Amidst a stagnant domestic economy, geopolitical tensions in the Middle East are regarded as a crucial factor that could greatly impact the Thai private sector as the war between Israel and Hamas drags on for over a year with no end in sight.
From soaring oil prices to shipping blockages, Thai industry leaders and economists have warned these conflicts could affect the Thai currency as higher fuel prices lead to inflation, forcing countries such as the US to raise interest rates.
EXPENSIVE OIL
The Energy Ministry is bracing for the impact of the escalating conflicts in the Middle East, following a year of the Israel-Hamas war, preparing for an oil price surge.
The latest missile attacks from Iran and Yemen-based Houthi rebels on Israel, and Israel’s prolonged military missions, notably strikes against the Iran-backed Hezbollah militia in Lebanon, signal a protracted struggle.
If the escalation expands, it will affect oil production and exports from the Middle East, said Veerapat Kiatfuengfoo, deputy permanent energy secretary. A subsequent surge in global oil prices is expected, and Thailand, a major oil importer, is unlikely to avoid the impact.
Prices of crude oil futures increased after US President Joe Biden said Washington would talk to Israel about its conflict with Iran, which fired missiles at Israel early this month in response to Israeli attacks in Gaza and Lebanon, as well as the killings of Hamas and Hezbollah leaders, according to media reports.
On Oct 3, Brent crude oil prices rose by 4.8%, closing at US$77.4 per barrel for November delivery, while West Texas Intermediate crude oil prices increased by 5.1% to $73.6 per barrel.
Mr Veerapat said the ministry will continue to regulate domestic oil prices through subsidy programmes using the Oil Fuel Fund, which is in the red. The fund’s financial status has improved, with its losses falling to less than 97 billion baht, down from more than 130 billion, as global oil prices declined earlier this year and in 2023.
If the conflicts in the Middle East lead to oil supply disruptions, officials will try to keep domestic prices under control, preventing large fluctuations to ease the impact on businesses and households, he said.
In 2022, the Russian invasion of Ukraine caused global oil prices to spike at more than $100 per barrel, plunging the Oil Fuel Fund into a huge loss of 135 billion baht that year.
Mr Veerapat played down concerns over Thailand’s oil supply, saying the country has oil stocks of up to two months if tensions in the Middle East escalate.
The stockpile of 3.36 billion litres of crude oil can be used for 26 days, with an additional 2.05 billion litres being transported to Thailand, ensuring usage for another 16 days. Thailand also has 2.41 billion litres of refined oil to serve domestic demand for 20 days in case of emergency, he said.
TROUBLED SHIPPING
Cargo transport to the Middle East is expected to slow down based on prolonged tensions in the region, intensifying fears of the negative impact on trade sparked by the Israel-Hamas war, said the Federation of Thai Industries (FTI).
The FTI previously expressed concern over the impact on exports, especially cars and auto parts, from Thailand to the Middle East if the war is protracted. Exporters face difficulties shipping goods via the Middle East and are likely to pay costlier freight rates, said the federation.
If the Houthis, an armed political and religious group, continue to attack container ships in the Red Sea and the Gulf of Aden, this will deal a blow to the international economy and global supply chains, noted the FTI.
“The shipping lanes in these areas are important to the world’s economy. Up to 12% of global trade passes through the Red Sea annually,” said Kriengkrai Thiennukul, chairman of the FTI.
He also raised concerns over higher logistics costs as freight rates, which earlier fell to $8,000-9,000 a container, are likely to soar back to $12,000 a container.
CALL FOR DIVERSIFICATION
Mr Kriengkrai suggested logistics providers seek new transport routes, such as the Eurasia Train Direct. This rail freight service, part of Chinese Railway Express, links Europe and Asia, allowing exporters to move goods between the two continents without relying on maritime shipping.
“This route is safe and takes a shorter time to destinations,” he said.
Because it is operated by the Chinese government, the FTI would like the Thai government to hold talks with Beijing over whether Thai exporters can use the service.
“Successful talks would benefit the export sector as the cost of rail transport is 50% lower than shipping by vessels,” said Mr Kriengkrai.
Chaichan Charoensuk, chairman of the Thai National Shippers’ Council (TNSC), agreed that key maritime routes from Asia to Europe have become vulnerable to intensifying geopolitical conflicts.
