KKP Warns Thailand Risks Falling to Fifth in ASEAN as Deindustrialisation Accelerates

In the automotive sector, electric vehicles from China now account for nearly 20% of new car registrations, up from 10% previously, undermining Thailand’s traditional role as a production hub for Japanese manufacturers.

 

“The property sector crisis, overcapacity and deflation, and geopolitical tech rivalry” represent China’s “three illnesses” that are reverberating across the region, Pipat noted, with Chinese deflation potentially exporting price pressures that further squeeze ASEAN manufacturers.

Meanwhile, Thailand’s pivot towards tourism as an alternative growth engine shows signs of exhaustion.

Tourist arrivals are stabilising near pre-COVID levels, but the absence of 11 million Chinese tourists compared with 2019 means the sector can no longer single-handedly sustain economic expansion. 

The situation has been exacerbated by Chinese visa liberalisation, which has tripled Thai outbound tourism to China from 500,000 to over 2 million annually, whilst Chinese arrivals to Thailand remain at just 40% of pre-pandemic levels.

Credit Crunch Compounds Woes

A vicious cycle is taking hold as weak economic growth prompts banks to restrict lending, which in turn further dampens consumption and investment. 

SME credit growth has been negative for 13 consecutive quarters, whilst sales of long-term assets such as houses and cars continue declining—a trend reflecting both credit constraints and unfavourable demographics from a shrinking working-age population.

“Weak economy leads to banks restricting credit, which leads to weaker consumption in cars and housing, which further weakens the economy,” Pipat explained.

 

Policy Options Narrow

The government’s room for manoeuvre is severely constrained. Public debt is projected to approach 70% of GDP, limiting fiscal stimulus capacity, whilst the medium-term fiscal framework caps spending growth at less than 1%. 

This has prompted discussions about expanding the tax base to boost revenue.

On monetary policy, Pipat believes the Bank of Thailand has scope for further interest rate cuts, potentially beginning in December. 

However, he cautioned that rate reductions alone cannot address Thailand’s deep-seated structural challenges, emphasising instead the need to improve the transmission mechanism to ensure banks actually lend.

Three-Pronged Strategy Needed

KKP Research proposes a three-pronged strategy to navigate the economic transition.

First, policymakers must identify which industries retain competitive potential and support their innovation capabilities. 

Second, Thailand must attract foreign direct investment in genuinely productive industries whilst developing high-value services such as IT outsourcing, financial services, and technology exports—sectors where countries like India, Singapore, and Ireland have excelled.

Third, the country must prepare its infrastructure and human capital for economic transformation through education reform, labour upskilling, and potentially easing restrictions on skilled foreign workers, alongside improvements in business facilitation and reductions in corruption.

“In a changing global environment, hoping to rely on the same old engines for Thailand’s economic growth may no longer work,” the research warns. “If Thailand does not prepare well to cope, we are going to face a situation where economic growth keeps deteriorating.”

Global Context: K-Shaped Trajectory

Pipat’s global outlook for 2026 anticipates continued “K-shaped growth and K-shaped risk,” with the US economy expected to expand around 2.5%—above its potential rate—driven by artificial intelligence optimism and related capital expenditure. 

However, he identified four major global risks: the possibility that massive AI investments fail to generate adequate returns, diminishing liquidity as central banks end quantitative easing, China’s “three illnesses,” and the mounting developed-market debt crisis, particularly in Japan where debt exceeds 220% of GDP.

The IMF projects that whilst developed economies will maintain growth near 1.5-1.6%, emerging markets will slow from 4.8% in 2024 to 3.8% by 2030—a reversal of the traditional pattern where developing nations grow faster than their advanced counterparts.

For Thailand, the message from KKP is clear: without urgent action to address its structural challenges and develop new sources of competitive advantage, the country risks being trapped in middle-income status as the industrial foundations that lifted it from poverty continue to erode.