thailand 4.0 (…and the imf article iv) · thailand article iv—imf staff advice avoid a...

Thailand 4.0 (…and the IMF Article IV)

Ana Corbacho

IMF Mission Chief for Thailand

September 25, 2017

Tokyo

Thailand 4.0—Government’s vision

Transform Thailand into a value-added and innovation-driven economy

from commodities to innovative products;

from production-based to service-based;

…by creating an environment for investment and growth into the future

But relying on some old ways: target industries; tax incentives

Context—Cyclically-weak emerging market…

Persistent (small) negative output gap Inflation below target band

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013 2014 2015 2016

Output Gap(Percent of potential GDP)

Source: IMF staff calculations.

-6

-4

-2

0

2

4

6

8

Jan-

10

Jun-

10

Nov

-10

Apr-

11

Sep-

11

Feb-

12

Jul-

12

Dec

-12

May

-13

Oct

-13

Mar

-14

Aug-

14

Jan-

15

Jun-

15

Nov

-15

Apr-

16

Sep-

16

Feb-

17

Headline CoreOld core target band Headline mid-point targetHeadline target band

Headline and Core CPI Inflation(Y/y percent change)

Sources: CEIC Data Co. Ltd.; and IMF staff calculations.

…that is saving too much, investing too little

Political transition

• 2014: Military regime

• 2016: Royal Succession

• 2017: Constitution endorsed

• 2018: General elections

…and faces long-term challenges today

Rapid Population Aging

0 10 20 30 40 50 60

SGPTHACHNVTNJPNKORIDN

INDMYSPHLHGK

USEUR

Years for the Old-Age Dependency Ratio to Increase from 15 to 20 Percent

Slowdown in Productivity

-1 0 1 2 3 4

VTNIDNPHLMYSINDJPNKORTHAHKGSGP

CHN

USOther AEs

Decline in TFP Growth Since Global Financial Crisis(In percentage points)

Where is Thailand heading?

• Strong exports and tourism are supporting growth, but investment has been disappointing—large infrastructure projects taking time

• Inflation is projected to undershoot the target band in 2017 and reach the lower end of the band (1 percent) only by end-2018

• Excessive current account is expected to persist into the medium term

Near-term growth is holding up, but downside risks dominate

Global financial volatility Entrenched low inflationA turn to inward-looking policies Household debt overhangHard landing in China Political uncertainty

Thailand Article IV—IMF staff advice

Avoid a low-inflation, low-growth trap through an expansionary policy mix and structural reforms:

1) Monetary policy easing and enhanced communication should steer inflation back to target 2) Macroprudential policy and regulatory reform can address emerging pockets of financial fragility3) Existing fiscal space should be used to remove infrastructure bottlenecks within a sustainable, medium-term framework4) Concerted reforms should foster inclusive and sustained growth

Reduce the excessive current account through a growth-driven process, boosting real incomes

1) Monetary easing and enhanced communication to steer inflation back to target

Trend inflation below target since 2015 Inflation dynamics less forward-looking

1.5

2.0

2.5

3.0

3.5

4.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Trend inflation 1/Consensus Forecast (6-10 years)Inflation target (mid-point value)

Thailand: Trend Inflation(In percent)

Sources: Consensus Forecast; and IMF staff calculations.1/ Trend inflation estimates, from Garcia and Poon (forthcoming), are based on actual inflation dynamics and long-term survey inflation expectations, following Chan, J., Clark, T., and Koop, G., 2015, “A New Model of Inflation, Trend Inflation, and Long-Run Inflation Expectations,” FRB of Cleveland Working Paper No. 15-20.

-5

-3

-1

1

3

5

7

9

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Trend inflation PersistenceEconomic slack (output gap) Import inflationOil price ResidualActual inflation

Thailand: Main Drivers of Inflation(In percent)

Sources: Thai authorities; and IMF staff calculations.

Policy Rate Headline Inflation and Target Band(Percent) (Percent)

0

1

2

3

4

5

2017

Q1

2017

Q2

2017

Q3

2017

Q4

2018

Q1

2018

Q2

2018

Q3

2018

Q4

2019

Q1

2019

Q2

2019

Q3

2019

Q4

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

2017

Q1

2017

Q2

2017

Q3

2017

Q4

2018

Q1

2018

Q2

2018

Q3

2018

Q4

2019

Q1

2019

Q2

2019

Q3

2019

Q4

Monetary policy alone is not enough—reinforce fiscal stimulus and expectations channel

Fiscal + monetary stimulus

No stimulus

2) Macroprudential policy and regulatory reform to address pockets of financial fragility

Assessment of risks

• Financial stability risks contained

• Pockets of fragility

High household debt—legacy from past rapid credit growth

Housing prices—fast appreciation in Bangkok condominium area

Regulatory arbitrage—shift in risks to shadow banking

Advice

• Monetary easing increases risks?

