SINGAPORE: Foreign investors are selling Thai assets as an energy shock from the US-Israeli strikes on Iran threatens to snuff out hopes for an economic revival under Prime Minister Anutin Charnvirakul and exposes the policy paralysis that is gripping Bangkok.
The conflict has sent global oil prices up to near US$100 a barrel, sharpening the focus on Asia's reliance on energy supplies from the Gulf.
Thailand is among the most exposed, with the Middle East supplying nearly half of its oil and gas, according to Krungsri Research.
With public debt on the brink of eclipsing the government's self-imposed 70 per cent ceiling and an economy that was already in deflation before the conflict, Bangkok's challenge is far more acute than most of its neighbours.
The setback came just as the stars seemed to be aligning for South-East Asia's second-largest economy, with investors rushing into Thailand again for the first time in years.
Foreigners bought US$1.7 billion worth of Thai stocks in February, LSEG data showed.
Prime Minister Anutin Charnvirakul's resounding victory in February ushered in hopes of political stability and long-awaited economic reforms in a country that had lurched through years of turmoil and uncertainty.
But when the Iran conflict broke out at the end of February, foreign investors pulled back sharply, with an US$823 million net selloff in equities in March, while bond outflows hit US$705 million, the largest combined outflow since October 2024.
A two-week ceasefire this month has spurred hopes of a resolution and led to a sharp rally in Thai stocks and the baht, but investors are cautious about the country's vulnerability if oil prices remain elevated.
"The risk remains (that) markets remain complacent about the long-term impact from energy shock and that higher fuel costs hit consumption and disrupt exports and tourism, two key drivers of the Thai economy," said Daniel Tan, a portfolio manager at Grasshopper Asset Management.
Khoi Vu, an Asean equity strategist at JPMorgan, said his bank is still cautious on Thai equities, noting that while political stability had begun to brighten the outlook before the Middle East conflict, the energy shock is a near-term headwind.
"As the energy shock has yet to fully materialise, we believe the market has yet to price in significant growth impact," he said.
Limited policy options ahead
With the fragile ceasefire in mind, analysts and investors warn Thailand faces another difficult year.
Unlike many of its peers in the region, Thailand's exposure runs deeper than just fuel costs as over half of annual power output comes from gas, and liquefied natural gas (LNG) imports are accounting for an increasing share of generation.
Thailand's conundrum is that its economy has struggled to gain traction, growing just 2.4 per cent last year and lagging peers, while inflation dropped for 12 straight months, triggering a rate cut from the central bank in February before the conflict.
"There's a broad consensus among investors that Thailand is in a policy bind," said Gary Tan, a Singapore-based portfolio manager at Allspring Global Investments.
"The central bank has limited room to hike without derailing the recovery, but little urgency or space to ease, which leaves policy restrictive by default," said Tan, who is underweight on Thailand.
Every one baht rise in fuel prices cuts economic growth by 2 basis points, according to state planning agency estimates, underlining why Bangkok is reluctant to increase subsidies.
"Higher oil prices could weigh on consumption, the current account and the baht, while also complicating the disinflation path and potentially limiting how much further rates can fall," said Nattanont Arunyakananda, investment manager of Thai equities at Aberdeen Investments.
The conflict has upended Thailand's inflation picture, with average inflation projected to rise as much as 3.5 per cent this year depending on how the conflict unfolds, a stark turnaround from a 0.54 per cent contraction in the first quarter.
Thailand has limited ammunition to address its economic problems, Finance Minister Ekniti Nitithanprapas said on Friday (April 17).
Sliding baht taking the heat
The currency has emerged as the pressure valve, with the Thai baht sliding about 2.8 per cent since the conflict broke out, though it has clawed back some of the losses since the ceasefire was announced last week.
Regional rivals the Philippine peso and the Indonesian rupiah are at record lows, but the baht's strong performance in 2025 when it gained nine per cent, is likely to help provide Thailand some buffer and more room to weaken, analysts say.
Still, Thailand is walking a tightrope, having to pick and choose where to step in.
It has ruled out fuel subsidies for now, but will absorb higher costs to keep electricity tariffs largely unchanged ahead of the summer.
Fiscal worries are compounding the pressure, with public debt at 66 per cent of GDP - just shy of the 70 per cent ceiling - and investors worry that the government may need to raise it.
The government so far has said it does not plan to raise the ceiling.
"If the shock extends beyond April, it stops being just a headline issue and starts feeding into day-to-day operations," Aberdeen's Arunyakananda said. - Reuters
