Prolonged Iran war could drag Thai tourism and investment into slump

Thailand’s economy is facing mounting pressure from the escalating conflict in the Middle East, with economists warning that a prolonged war involving Iran could sharply weaken growth, tourism, exports and investment.

A key concern is the risk of disruption to the Strait of Hormuz, one of the world’s most important oil shipping routes. Any prolonged closure could send energy prices sharply higher and push up costs across the wider economy.

Thailand is particularly vulnerable because of its heavy reliance on imported oil, leaving the economy more exposed to shocks in energy prices, tourism flows, exports and exchange-rate stability.

Methas Rattanasorn, head of economic research at Tisco’s Economic Strategy Unit, said Thailand’s economy this year could grow by less than 1% if the Middle East conflict intensifies and drags on for three to six months.

He said the economy would slow further if Iran closed the Strait of Hormuz, disrupting more than 20% of global oil shipments and damaging refineries and oil drilling platforms in the Middle East.

Thailand imports a larger share of its oil from the Middle East than many countries in the region, equivalent to more than 6% of GDP. As a result, every 10% increase in Dubai crude prices from the base assumption of US$72 per barrel would shave around 0.3-0.4 percentage points off Thai GDP.

If average oil prices for the year rise to US$82.5 per barrel, Thai GDP growth would fall to just 1.2%, he said.

Oil price cap seen lasting only one month

Methas said the government’s fuel price cap, funded through the Oil Fuel Fund, would only be a temporary measure designed to delay price increases.

In his view, domestic fuel prices would still need to move higher in line with world oil prices, which may settle in a new equilibrium range of US$80-100 per barrel.

He estimated that maintaining the diesel subsidy alone costs more than 1.3 billion baht per day, excluding other fuel products and natural gas.

As a result, the government is unlikely to be able to keep diesel capped at 33 baht per litre for more than one month. Instead, prices are likely to be raised in stages to avoid a severe economic shock.

Diesel prices could climb to around 35 baht per litre, similar to levels seen during the Russia-Ukraine war, and could rise to 40 baht per litre if the situation worsens further. Petrol prices, meanwhile, may be allowed to float up to 45 baht per litre.

He said the government could consider combining diesel excise tax cuts with support from the Oil Fuel Fund to ease the burden, though this would depend on limited fiscal space.

At the same time, short-term economic stimulus measures should be delayed and replaced with policies aimed at reducing electricity costs for households, which could rise from 4 baht to 5-6 baht per unit.

Over the longer term, he suggested soft loans for community solar projects to reduce dependence on conventional energy.

Tourism and exports at risk if war drags on

If the war lasts more than six to 10 weeks, Thailand’s tourism sector is likely to suffer from falling visitor numbers, particularly from the Middle East and Europe, where tourists tend to spend heavily.

That would be driven by airspace closures and more expensive air fares linked to higher fuel costs.

In March alone, Thailand has already seen tourist arrivals fall by more than 300,000, down 10% from the same period a year earlier. By year-end, total arrivals could be down by between 600,000 and 1.2 million from last year’s level.

Exports are also expected to grow by less than the previously forecast 3%, as higher shipping costs add pressure to an already weak manufacturing sector.

At the same time, prices of commodities such as fertiliser and plastic resin are rising in line with transport and fuel costs, placing additional strain on low-income households.

Methas said every 10% increase in oil prices above the US$72-per-barrel base assumption would push headline inflation up by around 0.8 percentage points. That could lift inflation to 1-2% this year and weaken the baht to 33 per US dollar in the second quarter, with a further depreciation to 35 baht by year-end possible.

He added that the Bank of Thailand’s Monetary Policy Committee is likely to keep the policy rate at 1% throughout 2026.

Structural risks add to economic pressure

Beyond the immediate impact of war, Thailand is also facing a range of longer-term structural risks.

These include climate change, with the World Bank estimating that Thailand could lose 7-14% of economic value by 2050 from floods and drought if it fails to adapt effectively to global warming.

At the same time, Thailand is moving rapidly towards a super-aged society. The share of elderly people is expected to rise to 28% within the next three to four years, from around 22% at present.

Combined with a long-running decline in birth rates, this is likely to weaken the labour force and reduce economic growth potential by 0.5-1 percentage points annually over the next 30 years, while adding to fiscal pressure as tax revenues decline.

Healthcare costs are also rising rapidly in Thailand, at 10.8% per year, above the global average of around 10%. Although the country has universal health coverage, around 8% of Thais still lack adequate health insurance, leaving many households vulnerable to financial strain and possible poverty due to soaring medical bills.

Investors shift to wait-and-see mode

Passanee Udompanich, a wealth management executive at Bank of Ayudhya (BAY), said the Middle East conflict has created short-term concern among investors, prompting some to adopt a wait-and-see approach while assessing whether tensions will escalate further.

If the conflict drags on, it will become another negative factor pushing up oil prices and worsening inflation, which in turn would affect monetary policy, damage financial assets and eventually weigh on economic growth.

She said each war has its own distinct features and risks, and the current conflict should not be viewed simply through the lens of the Russia-Ukraine war.

Against this backdrop of volatility and uncertainty, Thai investors are increasingly focused on protecting wealth rather than chasing high-risk capital gains.

Many are shifting from medium- and long-term bonds into short-term fixed-income instruments, while reducing exposure to risky assets and holding more cash to cushion the impact of war concerns and interest-rate uncertainty.

For short-term investors, she recommended taking profits and keeping part of their portfolio in cash while waiting for more suitable entry points.

As for Krungsri’s wealth business this year, she said the bank remains focused on quality growth despite an increasingly complex and unpredictable global environment, with targets of around 4-5% growth in both client numbers and assets under management.