The International Monetary Fund (IMF) recently concluded its Article IV consultation with Thailand for 2008, and has published its preliminary recommendations for the Thai economy.
Describing Thailand's economic fundamentals as "favourable", the Directors predicted a return to medium-term growth rates of around 6% "predicated on the assumption of a continued macroeconomic stability and higher productivity dividends from investment in infrastructure".
Chief among the IMF's recommendations was the maintenance of medium-term fiscal sustainability, in light of the government's current short-term policy of fiscal loosening. While noting that the implementation of infrastructure megaprojects will "support demand in the near term, relieve infrastructure bottlenecks, raise total factor productivity, and sustain faster growth over the medium term", the IMF appears to be serving advanced notice that such works should not be at the expense of a balanced budget.
In the short-term at least there would seem little danger of fiscal imbalances. While fiscal easing led to the central government cash budget posting a deficit of 1.25% of Gross Domestic Product (GDP), the general government account was still in surplus (though falling around 75 basis points to around one quarter of a point of GDP). The overall public sector was close to balance. Thailand's foreign trade position also remains positive: the current account registered a surplus equivalent to over 6% of GDP, and reserves increased to $87.5bn by the end of 2007 - equivalent to 6.5 months of imports. The baht appreciated by 6.4% against the dollar in 2007, in line with regional currencies.
The Directors noted that central bank monetary policy has succeeded in stimulating domestic demand, which after stagnating for several years now looks set to become one of the driving forces of the economy. Bank of Thailand (BOT) rate cuts of 175 basis points between January and July were agreed by the Directors to be sufficient for the time being, with the importance of maintaining the credibility of the central bank's inflation-targeting framework reaffirmed during the consultation. Private demand is expected to be further supported by recent tax measures designed to stimulate the economy.
Among potential clouds on the horizon is the ever-constant threat of inflationary pressures - picking up in Q4 2007 and reaching 5.25% (headline) in March 2008 - and diminishing demand from some of Thailand's trading partners. The Directors however welcomed the resilience of Thailand's economy against the background of domestic political uncertainties and the turmoil in global financial markets. In particular, efforts to strengthen the financial and corporate sectors were commended. The completion of the Financial Sector Stability Assessment (FSSA) was highlighted, and the IMF urged the government to implement its recommendations "rapidly". Meanwhile the granting of operational independence to the BOT was also praised.
Looking ahead, the basic fundamentals of the Thai economy are expected to remain positive. Growth is projected to rise by half a percentage point to 5.3% in 2008, while consumption is anticipated to rise by over 2% to 4.8%. Growth in imports is expected to almost double from 9.6% to 18.2%, while export growth is expected to shrink from 18.1% to 13.2%. This will inevitably lead to some deterioration in Thailand's relative terms of trade; however, exports will continue to exceed imports for the time being. External debt is anticipated to grow at a slower rate than the economy, meaning a drop from 29.4% of GDP to 27.7%, despite a dollar-terms growth from $61.7bn to $75.5bn.
It would seem that, in the IMF's eyes at least, Thailand continues to remain a strong performer - despite the well-documented political instabilities it has endured in the past 12 months, and the worsening condition of the global economy.
