Thailand's economic recovery at risk amid PM suspension, tariffs

Business Times

02-07-2025

[BANGKOK] Thailand's political crisis deepened on Jul 1 as the Constitutional Court suspended Prime Minister Paetongtarn Shinawatra over a leaked phone call with Cambodian leader Hun Sen – a move that may temporarily defuse protests, but injects fresh uncertainty into an already-flagging economy.
While the court's 7-2 ruling may have calmed tensions on the streets, it does little to dispel deeper anxieties over Thailand's longer-term political and economic woes, with investors and businesses now bracing themselves for months of limbo. This adds downside risk to a growth outlook already clouded by uncertainty over US tariffs.
'The immediate aftermath of these court decisions is usually heightened uncertainty regarding policy continuity. The sustainability of the government and its associated policies will need to be addressed sooner rather than later,' remarked Lavanya Venkateswaran, OCBC's senior Asean economist, in a recent note.
The Stock Exchange of Thailand Index climbed nearly 2 per cent on Jul 1, perhaps buoyed by hopes that the court ruling would take the steam out of a growing protest movement calling for the resignation of Paetongtarn, 38. A demonstration on Saturday (Jun 28) drew a crowd of up to 30,000 at Bangkok's Victory Monument.
Those gains have quickly evaporated, with the market ending flat on Wednesday as investors weighed Thailand's uncertain political future, the risks of policy paralysis, delayed Budget spending, and the spectre of another military intervention.
'Despite the mixed market reaction, we see (the court's) move as exacerbating prevailing uncertainties related to the economic outlook... the timing could not be more inconvenient,' said Venkateswaran.
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Paetongtarn, the daughter of former prime minister Thaksin Shinawatra, has been accused of putting the country's sovereignty at risk after she held a private phone conversation on Jun 15 with Hun Sen, in which she discussed a border dispute between the two neighbours.
In the audio clip, which Hun Sen leaked to his colleagues, Paetongtarn is heard describing the Thai army commander of the second region (which borders Cambodia) as an 'opponent' and calling Hun Sen 'uncle'. Hun Sen is a family friend of the Shinawatras.
Bangkok has been the scene of numerous Thaksin-related street protests over the past two decades, two of which (in 2006 and 2014) have resulted in military coups.
Thailand's economy, already in the doldrums owing to tariff headwinds and slowing private consumption, is expected to see gross domestic product expand a limpid 1.6 to 1.8 per cent this year. Analysts warn that growth could dip further as political uncertainty threatens government spending, compounding the drag from soft exports expected in the second half of 2025.
The projected growth rate is among the slowest in South-east Asia, trailing far behind regional peers such as Indonesia and the Philippines, with GDP in each country forecast to increase by more than 5 per cent, and Vietnam's official projection of 6.5 per cent and higher.
In short, the kingdom can ill afford another military coup and its undesirable consequences – economic stagnation, capital flight and foreign condemnation.
'If a coup comes again, Thailand would just be finished,' said Dr Pavida Pananond, professor of business at Thammasat University.
'With another coup, you can predict another 10 years in the land of the forgotten,' she added, referring to the political isolation and economic stagnation that often follow military takeovers.
On the same day as the court ruling, a new Cabinet line-up was announced in the official government publication Royal Gazette. The new members will be sworn in on Jul 3, with Paetongtarn staying on as culture minister.
Deputy Prime Minister Phumtham Wechayachai, a member of the leading Pheu Thai Party, is expected to become acting prime minister while Paetongtarn's case is under way at the Constitutional Court (a process that could take one to three months).
If she is found guilty, Paetongtarn is likely to be banned from politics for 10 years, and Chaikasem Nitisiri – one of three Pheu Thai candidates for the premiership in the May 2023 election – is likely to be appointed the next prime minister.
The new Cabinet's priority should be the passing of the 2026 fiscal Budget, which would assure a steady flow of government spending on important commitments, such as civil-servant salaries and ongoing stimulus and pro-poor schemes.
'The acting prime minister can still perform duties, including pushing through the Budget Bill,' said Weerawat Wirojphoka, director of securities analysis at Finansia Syrus Securities, in an interview with Krungthep Turakij.
After the last general election in 2023, the process of setting up a new Cabinet was so lengthy that Budget disbursements were delayed for months, resulting in 2 per cent GDP growth that year, with public investment declining 4.2 per cent.
While the country has enjoyed 3.1 per cent growth in the first quarter of 2025, driven in part by a 15 per cent jump in exports year on year, the year's outlook has been overshadowed by US President Donald Trump's 'Liberation Day' tariffs announced on Apr 2. Thailand was to be charged a flat 36 per cent, as it is among the top-10 countries with a trade surplus with the US. The high tariffs have been paused pending trade negotiations.
Thai Finance Minister Pichai Chunhavajira, who is reportedly seeking to reduce the tariffs to 10 per cent, is leading a trade delegation to Washington, where negotiations are expected to continue on Jul 3.
While Pichai has retained his post as finance minister in the new Cabinet, he is unlikely to be negotiating from a position of strength given the uncertainties about his government's longevity.
'It will undermine the leverage of the negotiating team if their tenure cannot be confirmed and they cannot guarantee that they will implement whatever they guarantee to the Trump team,' noted Dr Pavida.
'And, in the longer term, it relieves Thai policymakers from the need to focus on what to do with the industrial policy to help Thailand get out of this economic doldrums,' she said. 'Trump tariffs need to be considered not just as a trade negotiation exercise but also as an opportunity to rethink Thailand's economic growth model in the longer run.'
All eyes are now on how the country will balance governance continuity with political fallout as Paetongtarn's case unfolds, and whether the acting administration can maintain investor confidence and manage trade relations before the uncertainty begins to bite.