KKP Research slashes Thailand's 69 GDP growth forecast to 1.3%, warning of stagflation.

KKP Research has cut its 2569 GDP growth forecast for Thailand to 1.3% from the previous 1.8%. It has also revised its inflation forecast upwards to 3.0% due to the prolonged conflict in the Middle East. The research warns that the Thai economy should prepare for stagflation and that public debt risks exceeding the 70% ceiling. It anticipates that the Bank of Thailand's final Monetary Policy Committee meeting in 69 will cut the interest rate to 0.75%.

21 April 2569 Kiatnakin Phatra Financial Group (KKP) released an analysis titled "KKP Research Cuts 2569 GDP Target to 1.3% Due to Prolonged War, Warns Thailand to Prepare for Stagflation." Stating that the unexpectedly prolonged war between Iran, Israel, and the United States is putting ongoing pressure on the global economy, KKP Research assesses that the most worrying economic risk at present is "stagflation," or a condition where the economy slows down coupled with soaring inflation, similar to the crisis of the 1970s.

Given that Thailand is one of the largest net energy importers in the region and heavily reliant on tourism revenue, it is at risk of being more severely impacted than many other countries. Therefore, KKP Research has revised down its baseline GDP forecast for 2569 to 1.3% from 1.8% and revised upward its headline inflation forecast to 3.0% from 0.2%, based on the assumption of an average Brent crude oil price of $92.5 per barrel.

Assess three scenarios for the impact of war.

Base Case: With the war expected to ease in the next 2-3 weeks, the average price of Brent crude oil for the year 2569 will be $92.5/barrel, before falling below $70/barrel by the end of 2570.

Case where the situation resolves quickly (low probability): With an average Brent crude oil price of $77.5 per barrel, the impact on the Thai economy will be minimal and similar to previous assessments.

Severe cases: The average oil price could reach $130/barrel and even surpass $150/barrel, which would severely slow down the Thai economy and pose a high risk of entering a recession.

Furthermore, the vulnerability of the Thai economy is not limited to crude oil and LNG imports. The Middle Eastern shipping routes also impact shortages of fertilizers (affecting agricultural production), petrochemical raw materials (affecting the plastics and textile industries), and helium (essential for global semiconductor production).

Soaring oil prices affect four channels.

The current Thai economy differs significantly from the post-COVID-2565 period of 2565. While 4 was supported by pent-up demand, today household financial fundamentals are much weaker and must cope with soaring oil prices through four channels simultaneously:

(1) The tourism sector is sluggish, with higher travel costs and decreased confidence, causing KKP Research to revise down its forecast for 2569 foreign tourists to 31.2 million from the original 35.1 million), which will directly affect the hotel, restaurant, retail and transportation businesses.

(2) Exports face pressure from higher transportation costs, weaker foreign demand in key trading partners (US, China, Europe, Japan) and the risk of a US Section 301 investigation.

(3) Household purchasing power is contracting, with energy prices accounting for 14% of the consumption basket, which are rising due to the floating price of diesel fuel, putting heavy pressure on purchasing power, especially among low-income groups.

(4) Public debt is poised to break through the ceiling, with the government having limited fiscal policy space. Lower GDP growth and subsidies to reduce the burden on the people may push the public debt-to-GDP ratio to break through the 70% ceiling faster.

The Monetary Policy Committee is expected to cut interest rates to support the economy at the end of the year.

Even in a world of stagflation, where central banks often face difficult decisions, KKP Research estimates that the Monetary Policy Committee (MPC) will likely pursue a more accommodative policy rather than raising interest rates. This is because Thailand's inflation situation has only recently moved out of negative territory, coupled with an economic slowdown, making concerns about persistently high inflation less likely than in 2565.

The Monetary Policy Committee (MPC) is expected to maintain interest rates as oil prices remain high, and there is a possibility of further rate cuts to 0.75% at its final meeting in 2569 to support weak purchasing power, before raising them back to 1.0% in 2570.

“Thailand is at significant risk of being impacted by this crisis due to its reliance on energy imports, tourism, high household debt, limited fiscal space, and incomplete recovery from COVID-4. A key risk to watch is a potentially prolonged conflict. If the situation escalates, stagflation (energy and goods shortages) could occur, leading to a recession affecting tourism, consumption, and fiscal pressures simultaneously. KKP Research is monitoring four factors: oil price trends, the speed of the tourism slowdown, the fiscal response to debt ceiling constraints, and the Bank of Thailand's communication regarding inflation, which is projected to exceed the inflation target range.”

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