Thailand is warned to be prepared for inflation and vulnerability from the capital flows by the International Monetary Fund (IMF) which may add uncertainty to the Thai economy.

An IMF delegation, led by Luis E. Breuer, met with executives of the Bank of Thailand (BoT) and senior Finance Ministry officials last week.

The Thai economy has shown an impressive resilience to shocks, including the global financial crisis, supply-chain disruptions following the tsunami in Japan, and the devastating 2011 floods. The economic fundamentals are strong, including a track record of growth, stability and fiscal discipline, healthy balance sheets of commercial banks , corporations and high international reserves, and manages public debt. Despite Thailand’s economic slowdown in Q1, the IMF was optimistic that GDP will expand by 4.75 per cent this year, and further by 5.25 per cent next year. Against the backdrop of the global financial crisis and the devastating 2011 floods, the expansionary fiscal policy pursued in recent years was justified, aimed at supporting aggregate demand and reconstruction activities. But now, the strength of the ongoing economic recovery provides an opportunity to gradually withdraw the fiscal stimulus, create fiscal space for priority infrastructure spending, and rebuild policy buffers to address future possible shocks.

The IMF mission welcomed the authorities’ commitment to fiscal discipline, including their objectives of keeping the public debt ratio under 50 per cent of GDP and balancing the central government budget by 2017. The authorities are taking actions to improve tax compliance and expand the tax base, reduce tax incentives for consumption, and revamp excises, while confirming their strict control over current spending

The IMF delegation discussed additional measures that would support the authorities’ goals of increasing public spending on infrastructure, while also preserving fiscal discipline. In an era of volatile capital flows and rapid shifts in the investors risk appetite, the inflation targeting regime and the credibility of the central bank have served Thailand well. The policy response to the recent episode of capital flows was appropriate, including exchange rate flexibility and the preparation of contingency measures. Though the financial sector has benefited from the strong recovery, the IMF mission warned that vulnerabilities are rising, including from the expansion of the Specialized Financial Institutions (SFIs) and rising household debt.

The IMF delegation supports the authorities’ intention to strengthen the operating environment of SFIs, including their management and mandates. Building on Thailand’s remarkable record of economic development in recent decades, the mission supports the authorities’ intention to raise growth and to make growth more inclusive. The implementation of infrastructure projects, in particular in the transportation sector, is expected to raise economy-wide productivity