SINGAPORE, December 26, 2019 – Thailand’s economy is projected to slow from 4.1 percent in 2018 to 2.7 percent in 2019 and 3.1 percent in 2020, due to a decline in exports amid U.S.-China trade tensions, as well as a slowdown in private investment. This was highlighted in the 2019 Annual Consultation Report on Thailand published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared based on AMRO’s Annual Consultation Visit to the country from August 13 to 23, 2019 and data available up to November 22, 2019.

Overall, the contribution of the external sector to growth is expected to be moderate. While domestic demand is expected to be the main driver of growth, it is also likely to remain modest. Inflation remains low and subdued. Going forward, inflationary pressure is expected to be subdued reflecting the weak economic conditions and low oil prices, and headline inflation is projected to average 0.8 percent in 2019, and 1.0 percent in 2020, around the lower bound of the inflation targeting tolerance band. The external position remains strong, underpinned by the sizable current account surplus and substantial international reserves.

Downside risks to growth continue to stem mainly from a further escalation of the US-China trade tensions. While there are early signs of positive trade diversion and investment relocation to Thailand as a result of the U.S.-China trade conflict, the negative spillover effects of the trade conflict are still greater.

Risks to financial stability remain contained, although some pockets of risk remain. In particular, the non-performing loan (NPL) ratio of small and medium-sized enterprises remains elevated while the NPL ratio of state-owned financial institutions has been on a rising trend since the first quarter of 2018. The household debt to GDP ratio, which is higher than regional peers, has increased somewhat recently. The search-for-yield behavior of domestic investors under a prolonged period of low interest rate environment requires continued vigilance.

With a very low fertility rate, Thailand is aging at a relatively fast pace and is faced with the challenge of “getting old before getting rich”. Thailand’s labor force participation rate has started declining since 2012 with a consequent reduction in the contribution of labor to Thailand’s potential growth. This has been partially offset by an influx of migrant workers from neighboring countries.

Given the challenging global economic environment and easing global monetary conditions, Thailand can and should adopt more expansionary fiscal and monetary policies to support the weak economy, while employing macroprudential measures to address the pockets of risk in the financial sector.

Fiscal policy should prioritize infrastructure investment and facilitate structural reforms in order to lift the growth potential and enhance the social security system to address challenges posed by the aging population. The authorities should exert efforts to pass the FY2020 budget in a timely manner and avoid delays in implementation of mega- infrastructure projects. Given that the economy is operating below potential, fiscal spending should be countercyclical and front-loaded, while at the same time prioritizing infrastructure investment and facilitating structural reforms in order to enhance the growth potential.

The current monetary policy stance is appropriate in supporting growth amid low inflation and a strong external position. The low inflation and weak growth prospects amid strong external headwinds warrant continued vigilance and proactive policy response, if needed. The authorities have taken significant macroprudential measures to safeguard financial stability. Although some pockets of financial stability risks remain, they can be addressed by implementing the planned release of new measures. Against this background, monetary policy can focus more on supporting growth, which has fallen below potential, and the rise of headline inflation toward the target.

The Thailand 4.0 scheme and the Eastern Economic Corridor (EEC) flagship projects are key strategic initiatives to achieve the goal of becoming a high income developed country. The implementation of these initiatives should be ramped up. To further strengthen growth potential, the services sector can be further liberalized to attract more investment and encourage the development of higher value-added services based on digital technology.

About AMRO and AMRO’s Annual Consultation Report:
The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

The Annual Consultation Report was prepared in fulfilment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.