SMEs bogged down as profits shrink and debt piles up; major structural reform urged

Krungthai researchers are warning that Thailand’s economy in 2026 could record its weakest growth outlook in three decades, as the country remains stuck in a low-growth trap with no new engines of expansion. They also caution that SMEs could remain mired in difficulties, with shrinking profits and mounting debt, risking a broad-based “downgrade” across the sector unless business structures are reshaped quickly. Meanwhile, Kasikorn Thai Research Center notes that SME lending has continued to contract and non-performing loans (NPLs) have risen above 7%, reflecting a grassroots economy that has yet to recover.

Thailand is facing a critical point of vulnerability. Growth in 2026 is being projected at just 1.8% — below 2% for the first time in more than 30 years — highlighting an economy “stuck in the mud” and lacking new drivers. This has become a major challenge that requires Thailand to seriously overhaul its economic model.

Dr Phacharaphot Nuntramas, assistant managing director and chief economist at Krungthai COMPASS, presented an overview under the theme “Economic Outlook 2026: Reinvent Thailand Strategy for a sustainable turn around”, saying the Thai economy in 2026 is likely to grow by less than 2%, with an estimate of only 1.8%.

He said this is statistically very low — the weakest in 30 years — and marks the first time Thailand has begun a year with a growth forecast below 2%, excluding crisis periods such as the Covid-19 shock.

Thailand, he said, is currently trapped in a low-growth cycle. A key underlying problem is the long-running lack of a new engine to propel economic expansion.

A major concern is the SME sector, which is struggling to manage risk in a sluggish economic environment. Under the Reinvent Thailand initiative — which assumes limited public and private resources — Thailand should focus on six high-potential industries to push them into becoming new S-curves, or new engines of the economy.

Urgent overhaul needed

Dr Chamadanai Marknual, a director at Krungthai COMPASS, said it is time for Thailand to “overhaul” or urgently restructure its economy. The challenge is like a “perfect storm”, driven by geopolitics, shifts in global supply chains, and disruptive technologies.

Domestic structural problems are also chronic, including declining competitiveness in a changing global context, and greater constraints on government policy-making.

These signals are reflected in economic growth slipping below 2%, reinforcing the view that the old economic model may no longer be sufficient.

SMEs — the backbone — remain stuck

Dr Krit Sriprach, an analyst at Krungthai COMPASS, said SMEs are the heart of the Thai economy — the backbone and a key machine powering the country. A study of data over the past 15 years found the sector is in a worrying “stuck” state. Even after Covid-19, many businesses have not recovered.

Looking at corporate performance, competitiveness has continued to erode, suggesting problems that run deeper than a normal cyclical downturn and cannot simply be solved by waiting for the economy to rebound.

He noted that the six industries under the Reinvent Thailand project — which have a broad economic impact — include: food and agriculture, automotive, medical and health, smart electronics, tourism, and wholesale and retail. Together, these sectors generate around 38 trillion baht in revenue per year, or about 64% of total business revenue, and are significant in scale. They include around 230,000 SMEs and employ as many as 10.6 million people.

This indicates that if Thailand is to change, it must start by reinventing SMEs in these sectors first.

The study also examined 160,000 companies in the six strategic sectors and found that returns on assets (ROA) — a proxy for business profitability — have declined continuously over 15 years (2010–2024). This underscores that the fall in profits is inseparable from the broader deterioration among SMEs.

A “downgrade” across businesses as performance worsens

When businesses were grouped into five performance tiers — from very strong to very weak — the past 15 years showed a clear “downgrade” among SMEs.

The share of SMEs in the “orange” and “red” categories — businesses with poor and very poor performance — rose significantly. From around 20% 15 years ago, the proportion has increased to more than half of all businesses by 2024.

This suggests the SME trap is not confined to a few firms, but is a structural problem that is eroding competitiveness across the entire system.

The study found that businesses needing a turnaround typically share three major problems:

1. High accumulated debt, with liabilities several times higher than equity.
2. Weak liquidity, lacking sufficient cash flow to run day-to-day operations.
3. Low gross margins, a fundamental weakness rooted in the business model.

These issues undermine debt-servicing capacity. With thin profits, an unexpected shock can quickly push a business into losses, forcing it to borrow to plug liquidity gaps — creating a debt cycle that is difficult to escape.

The most worrying weakness is low margins. When profits are thin, businesses have little protection against risk. Even a small disruption can lead to losses, making entrepreneurs rely on more borrowing for working capital.

That, in turn, raises interest burdens. With limited income but a growing share diverted to interest payments, firms can become trapped in a hard-to-break debt spiral — unless they can unlock improvements in gross margins.

Debt build-up and weak liquidity remain key pressures

Dr Kongphop Wongkaew, an analyst at Krungthai COMPASS, said two main themes are crucial for Thai SMEs going forward:

1. Restoring SMEs’ financial health, an urgent short-term and chronic issue.
2. A major “surgical operation” to raise profitability, which is the bigger challenge.

A deeper look shows SMEs face very high debt-to-equity ratios, reflecting heavy accumulated debt and low liquidity.

To address this, debt restructuring is likely to be essential. Measures such as soft loans and credit guarantees under the Reinvent Thailand programme have helped ease pressure to some extent.

However, a key survival path for SMEs is to raise profitability by investing in new, higher-value products, and setting clearer target customer groups — especially in services — to give firms more ability to raise prices.

While liquidity support remains necessary, what will truly turn SMEs around is focusing on margins and upgrading within the value chain. This is one of the few viable options at a time when SMEs face substantial obstacles.

“What we worry about is that SMEs have low profits because most operate in markets with extremely intense competition, leaving them with little pricing power,” the analyst said. “The smaller the business, the weaker its bargaining power. The solution is to focus on adding value, upgrading products or services, and targeting more specific market niches.”

Watch SME credit shrink and bad debt rise

Dr Kanchana Chokpaisarnsilp, a research executive at Kasikorn Thai Research Center, said that over the past decade — including the post-Covid period — SME lending has not improved, as SMEs face ongoing challenges in a changing economic environment.

SME credit has been negative for several consecutive years, partly due to debt repayment, and partly because financial institutions have tightened lending standards, focusing more on borrowers’ true capacity, credit profiles and risks.

Another factor is that SME operators themselves no longer demand credit as heavily as before. While they still need funding, they have become much more cautious about borrowing because current economic conditions do not support business expansion.

As a result, SME credit remains negative even with efforts by the government and financial institutions to launch new lending mechanisms, such as credit-boost measures aimed at groups with better prospects.

“Overall credit this year still does not look good. Credit could contract by as much as 0.4%,” she said. “SMEs remain a segment where loan growth is consistently negative. This shows that access-to-credit issues and the shrinking SME loan book have not been resolved sustainably, and small businesses continue to struggle to expand.”

SME NPL ratio higher than the overall market

SME non-performing loans remain a continuing concern. Because the economy has faced repeated waves of challenges, the recovery has been uneven, pushing SME NPLs higher over recent quarters.

Overall, SME NPLs make up a higher share than other types of lending and exceed the market average, signalling a long-running structural problem that predates Covid-19 and continues today.

“Looking at the post-Covid period, the SME NPL ratio has now moved into a zone above 7%,” she said. “This reflects deteriorating credit quality and is a warning sign that many entrepreneurs are no longer able to carry their debt burdens, amid an economic environment that remains highly uncertain.”