SCB EIC supports lifting oil price controls, cuts GDP forecast to 1.4%, and monitors inflation rising to 5%.

SCB EIC slashes Thailand's 69 GDP growth forecast to 1.4%, citing the energy crisis as a major factor. They urge an end to oil price controls to prevent a repeat of the 40 economic shock. Inflation is projected to reach 5% in April, highlighting the monetary policy's limited resources and the challenge of stagflation.

March 26, 2569. Dr. Yanyong Thaicharoen, Chief Research Officer, Economic and Sustainability Division, Economic and Business Research Center, Siam Commercial Bank (SCB).SCB EIC) The report reveals the economic outlook under pressure from the energy crisis, stating that the conflict in the Middle East is likely to be prolonged, causing global oil prices to remain high even after the war ends. Therefore, the government's shift from subsidizing retail prices across the board to a gradual price increase is the correct and necessary direction.

According to the latest data from the Fuel Fund as of March 23, 2569, the fund is in a net deficit of approximately 20,000 billion baht. Currently, it needs to subsidize fuel prices at an average of about 2,500 billion baht per day. If this situation continues for just 2-3 more days, the deficit could increase by another 10,000 billion baht, bringing the fund's balance closer to 40,000 billion baht.

Under the legal framework of the Fuel Fund Act, the fund can borrow money within a limited amount. If the deficit exceeds the set limit, government approval is required for additional borrowing. Furthermore, if the burden exceeds 60,000 billion baht, loan guarantees may be necessary, ultimately leading to increased public debt.

"This situation reflects an important lesson from past economic crises, particularly the 2540 crisis: fixing prices or defying market mechanisms for extended periods can lead to more severe shocks when the situation becomes unsustainable. Therefore, gradual adjustments are crucial."

In the context of energy prices, a comparison with other countries in the region reveals that Thailand's oil prices remain low compared to many, even though it is not a major oil producer. In contrast, some countries have oil prices as high as 50–90 baht per liter, partly due to differing tax structures.

"The true cost of diesel, if reflecting global market prices, could be around 60 baht per liter, meaning Thailand has been continuously subsidizing its prices for a long time."

However, subsidizing fuel prices at the "refinery gate" has resulted in high-income groups benefiting the most. Data on energy spending shows that the top 20% of income earners use significantly more energy than lower-income earners.

"Universal subsidies exacerbate inequality because the biggest beneficiaries are high-income groups, who consume more energy per person, both for personal vehicle travel and business operations."

Furthermore, there is a risk of a sudden crisis (shock) if prices are fixed for too long until resources or the oil fund are depleted. When it reaches a point where it can no longer bear the burden and prices must be allowed to float, a situation will occur. "shock" This would have a severe impact on the economy, similar to the 2540 crisis where international reserves were depleted to preserve the currency's value.

"An increase in fuel prices will inevitably affect people's consumer sentiment and spending plans, especially during important festivals like the upcoming Songkran festival."

However, the policy signal that diesel prices should remain at around 30 baht per liter for a long time has distorted the country's energy consumption structure. As a result, Thailand has become a country with a very high proportion of diesel consumption compared to other countries. Furthermore, this policy has not been conducive to energy conservation or economic adaptation.

Despite campaigns to reduce energy consumption, the incentive to change behavior remains limited as prices remain low. This results in a cumulative fiscal burden and the risk that, when prices need to adjust, they will rise rapidly and have widespread consequences.

“Government policy in the coming period should focus on targeted assistance, prioritizing vulnerable groups such as low-income earners, small-scale farmers, and public transport service providers, while gradually allowing fuel prices to reflect their true costs in order to avoid shocks to the economy and society.”

• GDP growth forecast revised down to 1.4%.

Dr. Yanyong further stated that this energy price crisis can be used as an opportunity to adjust the economic direction, reduce reliance on energy imports, increase energy efficiency, and promote investment in new technologies such as smart grids, solar power, and green industries, which will help create long-term economic growth.

In terms of macroeconomic stability, increased fiscal burden could push public debt closer to its ceiling. While short-term necessity in the face of a crisis, the government needs clear plans and communication to build confidence that public debt can return to a sustainable path in the medium term.

Meanwhile, the Thai economy faces vulnerabilities in several areas, including limited recovery in private sector investment, rising costs in the manufacturing sector, accelerating inflation, and real income for workers not yet returning to pre-2562 levels. This situation reflects that household purchasing power will be further pressured by higher energy prices.

“SCB EIC has revised its forecast for Thailand's economy in 2569 down to 1.4% (from 1.8%) due to the impact of the Middle East conflict, which has caused energy and commodity prices to rise rapidly. Thailand's average annual headline inflation is expected to accelerate significantly beyond the Bank of Thailand's target of 3.2%. Oil prices are expected to peak in April 69, potentially pushing inflation to 4-5% before gradually declining.”

Dr. Yanyong further stated that while domestic spending will slow down, particularly consumption, which is likely to be affected by declining household purchasing power and confidence due to rising energy and food prices, and by contracting real labor income, businesses will face pressure from higher costs and lower profit margins. Businesses will delay investment due to increased uncertainty. Economic stability will become more fragile due to the likelihood of a higher current account deficit, a capital deficit, and a larger fiscal deficit (triple deficits).

