International Monetary Fund Thailand
September 3, 2010
Thailand: Staff Report for the 2010 Article IV Consultation
Prepared by the Staff Representatives for the 2010 Consultation with ThailandApproved by Masahiko Takeda and Aasim Husain
Key Issues and Recommendations
Thailand has made a remarkable comeback from the global crisis and around of domestic political turmoil. Led by strong export performance, growth is likely toreach 7½ percent in 2010, before easing to 4 percent in 2011. Risks to these projections are tothe downside, as the global recovery remains fragile, while political uncertainty couldcontinue to weigh on domestic demand.
Strengths and weaknesses:
Thailand’s resilience is a testimony to its skillful economicmanagement and the strengths built over the past decade. But the crisis has also underscoredits structural weaknesses, which have slowed growth and left it dependent on exports.
With the economy recovering, the authorities are normalizing the policy stance,winding back fiscal deficits and beginning to raise interest rates. Since policy rates are far from neutral, significant adjustments will eventually be needed. Given the downside risks,however, normalization should proceed gradually, as evidence accumulates that the recoveryis becoming entrenched. Should volatile capital flows intensify, the exchange rate should beallowed to serve as a buffer, reinforced if necessary by prudential measures.
The authorities aim to rejuvenate Thailand’s growth potential byalleviating constraints on economic activity, notably by building out the country’sinfrastructure and developing its financial sector.
Generating the needed budgetary resources will be a challenge. Theemergency crisis subsidies could be withdrawn, and an expenditure review could identifyfurther sources of savings. There is also scope to widen the corporate and personal income tax bases by reducing exemptions and deductions. And the VAT rate could be raised from itscurrent relatively low level of 7 percent.
Effective implementation of the master plans for the banking sector andcapital markets would inject new life into the system, by generating greater competition andintroducing new services. At the same time, steps should be taken to revamp the framework for specialized financial institutions, where nonperforming loans have been proliferating.
Discussions took place July 5–16. The staff team comprised Messrs. Felman, Kalra, and Yoshida, andMs. Oner (all APD), and Mr. Goldsworthy (FAD). Ms. Vongpradhip and Mr. Kanithasen (OED) alsoattended meetings.