The Executive Board of the International Monetary Fund (IMF) recently concluded their consultation1 with Thailand and laid out how they see the Thai economy now and what may happen in the future.

The News Is Mainly Good

Economic activity in Thailand is recovering from an unprecedented crisis, supported by a swift and bold policy response, while inflation is on an upward trend reflecting rising commodity prices. Thailand’s economy grew by 1.5 percent in 2021 bolstered by the implementation of a multi-pronged policy support package, and a rebound in exports. The current account balance turned into a deficit of 1.7 percent of GDP in 2021, from a surplus of 4.2 percent of GDP in 2020, largely reflecting a sharp decline in tourism receipts and soaring shipping costs amid supply chain disruptions. The growth momentum continued so far this year based on strong consumption and exports. Reflecting rising energy prices, headline inflation accelerated to [5.2] percent y/y during Jan-[May] 2022 from a 1.2 percent average inflation recorded in 2021.

The economic recovery continues in 2022 but is clouded by the deteriorated global outlook. Real GDP is projected to grow by 2.8 percent in 2022, lower than initially expected, as the prolonged war in Ukraine dampens domestic demand through rising commodity prices and lowers external demand. As the pandemic subsides, GDP growth is expected to rebound to about 4 percent in 2023 before trending down to its potential rate of about 3 percent in the medium term. Headline inflation is expected to average 6.1 percent in 2022 driven by high commodity prices, before decelerating to 2.5 percent in 2023—within the Bank of Thailand’s (BOT) target range. The current account deficit is expected to narrow to -0.8 percent of GDP in 2022 as tourism receipts gradually pick up along with the removal of COVID-19 entry restrictions, and to return to a surplus of around 3-3.5 percent of GDP over the medium term. Growth prospects critically hinge on the return of foreign tourists, while soaring energy prices due to the prolonged war in Ukraine could further weigh on private consumption and external demand. A disorderly tightening of global financial conditions and spillovers from a sharper growth slowdown in China amidst already-stretched private sector balance sheets could derail the economy’s rebound.

They Also Offered Advice

Executive Directors commended the authorities for their bold and appropriate policy response, which helped maintain macroeconomic and financial stability and facilitated a growth rebound despite the severe impact of the COVID-19 pandemic. Directors acknowledged that the recovery is fragile and uneven with risks to the outlook tilted to the downside. In that context, they encouraged the authorities to remain agile in their policy response under fast-changing circumstances and to press ahead with structural reforms to support sustainable, inclusive growth. Directors also emphasized the importance of a well-coordinated and integrated approach to recalibrate monetary, exchange rate, and fiscal policies should an adverse scenario materialize.

Directors welcomed the Bank of Thailand’s efforts to ensure that inflation expectations remain well anchored. They emphasized the importance of a data-dependent monetary policy normalization path and welcomed the recent policy rate increase and clear communication of a gradual normalization on the back of continued economic recovery. Directors also welcomed ongoing progress in strengthening financial sector risk analysis, specialized financial institutions’ supervision and bank resolution, as well as efforts to accelerate household debt restructuring, which should be accompanied by a gradual tapering of the financial sector support measures. Continued efforts to enhance the AML/CFT framework are also important.

Directors agreed with the near-term fiscal consolidation while encouraging the authorities to continue to gradually replace untargeted energy subsidies with targeted support to vulnerable groups. Over the medium term, a more gradual fiscal consolidation underpinned by enhanced domestic revenue mobilization could support structural reforms to strengthen the economy’s resilience while rebuilding policy buffers. Enhancing fiscal governance and transparency also remains a priority.

Most Directors noted that Thailand’s external position remains moderately stronger than warranted by medium term fundamentals and desirable policies, while some other Directors called for a more cautious interpretation of the external balance assessment given the pandemic-induced structural shifts in the global economy. Directors welcomed the authorities’ commitment to exchange rate flexibility and the easing of foreign exchange regulations and concurred that FX interventions should be limited to avoiding disorderly market conditions.

Directors encouraged the authorities to implement a well-coordinated structural reform agenda, supported by capacity development, to boost potential output and capitalize on the growth opportunities provided by the ongoing digital and green transformations. In this regard, measures to enhance human capital to close the skills gap will be important. They welcomed the authorities’ efforts to reposition Thailand’s financial sector for a sustainable, digital economy and highlighted the importance of balancing efficiency gains from financial innovation against financial stability risks.