Thailand: Investors Wary

Political Instability Dampens Medium-Term Growth

March 28, 2014

AEInvestor

The ongoing political crisis in Thailand has the potential to significantly dampen 2014 growth forecasts. Thailand’s economy has already begun to feel the effects of the ongoing unrest. Following a brief slump into recession in 2013, the Thai economy is being battered by weak consumer spending and a prolonged government shutdown that is delaying much-needed infrastructure investment.

The immediate effects of the crisis will be felt primarily in sectors relying on consumer demand and tourism. Consumer spending was responsible for lifting the economy when export demand was constrained, but this appears unlikely to occur again in the near-term due to decreased spending as a result of the current political turmoil. Domestic demand contracted by 1.2% year-on-year in the third quarter of 2013, restraining GDP growth to a lower-than-expected level of 2.7% for that quarter.

Recurring instability is likely to continue beyond the current crisis

The most recent protests in Bangkok are the manifestation of a trend of extreme political polarization since former Prime Minister Thaksin Shinawatra was ousted in a military coup in 2006. Social and economic changes are driving the ongoing turmoil in Thai politics, and they will remain a source of division for the foreseeable future.

Thailand’s rapid economic growth since the 1997 Asian crisis, along with Thaksin’s rise to power, has brought about significant change in the distribution of political and economic influence in the country. Thailand’s historically impoverished rural northern provinces have seen substantial growth in industrial and infrastructure investment over the last decade. This region has been the main beneficiary of Thaksin’s (and subsequently the Pheu Thai party’s) populist policies, including the provision of rice subsidies, which many in the opposition see as unsustainable and unfair.

Resentment among Bangkok’s middle and upper class towards the rising electoral power of the northern population is fueling political polarization. The Democrat Party, which is largely supported by the traditional political establishment, has not won an election in over 20 years. Much of the population in Bangkok and the southern provinces resents the growing political influence of northern voters, whom they see as uneducated and backward. This resentment is the primary driver behind the protests seeking to oust Prime Minister Yingluck Shinawatra, Thaksin’s sister, and remove the Shinawatra family’s influence from Thai politics. Due to the high levels of mutual animosity between the opposing groups, political crises often require the intervention of a third party – typically the army or the monarchy. However, since the coup in 2006, the pro-royalist judiciary has become more involved in politics, which is affecting the ability of the current government to push through policy.

Potential judicial intervention could weaken Pheu Thai’s ability to influence the current crisis

The military has thus far been reluctant to intervene in support of either side of the current conflict. Nevertheless, if the situation turns violent, risks of a military coup sharply increase. A military intervention can be expected to result in significant delays to projects approved by the Pheu Thai government. In addition, investors would need to engage with new stakeholders, as the cabinet would be reconstituted and senior bureaucrats suspected of being sympathetic to the Pheu Thai would probably be purged.

However, the most likely intervention in the current crisis would come from the judiciary. The judicial branch has become increasingly involved in Thai politics since the military coup that removed Thaksin in 2006. For instance, in 2008, the courts ordered the dissolution of the People’s Power Party – the predecessor of the Pheu Thai – for electoral fraud. The judiciary could intervene in the current crisis by denying approval of candidates who failed to complete registration for the February elections (due to candidate registration stations being blocked by protesters). This would prevent the minimum required number of parliamentary seats from being filled, thus effectively leading to dissolution of the government.

The court’s increased involvement in politics will also have an impact on investment in Thailand. Of particular importance is the January 8, 2014, rejection by the Constitutional Court of an amendment to the Constitution granting the executive branch greater autonomy in approving international agreements, including trade frameworks. However, the court warned that the legislation would damage the system of checks and balances and reduce transparency in the procurement process. One of the key motivations behind the amendment was to speed up the procedure for approving investments related to the government’s initiative to increase investment in the country’s infrastructure.

The crisis threatens much-needed investment in infrastructure in 2014

Spending on infrastructure, called for in the THB2.2 trillion (US$69 billion) budget approved in November 2013, will almost certainly be delayed due to the current crisis. The Democrat Party has challenged the spending proposal in court, calling it unconstitutional, as it bypassed the annual budget process, and says the bill will raise Thailand’s debt levels to unsustainably high levels.

Further cementing the judiciary’s importance to current political dynamics in Thailand, on January 8 the judge presiding over the case pronounced that the high-speed rail system envisaged under the infrastructure scheme is unnecessary for Thailand. The judge’s declaration, in addition to the ruling against the amendment on international agreements on the same day, comes as a major blow to the Yingluck government. This also signifies that any form of judicial intervention in the current crisis is likely to go against the government, as there is a strong bias against the current government within the nation’s high courts.

The high-speed rail project had originally been introduced by the Democrat Party during its 2010 campaign. The about-face on the issue is indicative of some bias from the court against the current government. This case not only indicates the risks of politically motivated delays to infrastructure projects but also represents a direct instance of how judicial activism can encroach into policy-making in Thailand.

Thailand’s economic prospects in 2014 are severely hampered by the political crisis and the resultant delays to executive decision making. The baht’s depreciation has accelerated more sharply than other emerging markets in early 2014, as concerns over political instability reduce the currency’s appeal to emerging market investors. With progress on infrastructure development stalled and tourism and consumer spending down, Thailand’s economy will face serious challenges to growth in 2014.

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