The main channels through which the impact on the Thai economy is transmitted are as follows:

1. International trade sector Exports will be affected by worsening terms of trade (the ratio of export prices to import prices). Import values ​​will accelerate significantly due to much higher energy prices, while exports will be impacted by a slower-than-expected global economic trend and potential supply disruptions. This will result in a significant decrease in the trade balance and a reversal of the current account deficit.

 2. Tourism sector The overall number of international tourists entering Thailand is expected to slow down, resulting from a projected decrease in flights, higher travel costs due to accelerating oil prices, and tourists' concerns about the economic outlook. Signs of a decline in tourists from the Middle East and Europe are already being seen, but there will still be support from tourists with growth potential from China and India. Overall, SCB EIC has revised its forecast for international tourists this year down from 34.1 million to 33.2 million.

 3. Private consumption. The slowdown is expected due to soaring living costs driven by rising global energy prices, further impacting the recovery of household spending, which continues to face economic scars such as fragile labor markets and high debt levels.

 Four business sectors are facing rising production costs.The shortage of raw materials, which impacts the supply chain and puts pressure on profit margins, coupled with uncertainty and rising costs, may cause some businesses to decide to postpone new investments.

 5 highly volatile financial markets. Capital outflows in the financial markets have caused the Thai baht to depreciate rapidly, resulting in a wider negative balance in the capital account. The Bank of Thailand may need to intervene in the foreign exchange market through the use of international reserves to prevent the baht from depreciating too quickly.

• The Middle East conflict has escalated into a “two-way crisis”.

The Middle East conflict has significantly reduced the volume of oil and gas passing through the Strait of Hormuz (approximately 20% of the global supply), causing energy prices to rise rapidly. Attacks on energy resources in the Middle East have raised concerns in markets about the potential for a lengthy energy supply recovery, as well as the need for countries worldwide to find additional energy sources to compensate for dwindling reserves. These supply and demand factors mean that global energy prices are unlikely to fall rapidly, even after the war ends.

• Three scenarios for the impact of a Middle Eastern war.

Dr. Yanyong stated that SCB EIC has assessed three scenarios for the Middle East crisis, as follows:

• Baseline case (50% chance)The conflict is expected to end within two months. GDP is projected to grow by 1.4% and inflation to be at 3.2%.
• Worst case scenario (40% chance)A conflict lasting four months has resulted in the destruction of energy infrastructure, potentially raising average oil prices to $105 per barrel, reducing GDP to 1.1%, and causing inflation to soar to 4-5%.
• And 3) severe cases (10% chance). If the conflict drags on for more than four months, expands, and more Middle Eastern countries join the war, along with extensive destruction of energy production facilities and infrastructure, the average price of Brent oil this year could reach $120 per barrel. GDP would contract by 0.5% to 1%, with inflation exceeding 5%.

In addition to soaring global energy prices, this war will accelerate and increase the volatility of land, sea, and air transportation costs. This energy crisis is therefore likely to have a broader impact than past energy crises, expanding into a "two-way crisis" stemming from both energy products and shortages of essential upstream commodities for key industries such as plastics, fertilizers, pharmaceuticals, and metals.

"The Thai economy may grow by only 1.4% due to its high dependence on energy imports, low energy efficiency, and inherent fragility."

Monetary policy faces stagflation with limited options.

Dr. Yanyong added that monetary policy faces challenges. stagflation Alternatively, an economic slowdown in a high-inflationary environment could lead the Monetary Policy Committee (MPC) to likely maintain the policy interest rate at 1% this year.

It is estimated that the Monetary Policy Committee (MPC) will not choose to raise interest rates to control rising inflation, as it will consider that inflation is primarily driven by supply-side factors. Businesses may not be able to pass on significant higher costs to consumers under sluggish demand.

"While raising interest rates could negatively impact the Thai economy, which is already projected to experience continued low growth and remains vulnerable to household and SME debt burdens."

At the same time, lowering the policy interest rate when inflation is likely to exceed the monetary policy range may cause the market to question the Bank of Thailand's commitment to inflation targeting and could lead to a faster depreciation of the baht, further impacting inflation.

Furthermore, the effectiveness of interest rate cuts on the economy is quite limited under conditions where interest rates are already very low and the economy is highly uncertain. Therefore, the Monetary Policy Committee (MPC) should reserve policy space for use when necessary and when there is greater confidence in the direction of the economy. However, the MPC may consider cutting interest rates by one more time this year if the impact on GDP is significantly more severe than estimated.

The Bank of Thailand intends to use targeted measures to enhance the effectiveness of monetary policy, such as debt restructuring measures, soft loan programs, and credit guarantees.

The global economy will slow down as a result of the war. Increased inflationary pressures will cause the Fed to postpone interest rate cuts until later in the year. SCB EIC estimates that in the base case scenario, the global economy in 2026 will grow at a slower rate from 2.7% year-on-year to 2.5% year-on-year, due to the war resulting in higher production costs and shortages of raw materials, which will lead to increased inflation.

Economy heavily reliant on energy imports, such as those in Asia, will be significantly impacted. Regarding monetary policy, major central banks are assessing the situation amidst high uncertainty. SCB EIC believes the Fed is likely to postpone interest rate cuts until the fourth quarter and expects only one cut of 25 basis points this year, given the potential for rising inflation.

Read news related to the economic situation across Thailand here.