IMF identifies '4 traps' hindering Thailand's economic growth amid U.S. tariff impact

The International Monetary Fund (IMF) has highlighted four significant challenges—referred to as "traps"—that are impeding Thailand's economic growth. These challenges have led the IMF to revise its 2025 growth forecast for Thailand down to 1.8%, a reduction from the previously projected rate of over 2%.

According to Rupa Duttagupta, Deputy Director of the IMF's Asia and Pacific Department, the global economic uncertainty has intensified, particularly due to the U.S. trade policies under President Donald Trump. The U.S. is currently imposing the highest tariffs in nearly a century, with some trading partners retaliating, escalating trade tensions to unprecedented levels.

“The ASEAN region, heavily reliant on exports—accounting for about 50% of its GDP—faces average tariffs of up to 30%. Thailand's exports to the U.S. constitute approximately 12-15% of its total exports,” Duttagupta told Krungthep Turakij newspaper.

The IMF has downgraded its ASEAN growth forecast from 4.8% in 2024 to 4.1% in 2025, with a further decline to 3.9% projected for 2026. This marks a 0.6% reduction for 2025 and 0.7% for 2026 compared to previous forecasts.

The IMF attributes the negative impact to five main channels:

• Direct effects of increased tariffs.
• Reduced exports to third countries affected by higher tariffs.
• Rising uncertainty affecting investment decisions and domestic demand.
• Severe domestic credit tightening impacting borrowing conditions and foreign direct investment.
• Declining commodity prices due to global economic slowdown, which may benefit commodity-importing countries like Thailand.

Despite a 90-day suspension of additional U.S. tariffs announced on April 2, the existing high tariff rates between China and the U.S. remain, continuing to strain the region's economies.

However, Duttagupta notes that ASEAN economies, including Thailand, have demonstrated resilience due to years of strong growth and improved policy frameworks. For instance, inflation rates have decreased to target levels, and in some countries, they are below target ranges, thanks to robust monetary policy responses.

Thailand's '4 traps' affecting economic growth

Duttagupta identified four key challenges, or "traps," affecting Thailand's economy:

1. Impact of U.S. Tariffs: The U.S. tariff hikes have led to a downward revision of Thailand's growth forecast to 1.8%, down from over 2% previously.

2. High Dependence on Tourism: Thailand's reliance on tourism has made it more vulnerable to global shocks, with a slower recovery post-COVID-19 compared to other countries.

3. High Household Debt: The elevated household debt levels constrain domestic consumption. Addressing this issue is crucial to unlocking domestic demand.

4. Structural Issues: Underinvestment in human and physical capital in recent years, coupled with an aging population, has led to reduced labor force participation and productivity growth.

 

Recommendations for Thailand and ASEAN

To navigate these challenges, the IMF suggests six key strategies:

1. Resolve Trade Tensions: Aim to de-escalate trade conflicts and reach compromise agreements to reduce uncertainty.

2. Diversify Trade Partners: Expand trade networks beyond traditional partners and increase intra-regional trade, which currently constitutes only about 20-21% of total ASEAN trade.

3. Monetary Policy Adjustments: Consider reducing interest rates when inflation decreases or economic growth slows, ensuring clear and gradual implementation to avoid increasing uncertainty.

4. Exchange Rate Flexibility: Maintain flexible exchange rates to absorb external shocks, intervening in foreign exchange markets only when necessary, in line with the IMF's integrated policy framework.

5. Targeted Fiscal Support: Use fiscal policy to support monetary policy, focusing on temporary, targeted assistance for sectors or households most affected by current disruptions.

6. Structural Reforms: Implement reforms to enhance productivity growth, such as increasing investment in human capital to prepare for digital and artificial intelligence transitions, developing new skills for an aging workforce, improving infrastructure, reducing barriers to foreign direct investment, enhancing governance, and strengthening social safety nets.

“Instead of relying solely on traditional tourism and exports, Thailand should consider upgrading the value of its existing industries—for example, by developing medical or wellness tourism, offering high value-added financial services, and producing higher value-added goods such as next-generation vehicles,” added Duttagupta.