• Targeted action

Time-varying MPMs for riskier households

Tighter LTV; DTI for segments of real estate market

Regulatory reform for consistent risk pricing across banks and nonbanks


Assessment of risks






Advice


• Targeted action

MPMs for riskier households


Regulatory reform for consistent risk pricing across banks and nonbanks20

30

40

50

60

70

80

90

199

1

199

3

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

Household Debt

Trend 1991-97

Trend 2007-15

Household Debt, 1991-2016(Percent of GDP)

Sources: Authorities' data; BIS; and IMF staff calculations.


Assessment of risks






Advice


• Targeted action




8090

100110120130140150160170180190

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

Single-detached house 1/Town house 1/CondominiumLand

Source: CEIC Data Co, Ltd.1/ Including land.

Thailand: Real House Price Indices(January 2009 = 100)

Jan-1

6

Apr-1

6

Jul-16

Oct-16

Jan-1

7

Apr-1

7

Jul-17


Assessment of risks






Advice


• Targeted action




Thailand: Unrated Corporate Bonds


Assessment of risks






Advice


• Targeted action




3) Existing fiscal space should be used for infrastructure within a sustainable MT framework

Does Thailand have Fiscal Space?

On the positive side: On the negative side:The overall fiscal balance of the public sector has been close to zero in recent years suggesting a good track record of fiscal discipline.

Quasifiscal activities by some SOEs are not properly tracked or reported. Risks of contingent liabilities are hard to quantify with the available information.

The current cost of debt financing is low but likely to increase in the medium term. Now is the time for debt financing at fixed rates for new debt issuance.

Age-related spending is projected to increase steadily for demographic reasons, threatening fiscal sustainability beyond the medium term.

Public debt and gross financing needs paths are below standard vulnerability benchmarks and below the Cabinet debt ceiling of 60 percent of GDP.

Bottom line: Thailand has some fiscal space that should be used wisely.









Public health and pension spending is set to rise due to rapid aging

• The increase in spending is driven primarily by demographics (changes in the old-dependency ratio)

• Aging will also lower labor force participation and potential growth

0

5

10

15

20

25

30

JPN CHNKORTHA IND IDN LKAMYSPHLVTN

2015 2030

2050

Public Health and Pension Spending(In percent of GDP)

Left unchecked, age-related spending is a threat to long-term fiscal sustainability

-20

30

80

130

180

2000 2020 2040

China

-20

30

80

130

180

2000 2020 2040

Korea

-20

30

80

130

180

2000 2020 2040

Thailand

2022 Status Quo Aging Less optimistic r - g

Pu

blic

Deb

t (I

n p

erce

nt

of

GD

P)

A less favorable interest rate-growth differential adds further risk

-20

30

80

130

180

2000 2020 2040

China

-20

30

80

130

180

2000 2020 2040

Korea

-20

30

80

130

180

2000 2020 2040

Thailand

2022 Status Quo Aging Less optimistic r - g

Pu

blic

Deb

t (I

n p

erce

nt

of

GD

P)









A simulation with fiscal and monetary policy

• Asia Module of the Flexible System of Global Models• 16 countries for Asia; 8 blocks for the RoW

• Households (liquidity-constrained, saving); firms

• Fiscal policy plays a key role in the economy• Infrastructure investment and consumption

• Transfers (general and targeted)

• Taxes (VAT, PIT, CIT)

• Monetary policy generally follows inflation targeting

Thailand: Infrastructure push under different financing and monetary policy

• In the baseline, monetary policy reacts to the infrastructure push, crowding out private demand

• With monetary accommodation, a flat interest rate encourages investment/discourages saving.

• With debt and monetary accommodation, GDP (and consumption) increase further.

Lower transfers without monetary accommodation Lower transfers with monetary accommodation Debt with monetary accommodation

Public debt: + 1 % GDP

0.0

1.0

2.0

3.0

4.0

0 1 2 3 4 5

Thailand: Real GDP (Percentage Points Difference)



• With monetary accommodation, a flat interest rate encourages investment/discourages saving

• With debt and monetary accommodation, GDP (and consumption) increase further.

