Listen to this story |
Economists are unanimous in their call that the Monetary Policy Committee (MPC) is likely to lower the interest rates during its next meeting this month as the Bank of Thailand could be one of the key agencies that would need to put its best foot forward to help rescue the possible impact of the ‘reciprocal tariff’ that was announced in the wee hours of April 3.
“We now view that the central bank may potentially respond with further easing of the policy rate further to support growth, given the immediate and significant downside risks on growth,” said Enrico Tanuwidjaja, ASEAN Economist for Global Economies and Market Research of UOB Group.
Enrico says that given the uncertainties surrounding the tariff negotiations, weaker near-term outlook, exacerbated by the recent earthquake and low credit growth, he expects 2 (not just 1) additional 25 basis points (bps) rate cuts to be delivered each in April and June.
He says that by lowering the policy rate to 1.50% by the 2nd quarter 2025 is something he expects, and additional cuts may follow if the growth outlook continues to deteriorate.
Other economists were in agreement that the central bank would need to take the lead in pushing for an economic recovery. Pipat Luengnaruemitchai, economist at Kiatnakin Phatra Securities, came out to say that there is a higher risk from the US trade policy is another headwind to the broker’s baseline growth forecast.
“We continue to expect 2 more rate cuts in 2025 and another cut in 2026, with risk of further cuts, considering the downside risk from slower tourism, earthquake, and the US tariffs,” Pipat said.
Pipat said that he now thinks the MPC will cut rates in its April meeting after this tariff announcement due to rising uncertainties which could have a negative impact on growth. Notably, the MPC no longer expressed concerns about household debt, which had been the key reason not to cut.
Enrico of UOB says that on the monetary policy front, he believes there is still room for the central bank to further ease the policy rate to support growth and the broader economy, given the BoT’s recent policy stance, which prioritizes growth.
Despite uncertainties surrounding the negotiations to lower the reciprocal tariff rate and the precise impact on growth, the near-term growth outlook is deteriorating, compounded by the recent earthquake and the negative feedback loop of low credit growth and weakening real activity.
‘Dirty 15’ but Heavy Impact
Thailand is on the list of ‘dirty 15’ countries with which the United States has a deficit and is ranked the top 10 countries with which the US had the highest trade deficit.
Thailand in 2024 had a trade surplus of US$ 45.6 billion, just US$ 100 million behind India (with US$45.7 billion). Since the onset of the US-China trade conflict (Trade War 1.0), Thailand’s trade surplus with the US has grown significantly, reaching US$ 45.6 billion, according to consensus US data for 2024.
Enrico of UOB says that based on his preliminary assessment of the tariff impact—calculated by multiplying the 37% reciprocal tariff rate by the value of US imports from Thailand, then dividing by Thailand’s GDP in 2024 in US dollar terms (excluding the effects of trade redirection, tax incidence, and price changes)—the initial impact of the tariff is 4.3% of gross domestic product (GDP).
This he says, would position Thailand among the top 10 countries most affected by the US’s recent tariff measures. Our analysis suggests that other heavily impacted countries include Cambodia, Vietnam, Mexico, Taiwan, and Canada.
Thailand, he says is particularly exposed to the broader consequences of slower global trade and subdued global growth, given its significant dependence on international trade.
“As a result, we have revised our GDP growth forecast for 2025 down to 2.0%, from our previous projection of 2.9%. We now expect growth to rebound to 2.6% in 2026, partly driven by a low base effect, which is also revised down from our earlier projection of 3.0%.”
18.3% of Exports to be Impacted
As of 2024, the US remains Thailand’s largest export market, accounting for 18.3% of total merchandise exports. Thai exports to the US are concentrated in several key sectors, including: 1) Electrical machinery & equipment (32.0%)
2) Machinery (24.7%)
3) Rubber products (9.2%)
4) Vehicles (4.3%)
5) Jewelry (3.6%)
Thailand depends heavily on a few major export markets, including:
- USA accounted for 18.3% of total exports of Thailand in 2024
- China 11.7%
- The EU-27 8.1%
- Japan 7.8%
- ASEAN 23.4%
In terms of specific sectors, Thailand’s exports are expected to be heavily affected by the higher tariff rates on electrical machinery & equipment, machinery, rubber products, vehicles, and jewelry. These categories together account for approximately 74% of Thailand’s total merchandise exports to the USA in 2024.
Beyond the direct effects of the tariffs, Thailand and its ASEAN neighbors are also exposed to the broader consequences of slower global trade and subdued global growth, given their significant dependence on international trade.
