Bangkok: CIMB Thai has issued a warning that ongoing conflict in the Middle East could exacerbate Thailand's current "fiscal vacuum." The bank stated that rising tensions might push oil prices beyond $120 per barrel, increasing fears of an economic recession and the potential for a credit rating downgrade during a period of governmental transition.
According to Thai News Agency, Dr. Amorntep Chavala, Assistant Managing Director and Head of Research at CIMB Thai Bank, analyzed the escalating conflict's impact on the Thai economy, focusing on the potential energy crisis amid existing budgetary constraints. The analysis was based on three scenarios: limited tensions with minor impact, the closure of the Strait of Hormuz affecting global oil exports, and a protracted war involving the US and Israel against Iran.
The most concerning scenario for Thailand is the "fiscal vacuum" occurring during a government transition, severely affecting budgetary mechanisms. The caretaker government is unable to approve new investment projects or implement large-scale emergency relief measures. Key financial instruments such as the Fuel Fund are overloaded, and public debt is nearing its fiscal discipline limit. This prevents the government from subsidizing retail fuel prices, resulting in higher living costs for the public and increased risks of a technical recession and credit rating downgrade.
The crisis also affects various sectors, particularly the capital market, where gold and oil prices are expected to surge, leading to heavy sell-offs of risky assets. The Thai baht may depreciate sharply due to the trade deficit caused by costly oil imports. The central bank faces challenges in implementing interest rate policies to control cost-side inflation, as domestic purchasing power remains weak. Additionally, the business and tourism sectors are impacted by increased logistics costs and the decline of high-spending tourists from the Middle East.
In light of stalled fiscal engines, the private sector and households need to adapt quickly to self-reliance by managing cash reserves to cope with rising costs. Importers should hedge against the baht depreciating beyond 34 baht per dollar, while households must exercise caution in taking on new debt to maintain financial stability.
The Thai economy is undergoing a significant test, where the speed of government formation and budget approval are crucial in mitigating the Middle East conflict's impact and preventing a national economic crisis.