KKP Warns Prolonged High Global Rates Threaten Thailand Economy

KKP Research warns of a prolonged period of high global interest rates driven by structural pressures, including expanding government debt, massive AI investment demand, and inflation risks. The firm notes Thailand faces significant pressure despite its still-low rates, which reflect economic weakness rather than fiscal strength, with public debt nearing the 70% ceiling.

KKP Research assesses that long-term global interest rates are likely to remain elevated longer than expected due to structural pressures: fiscal imbalances in major economies, enormous capital demand for AI investment, and inflation risks. It notes higher financing costs will hit private investment and add to government debt burdens. The firm cautions that Thailand's low rates are not a safety signal but reflect economic fragility amid public debt approaching the 70% ceiling.

In recent months, long-term government bond yields globally have surged rapidly. US 10-year Treasuries rose above 5%, the highest since 2007, while Japan and France hit multi-decade highs. While energy prices and central bank policies play a part, KKP Research judges this round of pressure stems from structural factors that may prevent rates from returning to the lows of the past decade. Although the US midterm election results reducing fiscal stimulus risks and easing Middle East tensions have pulled yields and oil prices down somewhat, both remain well above historical norms.

Three factors driving persistently high global rates:

Global competition for capital: Governments run large fiscal deficits while Big Tech hyperscalers borrow massively for AI and data center investment. Bond issuance by the five largest US tech firms is projected to jump to $1.21 trillion in 2025 from an average of $280 billion during 2020-2024.

Fiscal sustainability concerns: Investors demand higher risk premiums, especially in countries lacking credible deficit reduction plans.

Long-term inflation risk: Middle East conflict and energy prices push investors to require higher inflation compensation.

If rates stay high, the impact falls on interest-rate-sensitive sectors, especially high-yield borrowers refinancing at higher costs. AI-driven US growth and Asian exports could stall if borrowing costs make returns unviable. On the fiscal side, rising interest burdens create a debt snowball effect. Countries with high deficits, interest rates exceeding growth, and high debt-to-GDP ratios face mounting risk, and several major economies already meet these conditions.

KKP Research sees four main policy options for governments: reduce fiscal deficits via tax hikes or spending cuts, which is most sustainable but hurts short-term growth; issue more short-term debt to ease long-rate pressure but increase refinancing risk; implement quantitative easing, difficult amid high inflation; or repress rates below inflation with capital controls, a last resort that erodes savers' real wealth but pressures the currency and risks capital flight.

For Thailand, the yield on 10-year government bonds...