IMF expects growth at moderate pace amid risks

The team behind the report recommends a mutually reinforcing policy mix of fiscal and monetary stimulus, coupled with structural reforms
The IMF team, led by Ana Corbacho, visited Bangkok from February 16 to March 1. The IMF’s executive board is tentatively scheduled to discuss the report in May.
The team exchanged views on recent economic developments and the outlook with officials in the government, the Bank of Thailand and other public institutions. It also met representatives of the private sector and academics. 
At the end of the visit, Corbacho said the economy continued to recover in 2016. GDP growth reached 3.2 per cent, mainly driven by exports of services and public investment. Average headline inflation was 0.2 per cent, below the target band for the second year in a row, reflecting low energy prices and persistently weak core inflation, Corbacho said in a statement. Amid subdued import growth, the external current account strengthened further. Financial markets were highly resilient in the face of external and domestic shocks.
The recovery is expected to advance at a moderate pace in the near to medium term, the statement said. Public investment would remain a key driver, rising over the next few years in line with the government’s infrastructure plans, and crowding in private investment. Headline inflation is projected to increase in 2017 along with higher energy prices, but would remain below the 2.5 percent target for several years, amid subdued core inflation. The current account surplus is expected to decline gradually, as domestic demand improves over the medium term.
The statement noted that the outlook is subject to significant uncertainty and downside risks remain. On the external front, a bumpy rebalancing in China may hurt Thai exports. A shift in the US policy mix to expansionary fiscal policy and tighter monetary policy could generate capital outflows, raise financing costs, and trigger heightened global volatility. Trade protectionism could particularly affect open economies such as Thailand over the medium term. On the other hand, recent momentum in global growth could be sustained, providing upside risk through a faster recovery in Thai exports and tourism in the near term. On the domestic front, weaker crowding-in of private investment would reduce domestic demand and potential growth. Low inflation could become entrenched, while the household debt overhang could create stronger-than-expected headwinds to consumption and growth.
The statement said ample buffers can be deployed to minimise the risk of a low-inflation, low-growth trap. While cyclical conditions are improving, Thailand is afflicted by features of the “new mediocre” facing some advanced economies. Structural bottlenecks are holding back employment and investment, reinforcing weak expectations of domestic demand. 
The team recommends a mutually reinforcing policy mix of fiscal and monetary stimulus, coupled with structural reforms, to support domestic demand in the short run and boost potential growth over the long run. Such a strategy would also help reduce the high current account surplus over the medium term, helping to ensure that the needed real exchange rate appreciation takes place through a growth-driven process boosting real incomes. The exchange rate should remain the first line of defence against external shocks, with foreign exchange intervention limited to avoiding disorderly market conditions.
The team recommends monetary policy easing together with enhanced communication to improve the balance of risks and steer inflation back to the target. Monetary easing, as part of a broader expansionary policy mix, would counteract risks of low inflation becoming entrenched and prevent a further rise in real interest rates and the real debt burden. 
The team supports the use of fiscal space to accommodate higher public investment. It said large infrastructure projects remain macro-critical to stimulate domestic demand and inflation, crowd-in private investment and imports, and support potential growth and external rebalancing. Fiscal space should not be used for short-term measures that are untargeted and poorly aligned with long-term goals.
 A gradual increase in domestic fiscal revenues, focused on growth-friendly taxes, is needed to finance growing social protection needs and ensure debt sustainability over the longer term. A comprehensive pension reform should tackle design shortcomings and population ageing, with due consideration for equity, efficiency, and sustainability. Articulating a medium-term fiscal strategy would enhance fiscal management, credibility and transparency, the statement said.