SINGAPORE, September 14, 2018 – The Thai economy continues to gain traction, with growth expected to increase from 3.9 percent in 2017 to 4.4 percent in 2018,[1] mainly driven by strong exports and tourism. This was highlighted in the 2018 Annual Consultation Report on Thailand published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared on the basis of AMRO’s Annual Consultation Visit to the country from June 4 to 12, 2018 and data available up to 16 July 2018.

Strong global demand has boosted export-oriented manufacturing production, while increasing tourist arrivals have benefited several service sectors. Going forward, the Thai economy is expected to maintain its strong momentum in 2018 before moderating slightly to 4.0 percent in 2019. Headline inflation has continued to inch up in recent months, although it remains low. Inflation is expected to be slightly stronger and is forecast to be around 1.2 percent in 2018 and 2019. The external position remains strong, underpinned by the sizeable current account surplus and substantial international reserves.

Downside risks to growth stem mainly from spillover effects of an escalation in US-China trade conflicts. Risks to financial stability remain contained, although some pockets of vulnerabilities remain. Overall, the trend deterioration of bank asset quality has flattened out in line with the broader improvement of the economy. The search-for-yield behavior in a prolonged period of low interest rates, particularly with regard to savings cooperatives and mutual fund investments, requires continued vigilance. The household debt-to-GDP ratio, albeit moderating, remains high compared to regional peers.

Thailand is aging at a relatively fast pace, reflecting its low fertility rate, putting it at risk of “growing old before getting rich”. The aging population may undermine the country’s growth potential and put pressures on the fiscal position as pension and health-related spending will rise.

Fiscal policy should be directed towards strengthening infrastructure investment and structural reforms to lift growth potential and enhance the social security system to prepare for an aging population. The government’s thrust for mega-infrastructure projects is a welcome development and these projects should be expedited and executed in a well-coordinated manner. To support the infrastructure drive and expansionary fiscal policy, it is important to improve the buoyancy of the tax system. Therefore, efforts to broaden the tax base and improve tax administration are needed to raise the tax revenue ratio and maintain fiscal sustainability.

The current monetary policy stance is appropriate in supporting growth and financial stability, and consistent with inflation moving in line with the inflation target. While inflation is still low, it is gaining traction, and is expected to move to within the target band. Given the ample liquidity in the financial system and the weak demand for credit, as well as a relatively flat Phillips curve, a reduction in the policy rate will not be effective in boosting credit and domestic demand but may increase household borrowing. Maintaining financial stability in a prolonged period of low interest rate environment requires a set of well-calibrated and coordinated policy instruments that include monetary policy, macroprudential regulation, and coordination with other regulatory agencies.

The 20-year Strategic Plan, including the Thailand 4.0 scheme and the flagship project of Eastern Economic Corridor (EEC), is a welcome move. Labor productivity can be increased by improving the quality of education, especially in science and technology, and enhancing vocational training. A coordinated package of reforms is necessary in order to cope with the rapid pace of aging, including extending the retirement age, mobilizing previously untapped talents in the countryside, and encouraging high-skilled immigration.

In addition to the overall macroeconomic assessment for Thailand, the report also contains studies on two selected issues critical to the country’s macroeconomic developments. The first study discusses key drivers of Thailand’s private consumption growth and underlying factors responsible for its slow recovery since 2014. The second study examines factors that have contributed to the success of Thailand’s tourism as one of the world’s most popular destinations for tourists.

[1] The revised forecast is based on recent data updates on the Q2 GDP data and revised Q1 GDP data that were released on August 20, 2017. Such data updates were incorporated in the press release, but not incorporated in the report, which forecast a 2018 GDP growth of 4.2 percent.

About AMRO:

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization, established to contribute to securing the economic 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 fulfills its mandate by conducting regional macroeconomic surveillance, supporting the implementation of the Chiang Mai Initiative Multilateralisation (CMIM), and providing technical assistance to its members.

The Annual Consultation Report was prepared in accordance with AMRO’s macroeconomic surveillance function. 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.