Recent attacks on vessels transiting the Red Sea have reignited risks of supply chain disruptions. Shipping transit via the Red Sea, which carries about 40% of European-Asian trade, has plummeted by 60%. This trade was offset by rerouting traffic through the Cape of Good Hope, but this adds more time and increases freight costs.
The Middle East is a major trade transit point for Thai shipments, as up to 60% of total maritime exports travel through ports in the region, offering a gateway to Europe and North Africa.
In the first eight months of this year, Thai exports to the Middle East grew by 3.3%, down 4% from last year.
Mr Chaichan said exporters should monitor the shipping situation at all times, especially through the Strait of Hormuz, as a ballooning conflict could lead to the closure of that vital waterway.
He said exporters, particularly small businesses, should prepare working capital to address potential liquidity problems stemming from shipping delays. While maintaining markets in Europe and the Middle East, exporters are advised to diversify to Southeast Asia and China, according to the TNSC.
INFLATION THREATS
Nattapol Khamthakrua, director of securities analysis at Yuanta Securities (Thailand), said soaring oil prices as a result of tension in the Middle East could drive global inflation, thus affecting interest rates.
Oil prices could rise substantially higher if Israel’s allies, led by the US, decide to attack Iran’s oil facilities, said Mr Nattapol.
“That could possibly push global inflation to accelerate after it has gradually reduced. If so, the global economy and the interest rate trend might be affected,” he said.
Investors are monitoring the conflicts, concerned that Israel may attack Iran’s energy infrastructure, with Iran closing the Strait of Hormuz.
According to the US Energy Information Administration, the Strait of Hormuz, the most critical oil transit chokepoint globally, saw an average oil flow of 20.5 million barrels per day (mbd) in the first half of 2023. This included 14.7 mbd of crude oil and condensate, and 5.8 mbd of petroleum products, representing 27% of global maritime oil trade and 20% of global petroleum liquids consumption.
Iran, an Opec member, has oil production of around 3.2 mbd, comprising 3% of global output. Escalation of the conflict would pressure oil supplies, and closure of the Strait of Hormuz would add a significant oil price risk premium, noted the brokerage.
Energy contributes 7.2% of the items used to calculate US inflation. Every 1% rise in the oil price could push up US inflation by 0.04%, according to Asia Plus Securities (ASPS).
According to a Bloomberg model, if the Brent crude oil price rises by $20 and the dollar strengthens by 5%, US inflation is expected to rise from a normal level of 3% year-on-year to 3.23% in the fourth quarter of 2024.
Higher inflation makes the Fed unlikely to cut interest rates rapidly, which would strengthen the dollar, ASPS said in a research note.
“If the war escalates and is prolonged, the crude oil price will rise and inflation in many countries will accelerate, forcing central banks to slow easing of monetary policies. This would cause the dollar to strengthen, while the baht will weaken,” ASPS said.
“Fed Watch Tool projected a 55% probability of a 50 basis point [bps] cut after the Fed meeting in September, but now predicts a 69% chance of a 0.25 bps cut this November.”
TRAVEL DISRUPTION
The Tourism Authority of Thailand thinks the Mideast conflict could affect the foreign market during the high season, with governor Thapanee Kiatphaibool noting Iranian military exercises in its airspace after Israeli attacks prompted airlines to adjust their routes to avoid the area.
Chamnan Srisawat, president of the Tourism Council of Thailand, said airstrikes might lead to longer flight hours and soaring oil prices, which impact long-haul airfares. Yet tourists remain unfazed, as reasonable expenses in Thailand offset higher travel costs, he said.
Mr Chamnan said the number of Middle Eastern arrivals in Thailand, including Israelis, would reach 1 million this year. Past conflicts have not significantly affected tourism, he said.
The Israeli market has recovered and ranks as a top five market in recent weeks at hotels in Krabi, Phuket and Pattaya.
“Thailand is considered a safe place to travel, taking a rest from political tensions back home,” said Mr Chamnan.
Arabian guests regularly visit Thailand for medical and wellness services. They prefer using top-class private hospitals, and stay in Thailand for longer than leisure tourists generally do, he said.
A person holds a placard with the face of Israel’s National Security Advisor Tzachi Hanegbi, as women lead a march for the return of hostages kidnapped a year ago. REUTERS
Freighters ply the Mediterranean Sea off Israel at sunset on Thursday, amidst the ongoing conflict in Gaza. REUTERS
