IMF Finalizes 2023 Article IV Review with Thailand

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Thailand.

Thailand's economic recovery is losing momentum, amid decelerating inflation. Economic activity expanded by 2.6 percent in 2022, but growth moderated to 1.9 percent in 2023Q1‑Q3. This is despite robust private consumption buttressed by the recovery in tourism, as the economy is facing headwinds from weak external demand and domestic investment. Inflation decelerated in November 2023, owing to the base effect of energy and food prices, gradual monetary policy tightening, and the extension of energy price subsidies. The current account balance declined in 2022, reflecting higher commodity prices and slower external demand. As of September 2023, the current account balance has registered a small surplus aided by the recovery in tourist arrivals, the decline in shipping costs and a larger compression of imports relative to exports.

The recovery in 2023 is expected to remain timid, before accelerating in 2024. Real GDP is projected to grow by 2.5 percent in 2023, supported by an acceleration of services exports and private consumption in 2023Q4, while headline inflation is expected to average 1.3 percent in the year. Growth is projected to accelerate briefly in 2024, on account of improvements in external demand and robust growth in private consumption bolstered by the government's fiscal stimulus. Driven by the demand boost, headline inflation is expected to accelerate mildly in 2024— but remain within the Bank of Thailand's target range. The current account balance is expected to turn into a small surplus in 2023 and further increase in 2024, as the continued recovery in tourism receipts and decline in freight costs offset the weak performance of merchandise exports.

Downside external and domestic risks dominate Thailand's economic outlook. The economy's rebound is subject to external risks that include an abrupt global slowdown—including in China— hikes in commodity prices, tighter‑than‑expected global financial conditions, and deepening of geo‑economic fragmentation. Domestic risks add to the uncertainty as the lack of fiscal discipline could undermine macroeconomic stability, elevated private sector debt poses a threat to financial stability, and over‑reliance on tourism increases Thailand's vulnerability to external shocks.

Executive Board Assessment

Executive Directors welcomed Thailand's post-pandemic economic recovery and commended the authorities for maintaining macroeconomic stability amidst multiple shocks. However, the recovery has been slower than in ASEAN peers and the outlook remains uncertain, with risks tilted to the downside. Given limited fiscal space and longstanding structural weaknesses, Directors encouraged the authorities to continue with gradual policy normalization in the near term, while implementing bold structural reforms to boost productivity and potential growth and building climate resilience.

Directors took note of the authorities' announced near-term policy measures to stimulate economic growth, but considered a neutral fiscal stance, with targeted and sustained support for vulnerable groups through enhanced social safety nets and greater progressivity in the tax system, better suited for achieving their objectives to address poverty and inequality. They agreed that the medium-term fiscal strategy should aim at placing public debt on a downward path while providing fiscal space for investments in human and physical capital and reducing risks from state-owned enterprises and extra-budgetary funds. Enhanced revenue mobilization, through gradually increasing the VAT rate and improving spending efficiency, including by removing costly universal energy subsidies, should be key priorities.

Directors concurred that the Bank of Thailand's neutral monetary policy stance remains appropriate. Nonetheless, the authorities should be ready to tighten in case domestic or external risks to inflation materialize. Directors welcomed the unwinding of policy interventions in the financial sector. They encouraged the authorities to pursue their efforts to reduce elevated private debt by facilitating restructurings, promoting responsible lending and borrowing, and strengthening the macroprudential framework, instead of relying on debt moratoria that could cause moral hazard. Efforts to further strengthen the AML/CFT framework should also continue.

Directors reiterated that the exchange rate should continue to act as a shock absorber and foreign exchange intervention should be limited to addressing disorderly market conditions and preventing excessive deviations in hedging and financing premia due to large non-fundamental shocks. They noted the staff's preliminary assessment that Thailand's external position is stronger than implied by medium-term fundamentals and desirable policies, although some Directors recognized the authorities' reservations about the External Balance Assessment framework and called on staff to continue to work with them on addressing concerns.

Directors encouraged the authorities to implement structural reforms to promote investment and boost competitiveness and productivity. They underscored the need to remove excessive regulation, upskill the labor force, and reform the social protection system. Managing climate transition risks and building resilience to natural disasters will also be key.