Turmoil, tariffs, tourism: Thailand’s political woes threatens fragile recovery

Following the suspension of Thai Prime Minister Paetongtarn Shinawatra Tuesday by the country’s Constitutional Court, analysts are seeing a troubled future for the Southeast Asian nation.

Paetongtarn had been suspended by the court after it accepted a petition from 36 senators that accused her of dishonesty and breaching ethical standards.

It followed a leaked phone call between Paetongtarn and former Cambodian Prime Minister Hun Sen, in which she criticized a Thai military commander overseeing a border dispute with Cambodia while appearing to appease the Cambodian strongman, according to critics.

The suspended prime minister now has 15 days to respond to the allegations. Thailand’s current acting prime minister, Phumtham Wechayachai, is its sixth in just two years.

“I think there is no way she returns to being PM again as this is now a concerted effort by the military and its allies to finally finish off the Shinawatras, including, more importantly, Thaksin,” Joshua Kurlantzick, Senior Fellow for Southeast Asia and South Asia at the Council of Foreign Relations told CNBC.

Kurlantzick was referring to Thaksin Shinawatra, the father of Paetongtarn and Thailand’s prime minister from 2001 to 2006. Yingluck Shinawatra, the younger sister of Thaksin, was Thailand’s first female Prime Minister from 2011 to 2014.

The fallout from the leaked call saw the Bhumjaithai Party, the second-largest party in her governing coalition, withdraw from the alliance, leaving Shinawatra with only a razor-thin margin in Thailand’s lower house.

While it is plausible that Shinawatra’s Pheu Thai party could hold on to power for now, Kurlantzick said that the government “would be very shaky” and could collapse “in a month or two.” He added that Pheu Thai is “super unpopular now.”

Sreeparna Banerjee, associate research fellow at the Observer Research Foundation, told CNBC that even if Shinawatra is restored as PM, “her authority and coalition will remain fragile.”

The political instability could affect Thailand’s efforts to revive its economy, which is currently facing weak tourism numbers and looming tariffs from the Trump administration.

Banerjee said that without a stable head of government, “Thailand’s ability to respond decisively to external economic pressures, such as potential U.S. tariffs, will be limited.”

Under President Donald Trump’s so-called “reciprocal” tariffs announced in April, Thailand faces a 36% levy if no deal is reached with the U.S. by July 9, when Trump’s 90-day suspension on the “reciprocal tariffs” ends.

She also added that while the country will continue with policies from Paetongtarn’s government focusing on stimulus measures and boosting export competitiveness, an absence of strong leadership at the top could hinder their implementation and complicate trade negotiations.

“Investor confidence may weaken, and bureaucratic inertia could delay critical responses, at a time when Thailand urgently needs clear direction and coordination to revive its sluggish economy.”

The World Bank on Thursday sharply downgraded Thailand’s full-year growth forecast for 2025 to 1.8%, down from 2.9%, and also cut its 2026 projection to 1.7% from 2.7%.

Thailand’s economy grew 3.1% year over year in the first quarter of 2025, and 2.5% for the full year of 2024.

Such pessimism is also seen in Thailand’s markets, with the country’s SET index plunging by around 20% for the year to date.

Paul Gambles, co-founder of investment advisory group MBMG Group told CNBC’s “Squawk Box Asia” that tariffs may not be Thailand’s largest problems. Instead, he said that the issues in the domestic economy are prevailing.

“A lot of long-term structural issues are coming to the fore for Thailand at the wrong time, the worst possible time.”

While Thailand’s household debt is at five-year lows, the debt level as a ratio of GDP is higher than its Southeast Asian peers, raising concerns about consumption and economic growth.

Its key tourism sector is also under pressure, with total tourist arrivals down 12% year over year in the first six months of 2025, government data showed. Tourist arrivals from China, which was Thailand’s largest tourist market, plunged 34% year over year in the same period.

Local media reported that the country is likely to miss its target of 39 million tourists in 2025, citing the Association of Thai Travel Agents.

Thailand’s political stasis will continue for a while, CFR’s Kurlantzick said.

In 2023, the Move Forward party, led by the charismatic Pita Limjaroenrat, stunned Thailand’s military elite and royalists with an electoral victory.

However, the party failed to form a government due to opposition in the military-appointed senate over its campaign to amend Thailand’s lese-majeste law. It was dissolved by the constitutional court a year later, leading to the formation of the People’s Party, which is now the main opposition force.

“Maybe eventually… some kind of other coalition the military likes emerges in parliament. Maybe a new election [will happen] and the military tries to prevent the opposition from gaining a majority,” Kurlantzick said.

MBMG’s Gambles said, “Domestic political turmoil in Thailand is hardly news. It’s more likely just the standard operating procedure, to be honest.”

“We might get a change of Prime Minister. We may get major changes in Parliament, in the cabinet. But I think it will still be the same old, same old, business as usual.”