BOT warns SMEs and vulnerable groups face hardest economic shock

Amid global economic volatility driven by the unresolved war in the Middle East, Thailand’s economy is facing a “shock” that is beginning to take clearer form, including slower growth and inflationary pressure from higher energy costs.

The main concern is not only the direction of the economy but the “unevenness” of the impact across groups, particularly vulnerable people and SMEs, which face limits on income and liquidity.

Vitai Ratanakorn, governor of the Bank of Thailand (BOT), said the economy was likely to slow as many parties had assessed. The clear impact was higher inflation, affecting both businesses and households, which were beginning to face more pressure from rising costs, as well as effects on debt and liquidity.

He said this round of impact was “uneven”, with import-dependent countries affected more than exporters. Oil-importing countries in particular would be hit harder by higher energy prices, while domestic impacts were also becoming more uneven.

Vulnerable groups will be hit hardest as inflation rises and the economy slows. Oil prices have increased, for example, diesel from THB30 to THB40 per litre, while other goods prices have followed. Higher-income groups can still cope.

However, middle-income groups are facing a greater impact, while lower-income groups are affected the most because living expenses account for a high proportion of their income.

The business sector shows the same pattern. Large businesses have stronger adjustment capacity, liquidity and financial buffers, allowing them to manage the impact better. Smaller businesses or SMEs, which face limits in competition, innovation and liquidity, will be more affected.

Uneven impact becomes clearer

Businesses and households are the groups directly absorbing the shock in terms of costs, liquidity and their ability to maintain economic activity.

The impact also differs by industry. Some sectors, such as transport and tourism, are relatively heavily affected because of energy costs and sensitivity to the economy, while some industries are less affected. Domestically, the “uneven” pattern is becoming even clearer.

This is especially true in terms of people’s income and economic position. Low-income groups are hit hardest because living expenses such as food, travel and transport make up a high proportion of their income, causing a more direct and severe impact than for higher-income groups, which can still cope.

“In Thailand, it is uneven. If the economy is not doing well, vulnerable people are affected more than other groups, while SMEs with limited innovation, limited competitiveness, thin profits and low liquidity are also hit hard, depending on the industry.”

Warning of a lasting impact, even if the war ends

The economy is therefore certain to slow and needs stimulus from the government to provide support. Inflation will rise clearly and may be at 3-4% before easing late in the year. The key factor is oil prices remaining high even after the war ends; oil prices are likely to stay above pre-crisis levels, keeping pressure on inflation and causing further impact.

Inflation will begin to ease when it enters a high-base period, especially around March-April 2027. Therefore, even if the war ends, oil prices will remain higher than before the crisis.

“Economic stimulus measures will play an important role in supporting the economy. The form needs to be considered carefully, whether it is money transfers for short-term stimulus or investment to create longer-term effects. Each approach has different advantages. Money transfers stimulate the economy immediately, but the effect disappears the following year, while investment, although slower to take effect, is more sustainable. The government may therefore need to weigh the pros and cons that would arise.”

The debt situation is being closely monitored

On debt, the BOT is monitoring the situation closely and has asked financial institutions to accelerate help for borrowers through debt restructuring, interest-burden reduction or other measures to prevent bad debts. This includes using targeted tools such as SMEs Credit Boost and SMEs Secure+. However, the situation is not as difficult as during COVID-19, when income in many sectors almost disappeared.

Therefore, large-scale measures do not need to be used immediately, but readiness is being prepared if the situation worsens, with additional measures such as asset transfers to settle debt, the Fah-Som measure and asset-management measures that were used during Covid-19.

“Today, we are trying to support the situation, both by keeping repayments from turning into bad debt and by reducing interest and principal. All of this is being monitored closely.”

Fiscal policy is advised to handle the supply shock

The current shock to Thailand’s economy is a “supply-side shock” or supply shock. Fiscal policy is the most effective tool, not monetary policy, which is like a broad-acting tool.

At present, assistance needs to be targeted at affected groups, such as people at the grassroots level, SMEs, small operators or energy-intensive sectors.

Monetary policy is a broad tool that cannot be targeted. Measures should therefore become more “targeted”, focusing on high-impact groups such as low-income people, SMEs and energy-intensive businesses.

Borrowing should focus on investment

On the government’s plan to issue an emergency decree to borrow THB400 billion, the central bank believes greater priority should be given to the investment share rather than relief payments alone, because the latter helps only in the short term and would hurt GDP in the following year due to an artificially high base.

Investment, by contrast, would create continued and sustainable growth.

On the financial side, tools for handling problems have been developed much further. In the past, monetary policy alone was used to maintain stability, the macroeconomy and inflation.

The BOT has now expanded its role in maintaining stability, not only managing inflation but also ensuring the economy grows at an appropriate level so it does not become a structural problem. Monetary policy is therefore used to maintain price stability while increasingly being paired with economic support to help people and businesses.

The BOT also no longer relies only on interest-rate policy, but uses targeted measures recently announced that will gradually take effect over 3-6 months, such as the SMEs Credit Boost. It therefore has both the policy rate and targeted support measures.

In addition, an available tool when necessary is money used to repay the Financial Institutions Development Fund (FIDF) debt, by reducing contributions from 0.46% to 0.23%. This is a broad and powerful tool that immediately reduces loan interest costs, and the BOT is ready to do more if necessary.

No need for further rate cuts

At present, interest rates should not be reduced because inflation is rising temporarily. However, if the economy faces serious problems in 2026-2027, everything will depend on a data-dependent assessment. Monetary policy and targeted policies are ready to move immediately.

Thailand’s policy rate is low at 1%, the third lowest in the world after Switzerland and Japan. Monetary policy or policy rates among central banks worldwide are being assessed in the same direction: “wait and see”, meaning delaying to assess the situation or holding interest rates, and “look through”, meaning looking past temporary volatility.

This round of inflation is mainly supply-side, caused by higher energy costs, and is not due to demand outstripping supply, or demand-side pressure. Accelerating rate increases would therefore be of no benefit because they would hurt demand, would not lower asset prices and could damage the economy.