Economy gets a pat on back from IMF

Mission says strong domestic demand needed to sustain recovery; warns about fiscal costs of some projects

The International Monetary Fund has praised Thailand for its strong macroeconomic fundamentals, but warned that the prosperity could be mired by downside risks, which include the euro-zone crisis and fiscal costs of several projects.

Thomas Rumbaugh, mission chief for Thailand, said at a press briefing yesterday that the IMF expected the Thai economy to show a strong rebound from the flood disaster. Gross domestic product is expected to expand by 5.5 per cent this year and by 7.5 per cent in 2013.

"With the global economy projected to remain subdued and expand by only 3.3 per cent in 2012, strong domestic demand will be necessary to sustain the recovery. However, there are downside risks: the strains in Europe could further intensify and undermine global economic growth as well as overall momentum in Asia; implementation of water-management projects might be slower than anticipated; and any renewed domestic uncertainty could weigh on still-fragile investor sentiment," Rumbaugh said.

The IMF mission, in Bangkok for two weeks, just completed the annual Article IV consultation discussions.

The mission approved the Thai government's spending on water management in response to the crisis, to reassure investors. However, there could be risks if the implementation is slower than expected. The IMF also suggested that the government come up with a comprehensive fiscal framework on how to finance the spending. It is crucial that the financing is not carried out on an off-balance-sheet budget, he said.

The mission expressed concern about the rice-pledging scheme, as it could lead to higher-than-expected fiscal costs. Moreover, as oil prices are creeping up, the Thai government has been urged to look at policies that are not well targeted, including oil subsidies, Rumbaugh said.

Thailand's fiscal and monetary policies are currently supporting the economic recovery and the economy is in a position to achieve 5-per-cent annual growth in the medium term without inflationary pressure, he added.

Extra room

Regarding the transfer of the Financial Institutions Development Fund debt to the Bank of Thailand, he said "public debt remains public debt", but the transfer gives extra room for the debt-servicing ratio.

While supporting the stimulus measures, he said it was crucial that the government start to withdraw them before inflationary pressure kicks in.

Rumbaugh foresees full recovery of the manufacturing sector by the third quarter of this year, and GDP growth could exceed 5.5 per cent this year, depending on circumstances and production levels. This would draw capital inflows to Thailand, but would not put pressure on the baht, as the Bank of Thailand's policy is flexible enough to allow the currency to move in both directions.