Navigating twin crises and tightened monetary policy

Bangkok Post

8 hours ago

Financial markets in Thailand are confronting an unprecedented twin crisis, as political uncertainty from the audio clip scandal converges with escalating Middle East tensions that have rattled global capital markets.
This dual crisis severely affected Thailand's economy, with the Thai stock index plunging to its lowest point in five years, declining nearly 24% year-to-date to become the world's worst-performing equity market.
Thailand's political crisis stems from the withdrawal of the Bhumjaithai Party and its 69 MPs from the government coalition, creating political uncertainty.
As of Friday, political pressure had pushed the SET index down, testing the critical support level of 1,085 points. Our analysis identifies three main scenarios with varying economic implications.
The first scenario involves immediate parliamentary dissolution, though we reduced the probability of this outcome as the government is likely to retain its majority. This scenario would result in GDP contracting by 0.5 percentage points due to disruption of the budget process -- both fiscal 2025 disbursement and passage of the 2026 budget.
The second scenario, which we consider the base case with increased probability, involves a cabinet reshuffle followed by dissolution after the fiscal 2026 budget is passed, with the economic impact consisting of GDP shrinking by 0.3 percentage points.
The third scenario considers resignation or removal of the prime minister due to governance issues, carrying a moderate probability and resulting in a growth slowdown of 0.3-0.5 percentage points.
Under this scenario, the Bank of Thailand may need to accelerate interest rate cuts by 50 to 75 basis points to support the economy amid mounting pressure from anti-government demonstrations and various legal developments that could escalate the situation.
The US strike on Iran's nuclear facilities on June 22 significantly altered the Middle East conflict landscape. Brent crude initially surged 5.7% to $81.40 per barrel before falling below $70 as immediate supply disruption fears subsided.
The Israel-Iran conflict began to ease following a ceasefire announcement with US mediation. Analysts suggest Iran's military effectiveness may now be diminished, while the fragile domestic economy is experiencing inflation near 40%.
The US is reportedly preparing to open negotiations with Iran next week, which requires monitoring.
MIDEAST SCENARIOS
We forecast the probability of three Middle East scenarios.
The base scenario, with 40% probability, anticipates temporary oil price increases before a decline, resulting in Thai economic growth of 1.4% and inflation of 0.5%. The adverse scenario, also with 40% probability, involves oil prices sustained above $85 per barrel, leading to growth slowing to 1.2%, while inflation increases to 0.8%.
The crisis scenario, with a 20% probability, assumes Iran decides to close the Strait of Hormuz, potentially pushing oil prices to $130 or $140, resulting in economic growth of only 1% and inflation reaching 1%.
In Thailand, the central bank's Monetary Policy Committee (MPC) voted 6-1 this week to maintain the policy rate at 1.75%, with one member favouring a reduction to 1.50% to support the slowing economy.
According to the MPC, Thailand's economy in the first half of 2025 will expand better than projected, driven by exports, particularly to the US. As a consequence, the regulator revised its full-year GDP growth forecast to 2.3% from 2.0% earlier.
However, the central bank believes export momentum is temporary, with heavy frontloading of shipments to the US to avoid higher tariffs.
The economy faces risks in the second half from US tariffs, weak domestic demand and declining consumption amid reduced household income and confidence. The 2026 economic growth forecast was downgraded to 1.7% from 1.8%.
We believe Thailand's economy will slow significantly in the second half, risking a technical recession. Thailand faces substantial risk of higher US import tariffs compared with other trading partners.
Government budget disbursement remains below target, and despite expectations of acceleration in the second half, including 115 billion baht in stimulus projects, disbursement is expected to remain delayed due to uncertainty about government stability, preventing the public sector from fully driving the economy at a time of weak private demand.
Contracting credit will further pressure domestic demand. With inflation clearly below the central bank's 1-3% target range and with no signs of demand-side inflationary pressure, there is room for further monetary policy relaxation.
We maintain our view that the central bank should cut the policy rate at least twice more this year to 1.25% to alleviate household and business interest burdens, reduce tight financial conditions, and support a stable demand recovery. If the regulator doesn't cut rates in the third quarter, we see delays potentially weakening the economy, ultimately requiring more aggressive rate cuts later and further increasing risks to future economic stability.
In terms of investment strategy, the SET is expected to remain volatile amid negative domestic and external factors as outlined above.
However, we believe the SET index below 1,100 points, representing a 2025 price/earnings ratio of less than 12 times, is appropriate for medium- to long-term investment through gradual accumulation. Our investment strategy remains "selective buy" across four key areas.
First, we recommend defensive stocks with low volatility that are expected to resist external market turbulence, specifically DIF, BDMS and BCH.
Second, quality dividend stocks from the SET50 with SETESG ratings of A or higher should be considered to generate short-term cash flow, as these companies are expected to pay interim dividends from first-half 2025 profits with yields exceeding 2%, particularly ADVANC, BBL and PTT.
Third, earnings-play stocks with strong profit momentum deserve attention, as we expect normalised second-quarter 2025 profits to grow, with ADVANC, CPALL and BTG leading this category.
Finally, for investors with a high risk tolerance seeking trading opportunities amid the Middle East conflict, we recommend stocks benefiting from rising oil prices, specifically PTT and PTTEP.