Thailand faces fiscal strain as deficit rises and Middle East war weighs on economy
The incoming administration faces a difficult balancing act as rising budget shortfalls, higher energy costs and global uncertainty threaten economic stability and investor confidence in Thailand.
- Thailand is experiencing significant fiscal strain due to a persistently rising budget deficit and increasing public debt, prompting warnings from credit rating agencies.
- The war in the Middle East is a major external pressure, threatening to increase global oil prices, which would directly raise costs and inflation within the Thai economy.
- This conflict creates a dilemma for the government: provide costly relief measures that would worsen the deficit, or maintain fiscal discipline and risk slowing down the economy.
- The government has established a Medium-Term Fiscal Framework to reduce the deficit and control debt, but the economic impact of the war threatens its ability to meet these targets and could affect the country's credit rating.
Thailand’s fiscal position is once again at a critical turning point in 2026, as pressure from several directions is converging.
These include a persistently rising budget deficit burden, a global economy facing uncertainty from geopolitical tensions, particularly the war in the Middle East, as well as Thailand’s own structural economic challenges, with growth continuing to fall short of its potential.
These factors mean that the incoming government will face fiscal challenges that are more complex and more severe than at many points in the past.
In recent years, warning signs from credit rating agencies have become increasingly clear.
Many observers believe Thailand has little “fiscal space” left after maintaining an expansionary fiscal stance to support the economy during and after COVID, resulting in a budget deficit that remains high while public debt has continued to rise, even though it has not yet exceeded the prescribed ceiling.
This pressure has forced the government to send a serious signal on fiscal discipline through the announcement of the Medium-Term Fiscal Framework (MTFF) for fiscal years 2027–2030, which sets out several clear objectives:
- reducing the budget deficit to below 3% of GDP by 2029
- keeping public debt at no more than 70% of GDP
- improving the efficiency of government revenue collection through digital systems and a broader tax base
- controlling the growth of current government expenditure
The adoption of this MTFF is therefore not merely a budget management tool, but also a policy signal that the government wants to send to financial markets and credit rating agencies to affirm that Thailand remains committed to fiscal discipline and has a clear medium-term debt management plan.
However, just as Thailand is trying to restore fiscal confidence, the world is being hit by a new shock from the conflict between the United States, Israel and Iran, which has led to war in the Middle East and the closure of shipping routes in the Strait of Hormuz, one of the world’s key energy transport corridors.
This situation is creating risks for global energy prices, as around 20% of the world’s oil supply passes through this route.
If the conflict drags on, oil prices could rise further, directly affecting the Thai economy through higher energy costs, inflation and the cost of living for the public.
In such circumstances, the new government taking office will face an even more difficult task: striking a balance between supporting the economy in the short term and preserving fiscal discipline in the medium term.
If energy prices surge, the government may be forced to introduce relief measures for the public, whether through price controls, cuts in oil excise tax, or cost-of-living subsidies, all of which would increase the state’s budget burden, while tax revenue may not rise at the same pace if the global economy slows.
This narrows the government’s path even further, because if it relies too heavily on expansionary fiscal policy, it may fail to meet the target of reducing the deficit to below 3% of GDP by 2029, as set out in the MTFF, and this could affect the confidence of credit rating agencies.
On the other hand, if the government adheres too rigidly to fiscal discipline and cuts spending to stay within the budget framework, it could further slow the economy and weaken domestic purchasing power.
Therefore, the new government’s fiscal strategy must focus on the quality of spending rather than the quantity of spending, with an emphasis on investment that strengthens economic potential, such as infrastructure, digital technology and future industries.
At the same time, it must accelerate improvements in government revenue collection efficiency in order to reduce reliance on borrowing.
Another important challenge is reforming the public expenditure system, particularly by controlling current expenditure, which has continued to rise and remains a major factor reducing the flexibility of Thailand’s budget structure.
Ultimately, Thailand’s fiscal challenge in the period ahead is not merely a matter of budget figures, but of confidence in the eyes of global financial markets.
If the government can strike the right balance between supporting the economy and maintaining fiscal discipline, Thailand will still have an opportunity to preserve both its credit rating and fiscal stability.
But if uncertainty in the global economy persists and fiscal policy is unable to control the deficit in line with the MTFF framework, the risk to the country’s credit rating could become an issue that must be watched closely in the years ahead.
