KKP recommends ending the blanket diesel subsidy and switching to targeted assistance for specific groups.
KKP advises the government to stop subsidizing diesel at a flat rate of 18 baht per liter, arguing that forcing prices to reflect actual costs discourages consumer spending, increases debt in the oil fund, and could push inflation higher, putting Thailand at risk of stagflation and low GDP growth.
March 17, 69. Dr. Pipat Luangnarumitchai, Managing Director and Chief Economist of Kiatnakin Phatra Financial Group (KKP). It was revealed that the government's approach to managing oil prices, which involves subsidies amidst rising oil prices due to tensions in the Middle East, should be viewed as allowing prices to adjust more according to market mechanisms, coupled with a more targeted rather than blanket assistance approach.
"Fixing prices too low, such as capping diesel at 30 baht when the actual price could be as high as 48 baht, prevents the public from receiving a true price signal, resulting in a lack of incentive to conserve energy. A more appropriate approach is to gradually adjust prices to reflect true costs, allowing consumers to begin changing their behavior."
While the problem of blanket subsidies, or subsidizing fuel prices for everyone, may create significant distortions and burdens on public finances, as it's argued that even drivers of luxury cars would receive the same 18 baht per liter subsidy as everyone else, representing a substantial burden. For diesel alone, the subsidy could amount to over 1,000 billion baht per day. During 2022-2023, the burden on the Oil Fund peaked at 130,000 billion baht due to global energy prices being much higher than domestic retail prices.
"Instead of the government fixing prices for everyone, it should consider shifting to targeted subsidies, such as assisting vulnerable groups or low-income earners who are severely affected by rising living costs. This would help reduce the public debt burden and the oil fund, which is currently heavily burdened and could reach hundreds of billions of baht, even though it had only recently returned to a positive balance."
Furthermore, the government should implement long-term energy promotion measures because Thailand is the most reliant on energy imports in the region, exceeding 6% of GDP, and this has a greater impact than other countries in the region. Therefore, the government should promote ways to reduce dependence on imported energy, such as providing incentives for installing solar rooftops or switching to electric vehicles, so that the public can adapt sustainably.
However, oil has a relatively high weight in the consumer price index (CPI), around 10-15%. If oil prices rise by 10%, it will significantly impact inflation, especially since Thais spend as much as 12% of their total expenditure on energy. When oil prices rise, people will have to cut budgets in other areas, leading to a slowdown in domestic consumption and the risk of stagflation. If the economy slows down but inflation surges due to rising oil prices, it will make implementing monetary and fiscal policies more difficult.
“KKP estimates that average inflation for the whole year will be around 2%, which is still within the target range, as it starts from a low base and other components of current inflation are still negative. However, higher inflation will make it more difficult for the Bank of Thailand to lower interest rates.”
Mr. Latthakit Lapudomkan, an economist at KKP Research by Kiatnakin Phatra Financial Group, stated that rising oil prices are a significant negative factor leading to a substantial decrease in tourist numbers. This is a major contributor to the slowdown in Thailand's economic growth. When oil prices rise, airfares also increase significantly, directly impacting the decreased demand for travel.
While the tourism atmosphere and the conflict situation, particularly the conflict in the Middle East, are affecting tourist confidence, especially among tourists from the Middle East and Europe, who may decide to travel to Thailand less often, a slowdown in tourism will have a ripple effect on other service sectors that rely on income from foreign tourists, such as retail and food service businesses or restaurants.
"The number of flights from Europe and the Middle East is highly sensitive to oil prices. If oil prices increase by 1%, the number of flights may decrease by a similar proportion, almost 1%."
However, the impact on European tourists may not be very clear at present due to it being the low season for this group. It is estimated that a 20% impact would affect approximately 200,000 people. However, if oil prices remain high for an extended period into the high season, the impact will be much more severe than it is now.
Despite pressure from oil prices, Thailand's tourism sector continues to show positive momentum due to an increase in Chinese tourists returning to Thailand. This is partly a result of the conflict between China and Japan, which has caused flights from China to divert from Japan to Thailand instead. Overall, the number of tourists for the year is projected at approximately 35 million.
KKP has assessed three possible scenarios for the Thai economy, categorized by the duration and severity of the conflict in the Middle East, as follows:
- It ended quickly. The oil shortage is a short-term problem, and the Strait of Hormuz could reopen within a short period. Oil prices will rise and then fall back to normal levels within 1-2 months.
- protracted If the situation becomes more prolonged and the oil shortage lasts longer, the Thai economy will begin to feel the impact, specifically if the average oil price remains in the 85–90 dollar per barrel range for an extended period (4–6 months). The Thai economy is expected to grow by only 1.4%.
- severe In a worst-case scenario, if the situation escalates into a more severe regional war and destroys oil production infrastructure, preventing global oil supplies from returning to normal in the short term, leading to a prolonged oil shortage, prices could remain above $100 per barrel for an extended period, and the Thai economy might grow at less than 0.7% and face the risk of recession.
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