Optimizing growth, constrained by challenges in the business and political environments

Thailand experienced comparatively moderate GDP growth in the decade prior to the Covid-19 crisis, with an average annual growth rate of +3.6%. The pandemic had a large negative impact on the economy, resulting in a contraction of -6.1% in 2020 followed by a slow recovery in 2021 (+1.5%) and 2022 (+2.5%). The economy then decelerated to an annual growth rate of +1.9% in 2023, dragged down by challenging external conditions. While private investment contracted more than expected in 2024, private consumption was robust, inbound tourism accelerated and external demand recovered. Looking ahead, these tailwinds should maintain economic growth at +2.7% in 2025 and +2.5% in 2026. The government has also implemented several programs aimed at further boosting private consumption and investment, thereby supporting the country’s growth prospects. However, the looming trade war and slowing external demand from the US will pose risks to Thailand’s manufacturing output and export growth, either directly or indirectly through Thai manufacturers linked to Chinese firms. These effects could be offset by strong domestic demand and rising demand from Europe. Furthermore, Thailand stands to benefit significantly from higher FDI inflows as multinationals look to diversify their supply chains away from China – provided it is incentivized to improve its competitiveness relative to its regional peers (notably Vietnam and Indonesia).

In terms of fiscal policy, the Covid-19 crisis saw a shift in Thailand’s stance. The fiscal deficit deviated significantly from its trend in 2020 (-4.5% of GDP), 2021 (-7%) and 2022 (-4.6%) – compared with -0.8% of GDP in 2019 and -0.3% of GDP on average in the 2010s. The fiscal deficit moderated to -2.0% in 2023, and we expect it to average 3.1% during the 2025-2026 period amid populist policies to stimulate domestic consumption and higher infrastructure investment. At the same time, stronger growth should lead to higher government revenues. Thailand is expected to strengthen its tax collection process in the coming years, partly through a minimum corporate tax that is due to take effect in 2025.

On the monetary policy front, the Bank of Thailand shifted to monetary tightening in August 2022 with a cumulative increase of 200bps by the end of 2023, in the context of significant depreciation of the Baht against the US dollar and elevated inflation. After announcing a 25bps cut in October 2024 to mitigate tighter financial conditions, we expect the monetary policy stance to remain neutral in the near term with a gradual easing thereafter, in part depending on the government’s expected fiscal expansionary path and a gradual easing of inflationary pressures. After rising to a record high of 6.1% in 2022, headline inflation eased to 1.2% in 2023 and declined further in 2024, mainly on the back of lower energy and food prices. Headline inflation is expected to pick-up to 1.3% in 2025 and 1.4% in 2026 due to rising energy prices and potential for additional economic growth, thereby remaining within the target range of the central bank (1-3%). However, demand-induced inflationary pressures cannot be completely ruled out – notably from strong private consumption growth, wage growth prospects and fiscal stimulus measures.

Thailand’s business environment has deteriorated over the past few years, according to our assessment of 185 economies, in which the country now ranks just around the average. The Heritage Foundation’s Index of Economic Freedom 2023 survey assigns Thailand rank 80, down from rank 42 in the 2021 survey, reflecting deteriorations with regards to property rights, judicial effectiveness, government integrity, fiscal health, investment freedom and labor freedom. Meanwhile, the World Bank Institute’s annual Worldwide Governance Indicators 2024 survey suggests a decline in the already-weak control of corruption indicator, and a slight improvement in political stability and absence of violence/terrorism, although this indicator remains weak. Our proprietary Environmental Sustainability Index puts Thailand at rank 138 out of 210 economies, reflecting weaknesses in terms of renewable electricity output, the recycling rate and overall climate-change vulnerability. However, the country scores better with regard to CO2 emissions and energy use per GDP as well as water stress.

Former prime minister Srettha Thavisin was dismissed in August 2024 by a decision of the Constitutional Court, leading to the House of Representatives electing Paetongtarn Shinawatra as prime minister. Shinawatra is the daughter of a former prime minister and de factor leader of the ruling Pheu Thai Party (PTP). The alliance between the PTP, which has promised greater democracy, and the parties close to the military will continue to be challenged. However, the military is likely to remain powerful. The risk of a military coup remains quite low but it could increase should the coalition government fall apart. In addition, the leading opposition party – the Move Forward Party (MFP) – was dissolved by the Constitutional Court but has reformed under a new name (the People’s Party (PP)), and will keep pursuing progressist policies. The divisive issue of reforming the monarchy will also continue to weigh on political stability. In the short to medium term, risks to political stability in Thailand cannot be completely ruled out.