Escalating inflation poses a significant risk to the Thai economy, especially if the US-Iran war drags on until the second half of the year, as domestic consumption remains fragile and small businesses in provincial markets face a liquidity crunch, say economists.
Amonthep Chawla, executive vice-president and head of research at CIMB Thai Bank, said despite significant growth in the first quarter, the Thai economy remains at risk for the rest of the year as energy prices are high while overseas bond yields have risen.
"There are looming uncertainties about a Federal Reserve interest rate cut later this year, or rate hikes by other central banks as global inflation has been surging," said Mr Amonthep.
The Bank of Indonesia, for example, on Wednesday lifted its benchmark seven-day reverse repurchase rate by 50 basis points, the first increase in two years, to support the rupiah as it had fallen to record lows.
The Thais Help Thais Plus stimulus scheme set to launch on June 1 only offers short-term economic relief, he noted.
"What I'm worried about is if the energy crisis lingers until the second half of the year, more central banks will be pressured to raise interest rates, including the Bank of Thailand, which just slashed the policy rate to 1% in February," said Mr Amonthep.
A rate hike could affect households and small businesses outside Bangkok, most of which face a liquidity shortage, especially those not related to tourism, he noted.
"Those small businesses face difficulties as their revenue increases are inadequate to cover growing energy and raw material expenses," said Mr Amonthep.
"A higher interest rate would negatively affect their ability to service debts."
Somjai Phagaphasvivat, an inter- national economics analyst, also expressed concerns about inflation as the US-Iran war has no end in sight.
"Thai inflation soared more than 2%, while the economy is expanding at a low rate. The government needs to figure out this balance," he said.
The co-payment stimulus scheme, a state effort to inject 200 billion baht to prop up the economy, could result in GDP growth of 0.4 to 0.5 percentage points to 1.6-1.7% this year, rising from the previous estimate of 1.2-1.3%, said Mr Somjai.
"Still, volatility remains high and we don't know when oil prices are going to ease," he said.
Prakit Siriwattanaket, managing director of Merchant Partners Asset Management, said high inflation would eventually push the Bank of Thailand's Monetary Policy Committee to lift the policy rate.
"The troubles in the Strait of Hormuz are unlikely to end in May. The next hope is sometime in June," he said.
