BANGKOK, June 18 – The International Monetary Fund (IMF) warned Thailand to be prepared for inflation and vulnerability from capital flows which may add uncertainty to Thai economy outlook.
An IMF delegation, led by Luis E. Breuer, met with executives of the Bank of Thailand (BoT) and senior Finance Ministry officials last week.
Mr Breuer said the Thai economy has shown an impressive resilience to shocks, including the global financial crisis, supply-chain disruptions following the tsunami in Japan, and the devastating 2011 floods.
Economic fundamentals are strong, including a track record of growth, stability and fiscal discipline, healthy balance sheets of commercial banks and corporations, high international reserves, and manageable public debt, he added.
Despite Thailand’s economic slowdown in Q1, the IMF mission chief was optimistic that GDP will expand by 4.75 per cent this year, and further by 5.25 per cent next year – supported by strong private demand and an acceleration of public spending.
“Against the backdrop of the global financial crisis and the devastating 2011 floods, the expansionary fiscal policy pursued in recent years was justified, aimed at supporting aggregate demand and reconstruction activities,” Mr Breuer said in a statement.
“But now, the strength of the ongoing economic recovery provides an opportunity to gradually withdraw the fiscal stimulus, create fiscal space for priority infrastructure spending, and rebuild policy buffers to address future possible shocks.”
He said the IMF mission welcomed the authorities’ commitment to fiscal discipline, including their objectives of keeping the public debt ratio under 50 per cent of GDP and balancing the central government budget by 2017.
“The authorities are taking actions to improve tax compliance and expand the tax base, reduce tax incentives for consumption, and revamp excises, while confirming their strict control over current spending,” according to the statement.
Mr Breuer said the IMF delegation discussed additional measures that would support the authorities’ goals of increasing public spending on infrastructure, while also preserving fiscal discipline.
“The Bank of Thailand’s accommodative monetary stance is appropriately supporting the economy,” he said, however, calling on the central bank to continue to be vigilant to demand and wage pressures, and stand ready to normalise interest rates if overheating pressures emerge or inflation picks up.
The mission chief continued, “In an era of volatile capital flows and rapid shifts in investors risk appetite, the inflation targeting regime and the credibility of the central bank have served Thailand well. The policy response to the recent episode of capital flows was appropriate, including exchange rate flexibility and the preparation of contingency measures.”
Though the financial sector has benefited from the strong recovery, the IMF mission warned that vulnerabilities are rising, including from the expansion of specialised financial institutions (SFIs) and rising household debt.
The IMF delegation said it supports the authorities’ intention to strengthen the operating environment of SFIs, including their management and mandates.
“Building on Thailand’s remarkable record of economic development in recent decades, the mission supports the authorities’ intention to raise growth and to make growth more inclusive. The implementation of infrastructure projects, in particular in the transportation sector, is expected to raise economy-wide productivity,” the mission said.
