On September 30, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation ^[1] with Thailand.

Growth lost momentum over the last 12 months, while inflation remained subdued. Real GDP growth reached 4.8 percent year-on-year in 2018:H1 but declined to 3.4 percent in 2018:H2; and 2.8 percent and 2.3 percent in 2019:Q1 and 2019:Q2 respectively. Although private consumption held up, global trade tensions impacted Thai exports, particularly electronics, through the global value chains. Headline inflation averaged 1.1 percent in 2018 and declined to 0.5 percent in August 2019 on the back of food and energy prices, and core inflation remains subdued at 0.5 percent. The output gap seems to be closing by some measures, although the combination of low inflation and a large current account surplus suggest a still negative gap.

Credit and housing markets are also cooling. Total credit growth moderated in 2019:Q1, led by declines in corporate borrowing. In contrast, loans to households picked up in 2018 and remained buoyant through 2019:Q1, driven by auto loans and new mortgages. Following the tightening of LTVs in April 2019, housing loan demand softened, and condo prices declined by 1¾ percent (y/y) also reflecting weaker foreign demand. The housing market is already going through a period of adjustment consistent with the broad-based cooling of the Thai economy.

The current account surplus narrowed sharply in 2018. The decline of the surplus to 6.4 percent of GDP in 2018 from 9.7 percent in 2017 was driven partly by the U.S.-China trade tensions, which weighed on exports. Data as of end-June 2019 reveal the continued impact of trade tensions, as exports contracted by 2.2 percent y-o-y, driven by electronics and computer parts, with a 14.9 percent decline in China-bound goods and a 2.2 percent decline in U.S.-bound goods. Imports declined by 9.4 percent y-o-y, with lower capital goods, raw materials, and intermediate goods imports. Tourism receipts have also softened, led by a slowdown in Chinese tourists.

The continued strong external position and looser global financial conditions have contributed to the recent appreciation pressures. Since December 2018, the baht has appreciated by about 5.5 percent against the U.S. dollar, making it one of the best performers in the region. The level of reserves increased by nearly US$11 billion by end-June 2019 to US$250.3 billion, well above Fund adequacy metrics. Since May 2019, capital inflows have further accelerated, contributing to a sharper appreciation of the baht. On July 12, 2019, the Bank of Thailand announced measures aimed at curtailing short-term speculative capital inflows (a reduction in the limit of the outstanding balance for non-resident baht accounts) and the tightening of the reporting requirements for of non-resident holdings of debt securities issued in Thailand.

With respect to the outlook, growth is projected to slow down to about 3 percent in 2019–20 reflecting external and domestic headwinds. On the external side, the projected slowdown in global demand and uncertainty about trade tensions are expected to weigh on exports throughout this year. Domestic factors include a weakening in consumption growth—as the debt overhang weighs on credit growth and the drought depresses farm incomes. Over the medium term, private consumption and investment are expected to strengthen, supported by dissipating political uncertainty and a scale-up in public investment. This would also contribute to external rebalancing as demand feeds into higher imports. Risks to the outlook are tilted to the downside emanating most notably from the ongoing escalation of protectionism threatening the global trading system.

Executive Board Assessment ^[2]

Executive Directors noted that Thailand’s robust policy framework and ample buffers, created through the authorities’ judicious management of public finances, continue to underpin its resilience to shocks. Directors also welcomed the progress in improving the coverage and effectiveness of financial supervision and macroprudential policies which has enhanced financial stability. They noted, however, that external and domestic headwinds are challenging near term growth prospects, and that risks are tilted to the downside stemming from the impact of the global economic slowdown, ongoing trade tensions, and weak domestic demand. In this regard, Directors encouraged an expansionary policy mix to support domestic demand, and structural reforms to promote inclusive and sustainable growth.

Directors encouraged the authorities to undertake an investment-led expansion through the judicious use of existing fiscal space, while preserving sufficient buffers and ensuring fiscal sustainability. Strong implementation of macro-critical public infrastructure projects currently in the pipeline would crowd in private investment and stimulate domestic demand in the short run, while helping lift up potential growth in the long run. Directors emphasized the importance of better targeting social assistance to protect vulnerable households while minimizing distortions. They welcomed the authorities’ intention to strengthen revenue mobilization over the medium to long run, as part of a broader strategy to prepare for aging-related expenditure pressures.

Directors welcomed the Bank of Thailand’s August decision to cut the policy rate. Going forward, a number of Directors saw scope for further monetary easing to help steer inflation back to target. Many other Directors considered the current monetary stance to be sufficiently accommodative, and noted that monetary policy should be calibrated based on assessment of financial stability risks. Complementary use of macroprudential policy would also address financial stability concerns.

Many Directors considered that Thailand’s external position remains substantially stronger than warranted by medium-term fundamentals and desirable policies. A number of other Directors called for a more cautious interpretation of the external balance assessment citing Thailand-specific issues as contributing factors.

Directors emphasized the importance of exchange rate flexibility, with foreign exchange intervention limited to avoiding disorderly market conditions. While a number of Directors recognized that recent tightening of existing capital flow management measures (CFMs) plays an important role in mitigating short-term volatility, a number of other Directors considered that these measures should be phased out and replaced with appropriate macroeconomic, financial and structural policies.

Directors agreed that financial stability risks appear contained although household indebtedness is relatively high and there are pockets of vulnerability in the corporate sector. In line with the FSAP recommendations, they encouraged the authorities to strengthen the crisis management and resolution framework, close leakages in the macroprudential toolkit, and establish an overarching body to help enhance coordination among supervisors. Many Directors noted that the recommendations on institutional arrangements of supervisory agencies should be tailored to a country-specific context. To enhance oversight of the non-bank sector, Directors recommended strengthening the supervision and regulation of Specialized Financial Institutions and Credit Cooperatives.

Directors emphasized that the start of the new government is a timely opportunity to forge ahead with a concerted reform agenda. Targeted policies to enhance labor productivity across the regions can boost competitiveness, raise potential growth, and enhance its inclusiveness. A key priority is to address population aging through pension reform and investment in human capital that will help unlock growth potential, including through education, health, and equalizing opportunities. Directors took note of the authorities’ ongoing efforts to strengthen anti-corruption institutions and called for improving the operational aspects of the procurement law and addressing AML/CFT deficiencies.