IMF Concludes 2009 Article IV Consultation With Thailand

by Mary Swire, Tax-News.com, Hong Kong

15 June 2009

The IMF has concluded an Article IV consultation with Thailand. The output contraction in 2009 could be limited to about 3% provided that political stability is maintained and the authorities’ fiscal stimulus is speedily and efficiently implemented. Over the medium term, growth is expected to recover as the global economy turns around and public infrastructure spending crowds-in private investment. Economic fundamentals remain strong, underpinned by a track record of prudent macroeconomic policies and robust financial institutions.

Thailand has been in an investment slump since 2006. Political turmoil has led to reduced business confidence and slow private investment growth. The main engine of growth for the economy has been the export sector. However, since the fourth quarter of 2008, exports have contracted dramatically due to the global recession, thereby removing the only prop of growth. After rising on the back of oil and commodity prices in the first half of 2008, inflation has plunged sharply. Headline inflation (period average) was 5.5% in 2008, while core inflation was 2.5%, both representing substantial increases from the previous year. Since July, inflation has fallen in line with oil prices, with headline inflation in negative territory for the first three months of 2009.

The authorities have focused on fiscal measures to stimulate the economy since the second half of 2008. The 2008/09 (October-September) budget, passed under the old government last year, incorporated a mix of expenditure and tax measures to widen the small fiscal deficit. With the subsequent rapid deterioration of demand conditions, the new government is implementing a supplementary budget incorporating THB100 billion (1% of GDP) of additional spending, including fast-disbursing direct income transfers, subsidies for transport and utility services, and higher pensions. Overall, the central government is expected to shift from a deficit of 0.5% of GDP in 2007/08 to a deficit of 4.5% in 2008/09, delivering a cyclically-adjusted fiscal stimulus of about 2.5%. An early start of the three year public investment program to support demand beyond 2009 may help kick-start public infrastructure projects that are vital to medium-term growth.

International reserves rose to a healthy USD111 billion, equivalent to 9 months of imports, by end-2008. The baht appreciated against the US dollar in the first quarter of 2008, when capital controls were removed, but has subsequently fallen in line with regional currencies.

The IMF Directors made the following recommendations:

The IMF wishes to see the timely and efficient implementation of the fiscal stimulus plans which were seen and approved. Budgeted transfers and subsidies should target the most needed and vulnerable groups, and automatic stabilizers should be allowed to operate fully, says the IMF.

The IMF considers that, given the available fiscal space, the increases in deficits and public debt are appropriate from a countercyclical perspective and would decline over the medium term as growth picks up. The temporary nature of the fiscal stimulus measures, for example the raising of the mandatory ceilings on government borrowings in order to finance the deficits, is an indication of the authorities’ continued fiscal discipline, says the IMF. The IMF approved plans to guarantee credit for small- and medium-sized enterprises and exporters.

The IMF called for continued close supervision of the banks, particularly of state-owned specialized financial institutions, although it was recognized that the banking sector remains resilient, with limited exposure to subprime-related and structured products. The IMF believes that the strong initial positions of banks and strengthened supervision by the Bank of Thailand have helped the sector weather the global financial turmoil. Thailand was also encouraged to take further steps to complete implementation of the Financial Sector Assessment Program (FSAP) recommendations.

Recommended