Economic Challenges for Thailand’s New Government

The economic and social environment surrounding the new government in Thailand will be riddled with challenges. Major domestic economic issues that have become more serious under the Prayut administration include the household debt problem, the economic disparity problem (disparities in income and assets before taxes and transfers), and the declining birthrate and aging population. At the root of these problems is the slow improvement in the income environment for low-income earners, and increasing labor productivity will be essential if this issue is to be totally eliminated.

To address the various problems that have worsened under the Prayut administration, it is likely that the new government will expand fiscal spending, as doing so will have an immediate effect. However, in light of various factors, it is unclear whether it will be possible to implement election pledges as planned. These include 1) differences in policy priorities and specific measures among political parties, 2) the absence of a clear path to securing the stable financial resources needed to expand fiscal spending, and 3) the potential for political clashes over political and social reforms to impede the smooth rollout of economic policies. If policies are implemented by relying on the ease of issuing government bonds, the delay in making fundamental structural reforms, such as revamping the tax and social security systems, would be likely to undermine fiscal soundness and depress the medium- to long-term economic growth rate. Even minimum wage increases, which would not involve fiscal spending, could have an adverse impact on economic growth if wage hikes significantly outstrip the pace of productivity growth.

There can also be little optimism about the international environment surrounding Thailand. While there are bright spots, such as economic and social normalization in the wake of the COVID pandemic, the slowdown in the world economy and increasing protectionism will put downward pressure on Thai trade and investment. The U.S.-China confrontation and other factors have boosted Thailand’s trade and investment through the transfer of production from countries that are clashing with each other to countries that are taking a “neutral” position. However, Thailand has not been able to take full advantage of this tailwind due to its high labor costs compared to other emerging Asian countries and its poor competitiveness in capital- and knowledgeintensive industries compared to developed countries.

With challenges on both the domestic and international fronts expected to continue, Japanese companies have been losing interest in Thailand as part of their Asia business, and this could trigger a cycle of Japanese firms exiting Thailand and the Thai economy slumping. To avert such a vicious cycle, it will be necessary to increase the complementarity of business in Thailand and in other Asian countries. In this regard, it will be especially important for Thailand to be proactive in participating in the supply chain for next-generation vehicles, and electric vehicles (EVs) in particular. As momentum builds toward switching from fossil fuel-derived materials to biomaterials, the key to sustainable growth for Thailand will be for the country to establish itself as a production and export center for components that are compatible with a decarbonized society by, for example, proactively utilizing its abundant biomass resources.

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