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IMF Executive Board Concludes Consultation with Thailand

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The IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies

The Thai economy has been coming through two severe tests. The first test came when global trade collapsed following Lehman’s failure in September 2008. This collapse had profound consequences for one of the world’s most open economies, where exports account for more than 60 percent of GDP.

By the first quarter of 2009, output had fallen by 7 percent year-onyear. Then, just as the economy was beginning to recover from this shock, politics intervened. In March 2010, a large political protest started in Bangkok, which stretched on until the end of May, periodically leading to outbreaks of violence. As a result, tourist arrivals, which generate about 6 percent of GDP, plunged. Confidence indicators fell, and households again reacted by slowing their consumption.

The Thai economy has been coming through severe tests

Yet the economy was able to absorb these blows—and stage a remarkable comeback. The recovery began in the second quarter of 2009, narrowly and tentatively. By the first quarter of 2010, it had progressed to the point where GDP had essentially regained its previous peak. The political turmoil then set the recovery back, but again the economy rebounded. Tourism quickly began to recover, while private consumption rapidly resumed its upward trend. Most significantly, the rebound in investment continued at a robust pace, never flagging, even during the protest period. Therefore, by the third quarter of 2010, it seemed that a sustainable recovery

was taking hold. International reserves have been climbing, surpassing US$160 billion by September 2010, and the real effective exchange rate has regained its pre-crisis peak reached in 2008. A key factor behind this rapid recovery was the revival in global trade, starting in early 2009. This revival sparked a surge in Thailand’s exports, even as imports remained depressed, pushing the current account from near balance into a 7¾ percent of GDP surplus in 2009.

Vigorous export demand continued into 2010, and exporters were able to fill these orders, even during the political disturbances, because the industrial estates and ports were located far from the protest zone. Another factor behind Thailand’s recovery was its policy response, one of the most forceful in the region. Years of fiscal prudence and credible monetary management (reinforced by an inflation targeting framework) provided ample space for decisive action.

The Bank of Thailand cut its policy rate by 250 basis points to a historically low level of 1¼ percent. Meanwhile, the government swiftly introduced a sequence of stimulus packages. The first package focused squarely on putting spending power in the hands of the population, partly through direct cash transfers, partly by waiving charges, such as the cost of electricity, for the poor. The second package expanded spending to include investment projects, particularly on infrastructure. Together, they imparted an estimated stimulus of 3 percent of GDP in the two fiscal years since 2007/2008.2 The most fundamental explanation for Thailand’s rapid recovery, however, lies in its sound economic framework.

The country entered the global crisis from a position of financial strength, on all sides—bank, corporate, and public. So, when the stress arrived, these sectors were able to withstand the blow, and once the overseas orders came back, they were ready to resume production. As this happened, the impetus quickly fed through to domestic demand, in stark contrast to some advanced countries, where households and financial institutions were beset by balance sheet problems.

Over the short term, Thailand should benefit from some further economic normalization, which will buoy growth over the next few quarters. As a result, growth this year should reach 7½ percent and 4 percent in 2011, with low inflation. However, downside risks remain: slowing growth in advanced countries could undermine the global recovery, while political uncertainty could weigh on domestic demand. With the economy recovering, the authorities are starting to normalize the policy stance.

After two years of fiscal stimulus, disbursements from the off-budget second stimulus package are scheduled to fall by nearly 2 percent of GDP next fiscal year, as the special bond funding authority nears exhaustion. But part of the stimulus measures will be transferred to the regular budget, reducing the estimated withdrawal to a manageable 1 percent of GDP. The overall public sector deficit should also fall by the same amount, to a projected 3½ percent of GDP

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