IMF sees strong Thai recovery, urges timely stimulus roll-back

Positive signs of a recovery are already underway, with sharp improvements seen in high-frequency indicators since December, the IMF reported. Manufacturing output surged in December even though there were variations in the pace of recovery across industries. 

Confidence indicators have almost reached their pre-flood levels. As a result, gross domestic product should grow by 5.5 per cent in 2012 and a further 7.5 per cent in 2013 because of a large carryover effect from the strong recovery in the second half of 2012, it said. Domestic demand is expected to be the driving force of growth this year, partly because of reconstruction and flood-prevention efforts.

However, amid uncertainty about the evolution of the global economy and the success of flood-prevention measures, downside risks to the outlook are significant. The Thai economy remains vulnerable to contagion from the turmoil in the euro area, and weak growth in its trading partners as well as to domestic political tensions, if they are renewed. If water-management projects are not successful, that could also affect business and consumer confidence, the IMF said. 

Expansionary fiscal policies came at an opportune time to help offset weak world demand. In addition, in response to last year’s devastating floods, the government introduced plans to invest in flood prevention and boost a reconstruction-led recovery. Similarly, the Bank of Thailand halted its gradual normalisation policy and lowered the policy rate twice by a cumulative 50 basis points in November and January, it noted.

The IMF said the authorities’ policy response to the flood disaster propelled the strong recovery now underway. It noted that the short-term outlook was favourable, but significant downside risks stemmed from the unsettled global scenario, internal political uncertainties, and capacity constraints in the execution of public works. 

It said the current expansionary fiscal and monetary stances were appropriate in the context of weak world demand and muted inflationary pressures. Against this background, its analysts supported the government’s fiscal package and welcomed the BOT’s recent decisions to lower interest rates. The authorities, however, should unwind the supportive policy stance as the recovery takes hold and move to a medium-term consolidation path consistent with low inflation and fiscal sustainability. In particular, they should stand ready to tighten monetary policy as the output gap closes, the IMF suggested. 

The Fund expressed its support for the government’s ambitious reform agenda aimed at promoting more inclusive growth. It observed that recent income-redistribution policies, including the rice-price support mechanism, needed to be monitored and assessed with a view to containing fiscal costs and improving efficiency. 

Minimum-wage increases should be accompanied by measures boosting labour productivity to preserve competitiveness, the IMF said. 

To create the fiscal space necessary to support these reforms, the IMF saw scope for scaling back subsidies, eliminating income-tax credits, and reviewing the rate structure for excise and value-added taxes, while strengthening tax administration.

It said capital inflows were expected to be volatile and suggested that there was room to increase exchange-rate flexibility in both directions. 

It supported the government’s plans gradually to relax restrictions on capital outflow further while ensuring that adequate safeguards are in place to protect against sudden reversals.