Bangkok: The Bank of Thailand (BOT) has revealed that exports and tourism, once significant drivers of the Thai economy, no longer serve as effective engines for stimulating economic growth.
According to Thai News Agency, the BOT has identified structural issues and declining competitiveness as primary challenges facing the nation's economy. The Monetary Policy Committee (MPC) has responded by cutting interest rates to support economic recovery, while considering the medium-term benefits and potential drawbacks of future rate adjustments.
Mr. Sakkapop Phanyanukul, Assistant Governor of the Monetary Policy Department at BOT, noted during the latest MPC meeting that the Thai economy is expected to experience slow growth due to cyclical and structural factors. This trend is anticipated to lead to relatively low economic growth from 2025 to 2027. The BOT has highlighted that inflation remains persistently low, with limited demand-side pressures, which correlates with the economy operating below its potential.
Financial conditions in Thailand have tightened, as evidenced by decreased credit demand, reflecting the sluggish economic environment. The MPC is monitoring the financial well-being of vulnerable businesses, particularly small and medium-sized enterprises (SMEs), which face challenges from both domestic and international competition, as well as the rapid appreciation of the Thai baht. The policy interest rate was recently reduced to 1.25%, a level previously seen only during the COVID-19 pandemic.
Mr. Sakkapop indicated that the MPC's decision to lower interest rates is part of a broader effort to adopt an accommodative monetary policy to aid economic recovery and enhance the effectiveness of other policies. Given the current low interest rate environment, maintaining medium-term stability is crucial, involving the management of vulnerabilities that could arise from prolonged low rates and ensuring adequate monetary policy flexibility for potential future challenges.
Ms. Pranee Sutthasri, Senior Director of the Macroeconomic Department at BOT, has projected Thailand's economic growth to remain below potential levels, with estimates of 2.2% in 2025, 1.5% in 2026, and 2.3% in 2027. This is attributed to the country's heavy reliance on the external sector, with goods exports and tourism contributing significantly to the GDP. Despite promising export growth figures, questions linger about the sector's effectiveness as an economic growth engine, given stagnant industrial production and increased import competition.
Ms. Pranee also pointed out that the service sector has become the primary driver of recent economic growth, with labor migration into this sector mostly comprising traditional, low-cost jobs. The economy is expected to grow by only 1.5% this year, a slowdown linked to declining private consumption, lower income levels, and a projected downturn in merchandise exports. Contributing factors include a high base effect and delays in government spending due to parliamentary dissolution and impending elections.
Mr. Surach Tanboon, Senior Director of the Monetary Policy Department at BOT, stated that the general inflation rate is projected to stay low this year, largely due to supply-side factors, while demand-side inflation pressures remain limited. The risk of deflation is deemed low, and the general inflation rate is expected to return to the target range by the first half of 2027.
In terms of financial conditions, recent monetary policy easing has led to reduced interest rates in the financial market, yet credit continues to contract due to high credit risk. The BOT has launched the SMEs Credit Boost program to mitigate credit risk for new business lending, particularly benefiting promising SMEs.
Mr. Surach mentioned that the strengthening Thai baht, leading other regional currencies, aligns with policy changes in the United States and specific Thai factors, impacting exporters, particularly SMEs. The BOT is closely monitoring foreign exchange transactions and considering measures to mitigate pressures on the baht.
The MPC's recent interest rate cut is aimed at maintaining a relaxed monetary policy stance to support economic recovery, with a focus on the long-term implications of sustained low rates and ensuring adequate policy capacity to address unforeseen future events.