Despite the robust pace of public investment, private investment has been subpar, while a change in government policies is needed to upgrade Thailand's competitiveness, say analysts.
Public investment has been growing at double-digit rates in the past few quarters but has not been matched by stronger private investment, said Santitarn Sathirathai, the Singapore-based head of economic research for Southeast Asia and India at Credit Suisse.
"We expect public investment growth rates to fall in the second half due to a more challenging base. With government capital expenditure accounting for only 25% of total fixed capital formation, reviving private investment remains crucial to overall growth," he said.
The private investment index averaged meagre 1.5% growth in the first four months of the year, even with government tax incentives to front-load investment spending, said Mr Santitarn.
"We remain sceptical about the impact of these incentives given the weak sentiment and foreign direct investment," he said.
"Data so far is consistent with our long-standing view that exports and private investment will be disappointing this year, while public investment and tourism are bright spots."
Net investment applications by foreign companies last year plummeted 88% from 2014 to 218 billion baht for 1,038 projects, reported the Board of Investment (BoI).
There was a significant drop in investment by Japan, historically the largest investor in Thailand.
Thailand also faces stiff competition from increasingly attractive neighbours such as Vietnam, Cambodia and Myanmar.
In the first quarter, the BoI received 67 project applications with an investment value of 1.35 billion baht, up 68% from the same period last year.
Earlier, Jaturong Jantarangs, assistant governor of the Bank of Thailand's monetary policy group, said low private investment was still constraining Thailand's GDP growth, which should be above 3.5%.
"The Monetary Policy Committee assessed that as long as private investment remains subdued, it will be difficult for the economy to achieve its full growth potential," said Mr Jaturong.
The private investment index expanded by 1.5% year-on-year in May, up from 0.8% a month earlier, while month-on-month growth on a seasonally adjusted basis rose by 0.4%, according to central bank data.
The business sentiment index registered 50.4, up from May's 49.7, as falling commodity prices led to lower costs.
Manop Udomkerdmongkol, an economist at United Overseas Bank (Thai), said investment is the key to economic advancement and Thailand is at risk of losing its competitiveness as private investment fell by 17% and public investment by 7% between 1996 and 2015.
"To unleash the new investment cycle, the government must tackle the problems at both macro and micro levels," he said.
Macroeconomic stability, including institutional quality and political stability, must prevail in order to ensure continuous investment flows, said Mr Manop.
Public investment must gear towards areas such as construction investment, he said, noting that Thailand not only suffers from the quantity aspect of lower public investment but also suffers from the quality aspect.
"We observe that public investment has shifted towards the machinery and equipment category over the past 10 years. Such types of investment are not as effective as investment in infrastructure that debottlenecks the economy," said Mr Manop.
"Infrastructure investment will increase the investment worthiness of the private sector by lowering production and logistics costs, while public machinery and equipment investment may not necessarily increase private investment worthiness."
At micro level, competition policy should remove any regulatory impediments to market operations such as price controls, price administration and quotas on business licences, said Mr Manop.