Construction site in Bangkok, Thailand.
Thai economic expansion faces challenges from weak domestic as well as external demand and political uncertainty Reuters

Risks to Thailand's growth outlook are tilted to the downside due to weakening private investment and consumption as well as lower demand for exports from the country in addition to political uncertainty, the International Monetary Fund said on Wednesday.

"Domestic risks to the economy come from policy slippages, weaker-than-expected private demand and political uncertainty. External risks include a surge in global financial volatility and protracted slow growth in advanced and emerging economies," IMF said.

There would be room for further easing in the monetary policy in case recovery doesn't pick up pace, the Fund said. It expects Thailand's economic expansion rate to rise to 3.5% in 2015 helped by lower fuel prices and some recovery in consumption.

"On the upside, domestic consumption and exports may experience a stronger boost from sharply lower oil prices."

The IMF also emphasised the need for strengthening fiscal reforms starting from fully reinstating the diesel taxes and growing to increasing the VAT rate.

"Priority should be given to completing the fuel subsidy reform, including the full reinstatement of diesel taxes. As part of the medium-term fiscal strategy, the authorities should consider gradually increasing the VAT rate to 10% from 7%."

The Fund, however, added that hiking the VAT rate should start only when the economic recovery is well entrenched and there should be programmes to mitigate the impact on vulnerable groups.

IMF expects Thai inflation to remain subdued. Trade surplus is likely to widen in 2015 helped by lower oil prices but will come down over the medium term as exports growth would weaken.

"Inflation is projected to remain subdued in 2015 and recover somewhat toward the end of the year. A gradual recovery in imports is expected, while exports are projected to grow only modestly, leading to a lower current account surplus over the medium term."