Abstract
On behalf of the Thai authorities, we would like to express our sincere appreciation to the mission team for the constructive dialogue during the Article IV consultation. Our authorities welcome the staff’s acknowledgement of their steadfast efforts to ensure a sustainable economic recovery. We broadly agree with the staff’s assessments and policy recommendations, many of which are in line with the current policy priorities.
On behalf of the Thai authorities, we would like to express our sincere appreciation to the mission team for the constructive dialogue during the Article IV consultation. Our authorities welcome the staff’s acknowledgement of their steadfast efforts to ensure a sustainable economic recovery. We broadly agree with the staff’s assessments and policy recommendations, many of which are in line with the current policy priorities.
Recent Economic Development and Outlook
The Thai economy continues to recover and is expected to return to the pre-covid level around the end of this year. The actual outturn of GDP growth in 2022Q2 was 2.5 percent (year-on-year), led by private consumption and exports of services. Going forward, the Thai economy is projected to continue recovering with strong momentum. This is attributable to a significant pickup in the number of tourist arrivals following the relaxation of international travel restrictions and improved travel sentiments. In addition, private consumption would continue to recover in line with improvements in labor market conditions and household incomes. The authorities’ GDP growth projections are 3.0 – 3.5 and 3.5 – 4.5 percent for 2022 and 2023 respectively – compared to those of staff at 2.8 and 4.0 percent.
Headline inflation remains high, registering 7.6 percent in July 2022. Inflation is expected to reach its peak in 2022Q3, before gradually falling into the target range in 2023 as the supply-side inflationary pressures subside. Thus far, there is limited pass-through from wages to inflation and low probability of wage-price spiral due to remaining slack in the labor market and low contribution of wages to overall production costs. The latest headline inflation projections are 6.2 and 2.5 percent for 2022 and 20231, in line with those of staff.
Key risks remain including (1) a slowdown in the global economy, (2) the impact of higher prices on households’ cost of living (3) the high level of private debts amid interest rate uptrend, (4) the uncertainties regarding the pandemic, and (5) geopolitical risks. The upside risks to economic growth could be from higher-than-expected tourist arrivals and pent-up demand and spending by households with excess savings.
Monetary Policy
In August 2022, the Monetary Policy Committee (MPC) decided to raise the policy rate for the first time since 2018 from 0.5 to 0.75 percent. This reflects a shift of key considerations from growth to inflation, as economic recovery has gained traction while inflation will remain high for some time. Therefore, the extraordinarily accommodative monetary policy will become less needed. The MPC views that the policy rate should be normalized in a gradual and measured manner to the level that is consistent with sustainable growth in the long term.
The Bank of Thailand (BOT) had communicated its data-dependent and gradual normalization strategy to help shape market expectations prior to the actual rate hike. Amidst high inflationary pressure, the BOT has emphasized that monetary policy must first and foremost ensure that high inflation does not become entrenched, hence undermining economic activities.
Exchange Rate Policy and External Balance Assessment
The authorities reiterate their commitment to exchange rate flexibility and highlight the need to remain vigilant of the adverse impact on capital flows from the volatile global environment. Against the backdrop of major central banks’ normalization and the risk-off sentiment, Thai Baht has depreciated by around 9 percent in the first seven months of 2022 while foreign exchange intervention continues to be two-sided with an aim to prevent disorderly market conditions and excessive volatility.
The authorities continue to nurture a new FX ecosystem to complement the capital account liberalization effort and facilitate FX hedging activities. Since 2020, the BOT has revised regulations to address structural issues in the FX market to increase the flexibility of risk management while decreasing costs of hedging and improving surveillance to enhance market stability. The recent relaxation of foreign exchange regulations in 2022 further rebalances regulations on capital flows by allowing greater flexibility for both cross-border and domestic transfers of foreign exchange, managing currency risk exposures and easing the process involved in foreign exchange transactions.
Regarding staff’s recommendation on phasing out the remaining capital flow management measures on non-resident baht accounts, the authorities call for a holistic interpretation of such measures as part of the FX ecosystem package, which has effectively further liberalized capital flows. In addition, improving market surveillance and enhancing resilience could be emphasized as part of the effort to help safeguard stability along the liberalization journey.
On the External Balance Assessment (EBA), the authorities urge staff to be cautious on the interpretation and communication of EBA results given its technical limitations. Evidently, EBA results are extensively referred to by various third parties. In addition, the authorities see the benefit of having regular discussions with staff to better understand the country’s specific issues and circumstances.
Financial Sector Policy
Thailand’s financial system is resilient with commercial banks holding ample levels of capital and loan loss provisions, as well as being able to extend liquidity to support continued economic recovery. In 2022Q2, loan loss provision remained high with NPL coverage ratio of 166.6 percent. Liquidity coverage ratio registered at 185.5 percent and BIS ratio was at 19.6 percent. Furthermore, stress test results indicated that commercial banks have sufficient liquidity and strong financial position to withstand shocks under stress scenarios.2
The financial relief policy package had been effective in shoring up economic activities during the pandemic and in supporting the recovery. The soft loan program and special loan facility for SMEs continued to support the SME loan to expand at 0.9 percent in 2022Q2, which otherwise would have remained flat. The debt restructuring through asset warehousing program has been well in progress with the total of 50 billion baht loan under the scheme, as of July 2022. As the economy recovers, the number of debtors under financial assistance from banks, non-banks, and Specialized Financial Institutions (SFIs) continues to decline. The level of loan under credit assistance decreased to 2.9 trillion baht in May 2022 from 3.5 trillion baht at the end of 2021, which was a significant decline from the peak of 7.2 trillion baht in July 2020. In addition, the out-of-court debt resolution has been improved to facilitate household debt restructuring and repayment for debtors. This effort has been achieved through various schemes: Debt Consolidation scheme3 which helped reduce the burden for unsecured loan customers by sharing collateral from an existing residential mortgage loan to receive lower interest rates; Debt Clinic which helped resolve debt issues for around 87,000 accounts and has the success rate of 88 percent; and Debt Mediation Fair which processed more than 231,000 accounts with a 75 percent success rate for mediation.
