The country was thrown into political turmoil last week after the constitutional court dismissed Paetongtarn Shinawatra as prime minister for ethical misconduct.
The ruling has triggered a race between two rival blocs to anoint a new premier, with both seeking support from a party demanding fresh elections within months.
“If the political uncertainty results in a snap election, it could be dragged out and will put pressure on already softening growth momentum,” said Lavanya Venkateswaran, an economist at Oversea-Chinese Banking Corp in Singapore.
The Southeast Asian nation had already been battered by multiple headwinds, including US President Donald Trump’s tariffs and the deadly border clashes with Cambodia.
The government forecasts growth to average 2% this year, less than half the pace of expansion of regional peers such as Indonesia and the Philippines.
The Bank of Thailand’s monetary policy committee already cut the key rate by 100 basis points since October – to 1.5% – saying it would need to see a “significant material deterioration” in its economic growth outlook, or face unexpected shocks, to justify additional rate cuts.
“If policy implementation delays and confidence shocks persist, the Bank of Thailand could accelerate easing, though deeper cuts may have limited impact given structural constraints and external pressures,” according to Krystal Tan, an economist at ANZ Group Holdings Ltd, who forecasts a 25 basis-point cut in the fourth quarter.
The race to form a new government kicked off over the weekend as political parties courted rivals for support.
Anutin Charnvirakul, a businessman-turned-politician, has emerged as a frontrunner to head the new government after his conservative Bhumjaithai Party sought an agreement with the opposition People’s Party – the single-largest group in the 500-member House of Representatives.
The Pheu Thai Party, backed by the Shinawatra clan, also claimed to have enough backing to retain power.
The party is also seeking the support of People’s Party, saying it’s ready to accept the conditions set by the progressive group.
The parliament vote on the new premier is expected to take place this week.
“A change in the premiership to a different political party would affect policy direction entirely, including economic policy, which could result in hiccups, at least near-term,” said Tim Leelahaphan, a Bangkok-based economist at Standard Chartered Plc.
Tim has a non-consensus call for a 50-basis point policy rate cut at the next meeting on Oct 8 partly because of the ongoing political uncertainty.
Nomura Holdings Inc, which earlier forecast the nation’s terminal rate to go lower than 1%, flagged a risk of the nation’s credit rating being downgraded by Moody’s Ratings in the coming quarters on rising political uncertainty and sustained growth weakness.
Moody’s said in a recent analysis that Thailand’s polarised politics – characterised by frequent government changes and fragile coalitions – has held back investment and stalled reforms needed to fix structural issues.
One bright spot is that the lower house has already passed a ฿3.78 trillion (US$117 billion) budget, set to take effect on Oct 1, with Senate approval expected today.
That will be a relief to investors by avoiding a repeat of the months-long deadlock over spending plans seen in 2019.
S&P Global Ratings said the political volatility following Paetongtarn’s ouster is unlikely to seriously undermine Thailand’s sovereign credit outlook.
“The company expects little disruption to government operations as Thai bureaucracy has been a stabilising political institution through political crises since 2006,” it said in a note yesterday.
Still, Thai-US trade agreements, which remain under detailed negotiation, could be affected by political unrest – especially if parliament is dissolved, since key provisions on import-tariff cuts for American products require parliamentary approval.
“The budget disbursement, project implementation, investment and the trade deal with the US will get hit” if there’s political paralysis,” said Burin Adulwattana, chief economist at Kasikorn Research Center.
“There is no good news,” Adulwattana said.