If the Iran conflict drags on, S\&P anticipates Thailand could be among the worst-hit countries through higher input costs, weaker demand and supply disruptions.

Thai companies with high leverage are likely to face negative cash flow over the next two years, due to the impact of the conflict in the Middle East.

According to S\&P Global's stress test report, "Stress Tests Show How Thai Banks Would Handle a 10% NPL Shock", published on April 6, Thai corporates are expected to face rising credit stress over the next 12-24 months, driven primarily by weaker earnings and high leverage.

In particular, highly-leveraged large corporates are more vulnerable and account for 6 trillion baht of debt, including loans from financial institutions equivalent to 17% of total banking system lending and corporate bonds representing 60% of the bond market, based on central bank estimates as of Sept 30, 2025.

Earnings pressure is expected to stem from soft exports, weakening domestic demand and continued competition from Chinese imports. While policy measures may offer some relief, uneven access to credit and varying levels of financial resilience are likely to widen performance gaps.

"Our analysis indicates that 5% of Thai corporates could report negative cash flow in 2026 and 2027, up from 4% in 2024, and rising to 8% under stress scenarios," the report noted.

Larger, lower-leveraged firms with positive cash flow are better positioned to absorb shocks, whereas smaller and weaker borrowers may face tightening liquidity and rising borrowing costs.

The most exposed sectors are real estate, engineering and construction, retail, restaurants, and export-oriented industries such as automobiles and capital goods. Many of these sectors are already highly indebted and remain sensitive to slower consumption, tourism and external demand.

Downside risks remain elevated, particularly from prolonged geopolitical disruptions such as the Iran conflict. This could affect transportation, logistics, industrials, petrochemicals, and agriculture through margin compression and supply-chain disruptions.

In addition, inflationary pressure and weaker consumer spending also pose significant threats.

Meanwhile, Thai banks face prolonged asset-quality pressure amid an uneven recovery. High exposure to vulnerable borrower segments -- especially households and small and medium-sized enterprises -- leaves the sector sensitive to weaker macroeconomic conditions.

Geopolitical risks could further weigh on borrower repayment capacity. If the Iran conflict drags on, S\&P anticipates Thailand could be among the worst-hit countries through higher input costs, weaker demand and supply disruptions. These factors would likely amplify existing vulnerabilities rather than create new ones.

Nonetheless, under a severe stress scenario, Thai banks remain broadly resilient.

Under S\&P's stress-test scenario, in which the non-performing loan (NPL) ratio for each bank rises to 10% from a sector average of around 3%, most banks would remain above minimum capital requirements, supported by existing capital buffers, earnings generation and provisioning capacity.

Under the stress tests, S\&P estimates capital ratios could decline by up to 300 basis points for most banks, including the company's rated institutions, reflecting higher credit costs and non-accrual impacts. A small number of unrated institutions could face greater capital erosion -- exceeding 400 basis points.

According to the report, one bank in particular could breach regulatory requirements under this scenario. For another bank, stage 3 loans currently stand at 0%, suggesting that the 10% NPL assumption may overstate potential losses relative to its peers.

Both banks are foreign-owned, and the company expects parental support to help mitigate this risk. As a result, S\&P does not foresee any systemic implications.

S\&P also assumes that banks would draw on existing provisions, while maintaining NPL coverage at around 70% and stage 1 coverage at roughly 2%.