Thailand’s Medium-term Macroeconomic Policies: Major Challenges and Appropriate Responses

This paper aims to identify major medium-term challenges facing the Thai economy as a result of the Sub-prime financial crisis as well as the public policy reactions following the crisis before providing appropriate recommendations. Over the medium term, Thailand’s economic recovery may be subject to its ability to lift the level of potential output that has been lowered during the crisis from subdued investment and confidence; concerns over fiscal sustainability; as well as increased risks to asset prices and inflation, possibly through large capital inflows into the region induced by world excess liquidity. Appropriate fiscal policy calls for the balancing between the short-run growth stimulus and the long-run potential output elevation for a sustainable recovery. Fiscal measures must be carefully designed and budget effectively disbursed. The role of expenditure automatic stabilizer should be enhanced to lend greater flexibility in support of the economy during possible future challenges, while also formulate a clear plan for fiscal consolidation to preserve sustainability. On the other hand, monetary policy likely encounters limitation on continued easing stance due to rising inflationary pressure as economic recovery solidifies. Nonetheless, monetary discipline and price stability will foster as the potential economic growth over the long run. In addition, the role of central bank in preserving financial stability needs to be fortified by macro-prudential measures which are more targeted and flexible in conjunction with the option in interest rate policy, only when there are no conflicts to monetary policy objectives, to contain the financial imbalances as a detrimental risk factor to the overall economic stability.