Thriving tourism: The heartbeat of Thailand’s economy under the spotlight!

How does Thailand's vibrant tourism sector, a crucial economic pillar, navigate systemic risk challenges while contributing to financial stability?


Thailand’s thriving tourism sector receives widespread recognition, marking it a leading global destination. This vibrant industry represents a crucial pillar of Thailand’s economy, contributing roughly 20% to the national GDP and employing 21% of its workforce. However, the tourism sector is highly susceptible to crises, as demonstrated by the severe impact of the recent COVID-19 crisis on commerce, tourism, employment, and, subsequently, the broader economy. Over the past two decades, Thailand has also weathered the considerable effects of incidents such as flooding and political turbulence, which have profoundly influenced the country and its tourism sector.

Introduction to systemic risk

Systemic risk represents an undiversifiable hazard. It is typified by low-probability events with high impact, referring to the peril that a disruption to one part of the system could create a ripple effect, leading to comprehensive and catastrophic failure. During crises, losses often surpass individual institutions or sectors, spreading across the entire financial system. This interconnectivity results in extensive losses and turmoil, resulting in the emergence of systemic risk. The Global Financial Crisis (GFC), the Eurozone debt crisis, and the recent COVID-19 pandemic illustrate how systemic risk escalation jeopardises financial stability. These incidents over the past two decades underscore the potential repercussions of amplified systemic risk and its effect on the overall operations of the financial system.

Historically, systemic risk was predominantly associated with distress in the banking sector, owing to its central role in the economy. As such, losses and challenges experienced by banks could infiltrate the economy, leading to severe repercussions. However, with the financial system’s evolution, the concept of systemic risk is not exclusively limited to the banking sector. Research has elucidated the role of various sectors in exacerbating the economy’s systemic risk. This implies that systemic risk can stem from sources beyond traditional banking, demanding a more comprehensive understanding of its dynamics within the modern financial framework.

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Why Thailand

Thailand offers an intriguing case study for several compelling reasons. Firstly, it is a rapidly evolving and economically significant nation within emerging Asia. Secondly, tourism constitutes a pivotal sector in the country, substantially contributing to economic growth, GDP, employment, and foreign receipts. Thirdly, this sector is crucial in maintaining Thailand’s global reputation. Nonetheless, this sector remains highly susceptible to adverse events such as terrorist attacks, civil unrest, or global crises like COVID-19, leading to significant losses for businesses and the entire economy. The vulnerability of such a crucial sector could potentially endanger the overall stability of the economy.

Given this backdrop, the study seeks to analyse the influence of Thailand’s tourism sector on the nation’s systemic risk. It scrutinises the contributions of the tourism sector and the banking, finance and securities, and property fund and real estate sectors towards amplifying Thailand’s systemic risk. Additionally, the research examines the impact of significant systemic events, including the 2011 flood, the 2013 political unrest, and the 2020 COVID-19 pandemic, on Thailand’s systemic risk. In terms of methodology, the study employs two systemic risk measures, namely CoVaR and ΔCoVaR, to estimate and evaluate the extent of systemic risk in the country.

CoVaR quantifies the collective risk to the financial system when a sector is under duress. In contrast, ΔCoVaR encapsulates the difference between the CoVaR conditioned on the sector being in a state of distress (represented as the 95% and 80% quantiles) and the CoVaR conditioned on the median state (represented as the 50% quantile). Furthermore, the study examines periods characterised by elevated systemic risk in Thailand and pinpoints the sectors particularly affected by the crisis.

Thailand offers an intriguing case study for several compelling reasons. Firstly, it is a rapidly evolving and economically significant nation within emerging Asia.
Credit. Midjourney


The CoVaR estimates offer an all-encompassing measure of the risk faced by the Thai market, contingent on a severe downturn in the performance of particular sectors. The insights derived from these estimates suggest that, on average, Thailand’s systemic risk, conditioned on extreme fluctuations in the tourism sector, demonstrated higher risk levels than other sectors, with the real estate sector closely following. This accentuates the importance and vulnerability of the tourism sector in Thailand.

The tourism sector draws a significant number of visitors. It contributes to various facets, such as generating substantial revenue, foreign receipts, employing a sizable workforce, and enhancing Thailand’s reputation and goodwill. Our analysis reveals periodic spikes in CoVaR estimates that coincide with significant events like the 2011 floods, the 2013 political unrest, and the COVID-19 pandemic in 2020. However, the highest peak in systemic risk is observed during the COVID-19 crisis, suggesting a considerable setback for the tourism sector and its significant contribution to the country’s systemic risk escalation. While the aforementioned events had a limited impact on other sectors, all three incidents profoundly affected the tourism sector.


Furthermore, we utilise the Kolmogorov-Smirnov test to ascertain whether the tourism sector surpasses the other three industries’ contribution to Thailand’s systemic risk. Our results indicate that tourism contributes more significantly than the banking, finance, securities, and real estate sectors. These findings offer remarkable insights – firstly, the tourism sector is systematically riskier than the other three sectors. Secondly, extreme and moderate shocks to the tourism sector exert the most considerable influence on the market, surpassing the contributions of the other three sectors. This observation affirms the dominance of the tourism sector over the other sectors in amplifying Thailand’s systemic risk.


Journal reference

Tobias, A., & Brunnermeier, M. K. (2016). CoVaR. The American Economic Review106(7), 1705. https://doi.org/10.1257/aer.20120555

Shivani Narayan is a doctoral scholar at the Indian Institute of Management Kashipur, India. She has recently submitted her thesis titled 'Essays on Systemic Risk.' Her research interests include assessing systemic risk, gauging the role of institutions in increasing systemic risk, and analyzing the factors contributing to its escalation. She has 1.5 years of corporate and academic experience.