Lower transfers without monetary accommodation Lower transfers with monetary accommodationDebt with monetary accommodation


0.0

1.0

2.0

3.0

4.0

0 1 2 3 4 5




• With monetary accommodation, a flat interest rate encourages investment/discourages saving

• With monetary accommodation and debt financing, GDP and consumption increase further

0.0

1.0

2.0

3.0

4.0

0 1 2 3 4 5


Lower transfers without monetary accommodation Lower transfers with monetary accommodationDebt with monetary accommodation


To reap higher growth dividends, critical elements must be in place

• Simulation results hold if risk premium is contained

• More broadly, critical pillars are:

Quality projects that address country-specific gaps

Credible fiscal anchors that look long term

Inclusive and sustainable Social Security Reform

• Structural reforms in healthcare• Automatic adjustment mechanisms in pension• Better coverage and benefits—revenue mobilization

Pension reform to address design issues and population aging

Pension Reform Challenges

Harmonization The pension system is fragmented in regimes for public, (formal) private, and informal employees.Sustainability The retirement age, 55, and the contribution rate, 6 percent, are low.Coverage Over 60 percent of the working-age population is not covered by a formal pension.Adequacy The average replacement rate for private sector workers (19 percent) is too low.Fairness Pensions for civil servants are much more generous, with higher replacement ratios, than for private sector workers.Poverty Alleviation The old-age allowance (minimum pension for those without a formal pension) is low and untargeted.

How should revenue be mobilized?

Increase the low VAT rate

6

7

7.0

10

10

10

12

14.3

20.6

0 5 10 15 20 25

Malaysia

Thailand

Singapore

Cambodia

Laos

Indonesia

Philippines

Average in America

Average in Europe

VAT Rates in 2015(In percent)

Source: IBFD.

Compensate low-income households

-2.5

-2

-1.5

-1

-0.5

0

1 2 3 4 5 6 7 8 9 10

Thailand: Consumption Loss per Decile After a 1 PercentIncrease in VAT Rate (In percent of total consumption per decile)

Source: IMF staff calculations.

4) Concerted reforms to foster inclusive, sustained growth

• Mitigate demographic drag

• Support capital accumulation

• Increase TFP

Close gender gap in LFP

Increase retirement age

Facilitate skilled migration

Reform education

Upgrade infrastructure

Relax limits to foreign equity stakes

Facilitate PPPs

Adopt best practices in doing business

Eliminate untargeted subsidies (agriculture)

Revamp competition law

Restructure SOEs

Reduce tax distortions (incentives for target sectors)

Robust mechanism to identify and compensate vulnerable households

Reduce the excessive current account through a growth-driven process

Substantially stronger external position Two-sided intervention; but reserves

Actual current account (CA) 11.4

EBA CA estimates Cyclical adjustment 0.3 Cyclically adjusted CA 11.1

CA norm 1.1

CA gap 10.0 Policy gap 2.3 Unexplained residual 7.6

Staff-adjusted estimatesCyclical and transitory adjustments [3.0, 7.0] Terms of trade [1.0, 1.5] Tourism [1.0, 1.5] Political uncertainty [1.0, 4.0]

CA gap [3.0, 7.0]

REER gap (elasticity 0.6) [-11, -6]

Thailand: EBA Estimates and Staff Adjustments

-30

-20

-10

0

10

20

30

40

50

2008

2009

2010

2011

2012

2013

2014

2015

2016

Change in reserves Capital and financial accountCurrent account

Current Account, Capital and Financial Account, and Reserves (In billions of U.S. dollars)

Sources: CEIC Data Company Ltd.; and IMF staff calculations.

EBA: Staff’s adjustments of cyclical/transitory factors helped interpret part of the unexplained residual

-6

-4

-2

0

2015Q

1

2015Q

2

2015Q

3

2015Q

4

2016Q

1

2016Q

2

2016Q

3

2016Q

4

Source: IMF staff estimates.1/ Rolling regression of private investment (percent of GDP) on the inverse ofICRG index (measuring political uncertainty), controlling for external demand.

Impact of Political Uncertainty on Private Investment 1/(Regression coefficient)

20

22

24

26

28

30

32

34

2012

2013

2014

2015

2016

Actual Trend 1/

Thailand: Tourist Arrivals(In millions of persons)

Sources: Authorities; and IMF staff calculations. 1/ Trend calculated using an HP filter since the mid-1990s.

Demographic factors are expected to increase the CA norm in coming years

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Thailand World

Aging Speed 1/(Projected change in old-age dependency ratio )

Source: IMF staff calculations.1/ Projected change in old age dependency ratio in 20 years, relative to current level.World refers to other EBA countries.

95

145

195

245

295

345

395

445

495

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Thailand World

Old-Age Dependency Ratio 1/(Index; 1985=100)

Source: IMF staff calculations.1/ Population aged over 65 divided by population between 30 and 64 years old.

Final remarks

• Thailand’s economy is on a recovery path. Exports and tourism are engines of growth, but domestic demand (investment) and inflation are too weak

• Monetary policy should focus on returning inflation to target, while macroprudential policies address systemic risks

• Fiscal policy expected to do a lot. Infrastructure stimulus must be balanced against the fiscal cost of the rapid demographic transition

• Structural reforms are the only true long-term solution

Domestic and external rebalancing through inclusive growth

thailand 4.0 (…and the imf article iv) · thailand article iv—imf staff advice avoid a...

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