Foreign investors have moved decisively to reduce exposure to Thai assets following the outbreak of the U.S.-Israeli war on Iran, a turn that threatens to undo nascent signs of economic recovery in Bangkok. The conflict has driven global oil prices to near $100 a barrel and sharpened concerns over Asia’s dependence on Gulf energy supplies.
Thailand is particularly vulnerable because almost half of its oil and gas originates from the Middle East, according to Krungsri Research. That reliance is layered on top of an economy that was already struggling to gain momentum: growth last year was a modest 2.4% and inflation had contracted for 12 consecutive months before the war.
Investor enthusiasm had been building earlier in the year after political developments suggested a pathway to greater stability. Foreign purchases of Thai stocks reached $1.7 billion in February, LSEG data showed, and Prime Minister Anutin Charnvirakul’s emphatic election result in February raised hopes for both political calm and long-delayed economic reforms.
Those hopes were tested when the Iran war broke out at the end of February. Foreigners reversed course in March with an $823 million net selloff in equities, while bonds saw $705 million of outflows - the largest combined outflow since October 2024. The two-week ceasefire announced this month briefly lifted sentiment, helping Thai stocks and the baht recover some losses, but investor caution remains high given Thailand’s exposure if oil prices stay elevated.
Market participants point to the risk that the full economic impact of the energy shock has not yet been reflected in prices. "The risk remains (that) markets remain complacent about the long-term impact from energy shock and that higher fuel costs hit consumption and disrupt exports and tourism, two key drivers of the Thai economy," said Daniel Tan, a portfolio manager at Grasshopper Asset Management.
JPMorgan’s ASEAN equity strategist Khoi Vu echoed a cautious stance, noting that political stability had brightened the outlook before the conflict, but that the energy shock presents a near-term headwind. "As the energy shock has yet to fully materialise, we believe the market has yet to price in significant growth impact," he said.
Limited policy options
Analysts warn that Thailand is likely to face another challenging year even if the ceasefire holds. The country’s exposure goes beyond higher pump prices: over half of Thailand’s annual power generation is gas-based, and liquefied natural gas imports have been accounting for a growing share of electricity production. That mix leaves the economy sensitive to energy cost swings.
Thailand entered the conflict with constrained macroeconomic headroom. Inflation had been on a long downward path, prompting the central bank to cut rates in February prior to the war, and the government’s public debt stands at 66% of GDP - close to its self-imposed 70% ceiling. That framing creates a policy bind, according to portfolio managers watching the country.
"There’s a broad consensus among investors that Thailand is in a policy bind," said Gary Tan, a Singapore-based portfolio manager at Allspring Global Investments. "The central bank has limited room to hike without derailing the recovery, but little urgency or space to ease, which leaves policy restrictive by default," he added, noting his underweight position on Thailand.
State planning agency estimates underline the sensitivity: every one baht rise in fuel prices is estimated to shave economic growth by 2 basis points, which helps explain Bangkok’s hesitancy to expand fuel subsidies. Policymakers have instead signaled selective interventions - ruling out fuel subsidies for now while absorbing higher costs to keep electricity tariffs largely unchanged ahead of the summer.
Nattanont Arunyakananda, investment manager of Thai equities at Aberdeen Investments, highlighted the trade-offs policymakers face. "Higher oil prices could weigh on consumption, the current account and the baht, while also complicating the disinflation path and potentially limiting how much further rates can fall," he said.
Inflation, currency and fiscal pressure
The war has dramatically altered Thailand’s inflation outlook. Average inflation is now projected to rise as much as 3.5% this year depending on how the conflict evolves - a stark reversal from the 0.54% contraction seen in the first quarter.
The Thai baht has acted as an outlet for adjustment, sliding about 2.8% since the war began, although it regained some ground when the ceasefire was announced. Regional peers such as the Philippine peso and the Indonesian rupiah are at record lows, but Thailand’s 2025 performance - when the baht gained 9% - offers some cushion against further depreciation, analysts say.
Fiscal concerns add another layer of vulnerability. With public debt at 66% of GDP and the government maintaining that it will not raise the 70% ceiling, investors worry that protracted shocks could force a reassessment. Finance Minister Ekniti Nitithanprapas stated on Friday that Thailand has limited ammunition to address its economic problems.
Aberdeen’s Arunyakananda warned of the operational consequences if the shock persists. "If the shock extends beyond April, it stops being just a headline issue and starts feeding into day-to-day operations," he said, pointing to the risk that consumption, tourism and export activity could be materially affected.
Outlook
Thailand’s recent experience highlights the confluence of geopolitical risk, energy dependence and constrained policy firepower. The brief market relief from the ceasefire demonstrates the sensitivity of asset prices to shifts in conflict dynamics, but sustained investor confidence will likely depend on how oil prices and energy supply routes evolve and on whether policymakers can find a durable mix of support without breaching fiscal limits.
For now, foreign portfolios remain on edge. The shift from a $1.7 billion inflow in February to combined equity and bond outflows in March illustrates how quickly sentiment can swing when an external shock collides with domestic fragilities. The path forward for Thailand will hinge on the duration and intensity of the energy shock and on the country’s capacity to shield households and businesses without exhausting its fiscal buffers.