As the economic recovery gathers strength, the authorities seek to normalize policy by gradually unwinding broad-based policy support while maintaining targeted measures to help vulnerable groups. Financial assistance measures are being phased out for debtors, while for creditors, the covid-related restrictions such as a cap on dividend payout were lifted. Nonetheless, debtors who remain in need of financial assistance could still draw on the special loan facility and asset warehousing program which will continue until April 2023.
The authorities encourage financial institutions to implement long-term debt restructuring to help resolve the private sector’s debt overhang. The program aims to support flexible and practical debt restructuring process, with the focus on repayment rate that is commensurate with debtor’s income and appropriately stepping-up when income improves. The terms of debt agreement can be renegotiated in an uncertain situation to increase flexibility and ensure sustainability. To help accelerate such long-term debt restructuring, the BOT temporarily eased some of the bank regulations.
Nonetheless, the long-term debt restructuring program is only a part of the overall effort to help resolve the existing household debt overhang problem. It is important to adopt a holistic debt life-cycle approach that includes the lenders’ responsible lending practices, the borrowers’ financial literacy and discipline, as well as the debt mediation and bankruptcy process. At the same time, macroprudential measures to restrain indebtedness and a comprehensive social safety net to ensure adequate income for borrowers would play a critical role in the overall process.
Fiscal policy
The judicious use of fiscal space has been successful in minimizing the impact of the pandemic while supporting economic recovery. Policy space built during pre-pandemic years, along with the revision of debt ceiling to 70 percent of GDP in 2021, allowed for strong policy responses to protect the poor and the vulnerable. Numerous social assistance schemes, supported by the government’s digital platform (e-wallet) and database (national ID initiative), were effective and targeted. Subsidy to state welfare cardholders, special assistance program and Co-payment scheme, reached 41 million beneficiaries and helped shore up consumption, stimulating around 70 billion baht of spending with more than 1.4million entrepreneurs participating in the Co-payment scheme. Recent measures announced on July 26, 2022 (including the new phase of Co-payment scheme and subsidy to state welfare cardholders) will continue to support domestic consumption from 1 September-October 31, 2022.
In response to high inflation, the government has swiftly provided support to cushion the impact of high commodity prices on the purchasing power of vulnerable households and businesses. Energy subsidies and price caps on key basic goods and services have been implemented in a temporary manner. For example, the diesel excise tax was reduced by 5 baht per litre until September 20, 2022. The support measures are now more targeted to help mitigate the impact of higher cost of living, such as subsidies on LPG, cooking gas and electricity.
To this end, the authorities reiterate their commitment to the fiscal sustainability framework and appreciate staff’s alternative fiscal scenarios for the purpose of policy simulations. They maintain that fiscal position remains sound under the Medium-Term Fiscal Framework with various scenarios and acknowledge that building sufficient fiscal space is crucial to help withstand shocks in the highly volatile environment going forward. They are also mindful of the fiscal cost of temporary measures to assist households, and thus would gradually allow more cost pass-through, while continuing to protect the poor with targeted measures. On the revenue side, the authorities place an emphasis on the tax reform progress in order to broaden the tax base, such as VAT from e-commerce.
Structural policies
The authorities agree with staff on the need to transform towards a high-value economy post-pandemic by supporting new growth drivers as well as enabling a sustainable and digital economy. Key development targets are presented under the 13th National Development Plan (2023-2027). Main initiatives for sectoral development are Eastern Economic Corridor (EEC), which focuses on investment in 12 strategic industries4, and efforts to reshape tourism5. At the same time, investment in digital innovation and infrastructure is prioritized, while the Productivity-enhancing Active Labor Market Policy (ALMP) has helped address skill-shortages and skill-mismatches.
Monetary Policy Report (as of June 2022)
Both in the event of economic contraction as a result of a new wave of virus outbreak and energy crisis as well as in the event of sluggish economic recovery. as well as in the event of sluggish economic recovery.
The scheme consolidates multiple debts, both with and without collateral, across financial institutions.
The 12 strategic industries are Next-Generation Automotive, Intelligent Electronics, Advanced Agriculture and Biotechnology, Food for the Future, High-Value and Medical Tourism, Robotics, Aviation and Logistics, Medical and Comprehensive Healthcare, Biofuel and Biochemical, Digital, National Defense, and Education and Human Resource Development.
The objective of future tourism is to create more value-added in an environmentally sustainable fashion, which includes the Long-Term Resident Program and the development of high-potential specific tourism sectors such as health and wellness, culture, and heritage, as well as natural environment.