Thailand’s Transformation – Part 1: Securing Near-Term Growth

This is the first of a two-part blog series accompanying AMRO’s 2025 Thailand Annual Consultation Report. Part 1 examines Thailand’s near-term growth challenges and the macro-policy response needed to sustain momentum. Part 2 explores how Thailand can leverage foreign direct investment to achieve long-term structural transformation.

Thailand is seeing a promising surge of FDI inflows amid its structural transition toward new growth sectors. However, to fully reap the benefits of these inflows and sustain its transformation, the immediate priority is to ensure growth momentum stays on track.

Growth in the Thai economy has remained subdued, weighed down by continued weakness in domestic demand. Private consumption growth has slowed sharply from nearly 7 percent in 2023 to around 2 percent this year, reflecting sluggish income recovery and fragile sentiment. Meanwhile, credit expansion has been weak across most sectors, with bank lending to households and SMEs continuing to decline. Taken together, these indicators point to a broad-based softness in private sector.

There are, however, some encouraging developments. Despite the subdued domestic environment, foreign direct investment (FDI) has surged, particularly into high-value sectors such as electric vehicles, electronics, and data centers. Private investment has also shown early signs of rebound in recent months, supported by these inflows.

Yet to fully realize the benefits of this structural transition, the immediate policy priority is to sustain short-term growth momentum and prevent the recovery from derailing. In other words, the country must first navigate its short-term challenges to secure its medium-term gains.

The concern is that the weakness in private demand may have become more persistent than cyclical. Consumption growth has slowed markedly, while household debt – around 87 percent of GDP – continues to constrain spending. Weak income growth, tight credit conditions, and political uncertainty have further dampened confidence. These factors could reinforce one another, creating a negative feedback loop that could prove self-perpetuating if not addressed promptly.

While weak domestic demand typically calls for policy support, Thailand faces a more complex policy trade-off. The policy rate is already low by historical standards, public debt has increased after years of stimulus, and high private leverage constrains credit growth. Policymakers therefore face a delicate balance – whether to continue providing near-term policy support to sustain growth, or to preserve policy space amid unprecedented uncertainty both domestically and externally.

AMRO analysis suggests that the appropriate response depends critically on the nature of the shocks that Thailand is facing. When the weakness in domestic demand is temporary, it may be justified to adopt a wait-and-see approach to preserve policy space until greater clarity emerges – the so-called option value of waiting.

However, if the weakness proves persistent, a more front-loaded and decisive policy response would be warranted. Acting early to counter a sustained demand shortfall helps prevent expectations of low growth and inflation from becoming entrenched.

Delaying action, on the other hand, does not necessarily preserve policy space. On the contrary, prolonged domestic-demand weakness, if left unaddressed, can quickly erode policy space and push the economy into a self-reinforcing downturn that becomes harder to reverse.

This consideration is even more critical when monetary policy space is limited, with the policy rate already close to its historical low and the risk of hitting the effective lower bound. In such circumstances, the value of waiting diminishes; early and decisive action helps prevent or delay that constraint, preserving confidence and policy flexibility.

Apart from monetary policy, a supportive policy mix is also crucial. Fiscal policy should remain supportive in the near term, especially for vulnerable groups. Directing fiscal resources toward infrastructure and productivity-enhancing investments is welcome and should be implemented swiftly to support both near-term growth and long-term competitiveness. Over the medium term, fiscal consolidation efforts should continue to rebuild fiscal space amid growing demands on public resources.

Financial policy should strike a balance between managing legacy debt vulnerabilities and supporting new productive credit. While financial conditions have broadly stabilized, many households and SMEs still face debt-servicing challenges. Continued efforts to restructure or reschedule distressed loans are critical to reduce debt overhang and restore credit transmission.

Ultimately, Thailand can only fully benefit from its long-term structural transformation if near-term growth momentum is sustained. The surge in FDI and shift toward high-value industries are promising, but these opportunities will materialize only if short-term growth remains on track, which forms the foundation for long-term transformation and resilience.

But securing near-term growth is just the first step. In Part 2 of this blog series, we turn to the longer-term question: How can Thailand convert this surge of FDI into sustained productivity gains and inclusive growth? We examine the policy actions needed to maximize spillovers, strengthen absorptive capacity, and ensure that foreign investment becomes a catalyst for Thailand’s broader industrial upgrading.

Read the Thai translation of the blog here.