Positive Signs of the Recovery of the Thai Economy

(16/05/2012)

The Executive Board of the International Monetary Fund (IMF) has commended the Thai authorities for their policy response to the 2011 floods, which propelled the strong recovery of the Thai economy. The Bank of Thailand quoted the IMF Executive Board as saying that Thailand’s GDP should grow by 5.5 percent in 2012 and a further 7.5 percent in 2013 due to a large carryover effect from the strong recovery in the second half of 2012. Domestic demand is expected to be the driving force of growth in 2012, partly due to reconstruction and flood-prevention efforts. But IMF warned that significant downside risks still remain due to uncertainties from the global economy and the progress of flood-prevention measures. The Thai economy is expected to rebound sharply in 2012, partly owing to monetary easing and a large fiscal package. Positive signs of a recovery are already under way with sharp improvements seen in high-frequency indicators since December 2011. Manufacturing output surged in December 2011, though there are variations in the pace of recovery across industries. Confidence indicators have almost reached their pre-flood levels. According to an assessment by the IMF Executive Board, the short-term outlook is favorable, but significant downside risks stem from the unsettled global scenario, internal political uncertainties, and capacity constraints in the execution of public works. The main challenge for the period ahead is to complete reconstruction while maintaining macroeconomic stability and promoting inclusive growth. IMF supported the Thai government’s fiscal package and welcomed the Bank of Thailand’s recent decisions to lower interest rates. However, it stated that the authorities 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, the authorities should stand ready to tighten monetary policy as the output gap closes. Meanwhile, Fitch Ratings indicated that Thailand’s ratings and outlooks reflect its strong external financial position. The rating agency had reaffirmed Thailand’s long-term foreign and local currency issuer default ratings at “BBB” and “A-” respectively, with stable outlooks. According to Fitch Ratings, the Thai economy is expected to grow 5.5 percent in 2012 after flat results in 2011, when the country was hit by extensive flooding. It pointed out that the government’s response to the floods and other policy pledges under the current administration will drive up the general government debt ratio, bringing it to a level closer to the BBB range median. However, it notes the country’s strong financial flexibility and believes that Thailand can accommodate higher public debt at the current rating level. The country’s strong external financial position will also help to insulate the economy from external shocks.