Thailand risks stagflation if the Middle East war drags on

Thailand could face stagflation if the surge in oil prices linked to the Middle East conflict continues, warns an economist.

The term « stagflation » was invented during the oil shock of the 1970s to describe a situation characterized by persistently high inflation, combined with high unemployment and stagnant demand.

According to Amonthep Chawla, chief economist at the CIMB Thai Bank research centre, the situation is worsened by the fact that the new government n’est not yet in place and therefore cannot take measures to support an already fragile economy.

Mr. Amonthep predicts that the Thai economy could see zero growth, or even a quarterly contraction during the first half of this year.

Oil prices at the heart of economic concerns

Offshore oil and gas field in the Gulf of Thailand. Photo: Chatchaiapi – YouTube

Even if oil prices fell on Tuesday March 10, dropping below the $100 per barrel mark, he said that uncertainties remained, as the Strait d’Hormuz is still blocked and tensions are high between l’Iran and l’US-Israeli alliance.

See: Thailand deprived of half its oil after the closure of ’Ormuz

Oil-exporting countries have also reduced their production, limiting ’supply in a context of regional conflicts, added Mr. Amonthep.

« With current prices below 100 dollars per barrel, oil‑related issues are manageable for the government », he said.

« In terms of subsidies, I would suggest that the government subsidize prices only for specific groups rather than d’granting general subsidies, and d’encouraging a more efficient d’energy consumption. »

If the war in the Middle East s’intensifies and continues for more than two months, Mr. Amonthep estimates that the Thai economy will be under pressure and that monetary policy alone will not be enough to meet the challenges.

The Bank of Thailand has already cut rates to support l’economy

Bank of Thailand.

The Bank of Thailand unexpectedly cut its policy rate to 1% last month to stimulate a sluggish economy, and indicated that it couldn’t go any lower for now.

See: The Bank of Thailand cuts its rate to 1 % : a risky bet for l’economy

« I’m concerned about stagflation, as it would be difficult to manage for the government, especially since the new government isn’t yet in place », said Mr. Amonthep.

« The government's budget could be limited at a time when fiscal policies are needed to revive the economy. »

A prolonged conflict could weigh on Thai growth

Illustrating the Thai economy. Source: The Nation Thailand

CGS International Securities estimates that if oil prices remain around $100 per barrel for six months, Thailand's GDP would decline by 0.3% to 0.6%, mainly due to a drop in consumption and the deterioration of the trade balance.

« If oil prices remain at 100 dollars per barrel for six months, we think the government will continue to use the Fuel Fund to cushion the impact », said Kasem Prunratanamala, research director at the brokerage.

According to him, the main downside risks include a prolonged conflict in the Middle East, persistently high oil prices, a sharp decline in the number of tourists, and a resurgence of d’political uncertainty at the national level.

The new government will need time to implement measures aimed at supporting an already weakened economy.

See also:

Middle East war: Thailand prepares for an economic shock

Thailand: a journalist denounces the jungle law imposed by the United States

Thailand fears up to& rsquo; 25 % fewer tourists because of the war

Source : Bangkok Post