce private sector to become a main driving force for next phases of domestic investment in the period ahead.
17. The reform of state-owned enterprises (SOEs) also ranks high on policy priorities. The State Enterprise Policy Commission has been appointed to provide policy guidance and monitor the ongoing SOEs reform agenda. It also has mandate to make necessary decisions to strengthen SOEs’ financial positions to limit future fiscal burdens and restructure the organization as deemed appropriate. The key objective is to enhance efficiency and high degree of transparency of SOEs’ operations with improved corporate governance to prevent political interference. To this end, the State Enterprise Policy Commission recently approved in principle the establishment of a holding company to be an independent regulator to oversee listed SOEs on the Stock Exchange of Thailand such as the Thai Airways International Plc. and the Airports of Thailand Plc.
18. Recognizing the wind of change in global trade pattern, Thailand is gearing towards a technological upgrade to high-value added production. The Board of Investment has launched new 7-year investment strategies with a focus on promoting high value investments and those with a positive impact on society and the environment. These include high-tech and creative industries, service industries that support the development of a digital economy, and industries that utilize local resources. In parallel, the government also adopts measures to support financing to small and medium enterprises (SMEs) through the SFIs, together with promoting the coordination among entrepreneurs, academia, and financial institutions.
19. One of the key structural challenges is labor supply, which has started to decline due to the trend of aging population. Research shows that increasing labor supply by extending retirement age and reliance on foreign labor is neither sufficient nor sustainable. The government, working in close collaborations with private sector, continues its effort on development of skills in the labor force that match the need of industry. The alignment of hiring needs, education in relevant skills, and the right incentive structure is the most important requirement to unlock Thailand’s productivity limit.
20. Despite economic headwinds, Thailand’s strong fundamentals, political clarity, and unique cultural identity have helped the country to navigate through difficult times and resuscitate confidence from both domestic and international stakeholders. Going forward, preserving the macroeconomic and financial stability amidst global uncertainty remains top priorities. On the back of ample space for short-term policy mix and various structural changes on supply-side underway, combined with close cooperation between public and private sector, promising opportunities remain for Thailand to achieve sustainable long-term growth.
Bank of Thailand’s projection as of March 2015