UOB says that in 2023, Thailand’s ratio of goods trade to GDP was 111.5%, one of the highest in Southeast Asia, suggesting that the negative impacts of a decelerating global economy could significantly weigh on the country’s near-term growth prospects.
Tanawat Ruenbanterng, economist at TISCO Securities also says that the new tariffs are likely to hurt Thailand’s economic growth considerably. The tariffs should bring down global economic growth significantly, hurting Thailand which relies on external demand for both exports and tourism.
If the newly imposed tariff rates persist (both for Thailand and its trading partners), economic growth this year could fall below 2%, with a rising risk of recession. The tariff should raise inflationary pressure, putting central banks in a tough spot when it comes to easing monetary policy.
IMPACTED Sectors
- Lower Growth of Merchandise Exports: The higher-than-expected reciprocal tariff rates imposed on Thailand and other economies, coupled with the anticipated intensification of trade tensions, are expected to significantly impact Thailand’s exports, both directly and indirectly, in 2025 and beyond. This impact is primarily driven by the concentration of export markets and product categories.
The imposition of tariffs has made economists anticipate slower economic growth in the US and other regions, which will likely dampen demand for Thai exports. Additionally, the government’s efforts to diversify export markets and expand market access through free trade agreements (FTAs) will likely take time to produce tangible results.
As a result, UOB has revised its projection for merchandise export growth downward, now expecting a significant softening to a range of 0.5%–1.0% in 2025, compared to previous estimate of 2.0%–3.0%.
- Lower Exports of Services: While the tourism sector has been normalizing, the direct and indirect impact of the reciprocal tariffs on the broader global economy is further dampening the ongoing rebound. This is compounded by negative sentiment resulting from the recent earthquake and security concerns.
In light of these challenges, Enrico says that he has revised UOB’s forecast for tourist arrivals down to 37.0 million, from the previous projection of 37.5 million.
- Lower Private Investment: While UOB says that it maintains the view that private investment in 2025 will be supported by a record-high public investment budget and the historically high value of approved foreign direct investments (FDI) applications, the impact of reciprocal tariffs, uncertainties surrounding trade negotiations, subdued global growth prospects, and shifting sentiment are expected to weigh significantly on private investment activity in 2025.
The actual realization of FDI projects may decline substantially as a result. Consequently, we have revised our forecast for private investment growth down to 2.0%, from the previous projection of 2.9%.
- Lower Private Consumption: While the broader, slower, and uneven economic recovery, compounded by persistently subdued activity in manufacturing, is expected to weigh on the rebound in household income, the direct and indirect impacts of the reciprocal tariffs will likely exert additional pressure on private consumption.
This is due to worsened balance sheets in 2025, alongside ongoing cyclical and structural challenges, including a decline in commercial bank lending to households, deteriorating wealth effects from a slump in the equity market, and elevated further, with growth revised down to 2.4% in 2025, from UOB’s previous forecast of 3.0%.
Stock Market Dips
The implementation of the ‘reciprocal tariff’ has created a major upheaval in the equity markets around the world with the US market shredding up to US$ 5.4 trillion in value in the first 2 days after the announcement of the ‘reciprocal tariff’.
Tanawat of TISCO says that the downside risk to his 1,337 year-end target for the SET is evident now and that the slower growth in general should bring down the SET’s 2025 estimate earnings per share (EPS) from 81.80 Baht currently.
Thailand tends to be more sensitive to external demand vs. peers, and thus global economic slowdown, in addition to the higher reciprocal tariff rates, should sap market sentiment. That said, the downside could be limited by the fact the SET has already underperformed in the past 2 years, and current valuations are not expensive, with decent (and rising) dividend yields.
Enrico of UOB says that he anticipates that the repercussions of the US’s reciprocal tariffs, along with their subsequent adverse effects, will further exacerbate the K-shaped cyclical economic recovery. The service sector, which has been a key driver of Thailand’s economic rebound, is expected to soften, primarily due to the slower-than-expected normalization of foreign tourist arrivals.
Additionally, softer global growth and weakening activity in key trading partners will place further strain on the manufacturing sector. With the escalating trade tensions, the influx of Chinese imports is also expected to increase. As a result, the uneven economic recovery is likely to persist in the medium term.
Moreover, under the current global environment of heightened uncertainty and escalating tensions, there could be significant implications for FDI inflows into Thailand and the growth and development of supply chains of new S-curve industries.