Thailand: Ensuring entrenched recovery and fostering sustainable long-term growth
Thailand’s economy is improving on the back of resilient domestic demand and a sustained rebound in tourist arrivals. Inflation has declined rapidly this year. However, the country’s outlook is uncertain due to the external headwinds amid upside risks to inflation. Over the longer-term, Thailand is beset by structural challenges and weaker long-term growth potential, alongside increased complexities from ongoing geoeconomic shifts and climate change risks.
These conclusions are highlighted in the 2023 Annual Consultation Report on Thailand published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was based on AMRO’s Annual Consultation Visit to Thailand from July 26 to August 11, 2023, and data and information available up to September 15, 2023.
Economic developments and outlook
Thailand’s GDP growth picked up to 2.2 percent in 1H 2023 and the output level has surpassed its pre-pandemic level, after growing by 1.4 percent in Q4 2022. Growth is expected to improve from 2.6 percent in 2022 to 3.5 percent in 2023 and 3.9 percent in 2024, driven by the continued recovery in tourist arrivals and resilient domestic demand, and supported by improvement in exports.
Significant uncertainties stemming from both domestic and external factors could affect the strength and trajectory of Thailand’s recovery. On the domestic front, the newly formed government has announced a series of near-term measures to boost the Thai economy. However, the impact of these spendings remain uncertain given that details of these schemes, particularly the digital wallet scheme, have yet to be finalized.
Headline inflation slowed significantly and is projected to decline from 6.1 percent in 2022 to an average of 1.6 percent this year, mainly due to the decline in oil and commodity prices. In 2024, inflation is expected to increase slightly but should remain within the Bank of Thailand’s (BOT) 1-3 percent target range, in line with the continued strengthening of the economic recovery and expectations of higher food prices. However, the confluence of higher fiscal spending and a more severe El Niño can stoke inflationary pressures.
Risks and vulnerabilities
Compared to last year, downside risk to growth has receded, although a weaker-than-expected recovery in China could hinder the recovery in tourism and exports. In addition, a possible economic slowdown in the US and Europe could curtail demand for Thai manufacturing exports.
Inflationary pressure, arising from food prices, could be higher-than-expected due to more extreme El Niño conditions that could reduce agriculture output globally and increase protectionist measures. Higher fiscal spendings in the form of cash transfers would also spur inflation, depending on the design of the scheme and consumers’ spending pattern. A proposed minimum wage increase by the new government could also add to the inflationary pressure.
Various structural challenges could hinder Thailand's ability to revitalize its long-term growth. The country’s growth rate—constrained by a large informal sector—has been declining in the last 20 years, while the economy will become a "super-aged" society by the end of the decade. The infrastructure gap also remains large. The country will also have to navigate the ongoing geoeconomic shifts in trade and investment as well as address climate change risks.
Policy recommendations
Given the economic outlook and the underlying risks and vulnerabilities, the overarching policy priorities should be aimed at ensuring the economic recovery is firmly entrenched, rebuilding policy space and addressing existing vulnerabilities, as well as prioritizing the revitalization of sustainable long-term growth.
The current tight monetary policy stance is appropriate given the strengthening economic recovery and prevailing financial conditions. Looking ahead, the calibration of monetary policy should remain dependent on the evolution of the economic outlook, given the uncertainties over the external environment and upside risks to inflation.
On financial stability, the continued phasing out of pandemic-related support is appropriate amid the stronger recovery. As some measures progressively expire, the authorities are encouraged to closely monitor financial institutions’ asset quality for early signs of credit deterioration, especially for weaker borrowers. AMRO welcomes the new prudential measures announced by the BOT to address vulnerabilities from high household debt. The implementation of these measures should be accompanied by efforts to minimize the risks of unintended consequences, especially the migration of lending activities to the less regulated and the informal sectors.
AMRO supports the contractionary stance in Budget FY2023 and the medium-term fiscal consolidation. However, there is scope to increase the pace of consolidation to allow for swifter rebuilding of fiscal policy space and to bolster resilience against future shocks. Thailand’s longstanding record of fiscal discipline has helped it cope with the multiple challenges in the past decade. As the economy recovers, the authorities are encouraged to adhere to the consolidation efforts, emphasizing sustainable long-term growth over short-term stimulus. The authorities could consider introducing additional revenue-enhancement measures and implement tax policy and administration reforms.
A further scaling up of public investment, prioritizing supply side policies, encouraging balanced regional development, and improving labor productivity will be key to enhance longer-term growth. The pursuit of new free trade agreements will help Thailand buffer against geopolitical risks and sustain its external competitiveness. Sizable investment would be needed to address the risks associated with climate change and to support sustainable economic growth.
