Abstract

Thailand’s economy is undergoing a modest recovery after a sharp contraction in early 2014, when domestic demand was adversely affected by political unrest in Bangkok. The government was replaced in May 2014 in a military coup, which led to the end of large-scale street demonstrations and an improvement of business and consumer confidence. Outlook. The recovery is expected to continue, with GDP increasing 3.7 percent in 2015, although the economy is lacking a strong growth engine. With output below potential and sharply lower fuel prices, annual CPI inflation is projected to fall to 0.1 percent, undershooting the new target range. Risks to the outlook are slightly to the downside, reflecting political and policy uncertainty and potential surge in global financial volatility. Macroeconomic policy mix. The government’s plans for near-term fiscal stimulus followed by consolidation within a medium-term framework are appropriate. Monetary accommodation remains appropriate, and a further loosening may be useful if fiscal stimulus is delayed. The exchange rate is broadly consistent with medium-term fundamentals. Fiscal policy. Fuel price reform and elimination of the rice pledging scheme have reduced distortions by replacing price interventions with targeted income support. They have also freed up some fiscal room, which can be used to finance the government’s much-needed infrastructure investment program. An increase in the VAT, once the recovery is firmly entrenched, will help keep public debt sustainable in the medium term. Financial stability. Thailand has taken a number of important steps to strengthen the financial stability framework, including the decision to extend the Bank of Thailand’s supervisory and regulatory mandate to Specialized Financial Institutions. Credit growth has moderated considerably. Nevertheless, pockets of vulnerability remain; mainly, high household debt and the growth of nonbank financial intermediaries. Structural policies. Thailand’s growth has slowed significantly in the last few years. Looking forward, an aging population will present new challenges. Measures to augment dwindling labor supply, increase infrastructure investment, improve education and training, provide new incentives for R&D and high-value-added production, and step up regional integration are expected to boost inclusive growth.