Thailand : 2013 Article IV Consultation

KEY ISSUES Context. The Thai economy has shown an impressive resilience to shocks and staged a strong recovery in 2012. However, growth slowed significantly in the first half of 2013 on account of the expiration of some domestic stimulus programs that were taken in 2012 in the wake of the flood disaster and weak external demand. The economy is being supported by strong fundamentals and expansionary fiscal and monetary policies. The government is seeking to shift public expenditure from boosting domestic consumption to infrastructure investment. Volatile capital flows have presented a challenge to macroeconomic policy. Outlook and risks. Growth is expected to recover in the second half of the year, but at a more gradual pace than in the past, with low inflation. The global economy presents downside risks from a possible slowdown in EM growth and capital flow volatility. In addition, the impact of unwinding policies to boost consumption may be larger than anticipated, while public investment projects might be delayed. Labor skills mismatches and infrastructure bottlenecks are holding back potential growth. Policy recommendations. With solid macroeconomic conditions, the key challenge is to foster higher inclusive growth with stability. Key recommendations are: ? Creating fiscal space for priority spending and gradually rebuilding policy buffers to prepare for adverse shocks. The government’s commitment to fiscal discipline would be buttressed by strengthening the medium-term fiscal framework. ? Allowing the exchange rate to continue to move flexibly in line with fundamentals and respond with a mix of macroeconomic policies and, if needed, capital flow measures to deal with capital flow surges. ? While the banking sector remains sound, the regulatory and supervisory frameworks for specialized and non-bank institutions needs to be strengthened. ? Planned infrastructure investments should be implemented to enhance competitiveness and promote inclusive growth