Political Unrest Threatens Thailand’s Long-Term Prospects

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While frequent political upheaval in Thailand has not significantly harmed overall economic stability, it has constrained Thailand’s long-term economic growth and development.

By Shawn Greene

Dec. 2 – More than three weeks after the Thai Senate rejected a highly controversial bill that would have provided amnesty for political offenses dating back to the 2006 coup, anti-government protests appear to be escalating rather than subduing.

Last week, protesters effectively paralyzed Thailand’s government by occupying a number of ministerial offices – climaxing in the brief occupation of Thai Army headquarters Friday afternoon. After a military-moderated meeting between protest leader Suthep Thaugsuban and embattled PM Yingluck Sinawatra failed to reach compromise over the weekend, more than 30,000 protesters launched a “people’s coup” on Sunday giving PM Sinawatra a two day ultimatum to resign.

Thailand’s current spate of political upheaval, however, is only the most recent reminder that anytime political or social instability occurs, the biggest loser will always be the nation’s economy.

As the nation struggles to determine what its political identity will be after King Bhumibol Adjulyadej (reigning for 67 years), competing political factions must attempt to resolve disputes within the existing framework of governmental institutions rather than risk harming Thailand’s long-term economic prospects.

Measuring Impact

In the absence of political unrest, Thailand’s economy could arguably be among the most successful in ASEAN. While political upheaval has not yet significantly harmed the nation’s economic stability in the short-term, it does have the potential to constrain Thailand’s long-term economic growth and development.

Since the 2006 political crisis during which widespread protests lead to a military coup against former PM Thaksin Shinawatra, large-scale disturbances have become an ongoing feature of the country’s political landscape.

After the pro-Thaksin People Power Party came to power in December, massive anti-Thaksin ‘yellow-shirt’ protests in 2008 and pro-Thaksin ‘red-shirt’ protests in 2010 have led to governmental paralysis and political violence on a number of occasions.

According to Fitch Ratings, however, Thailand’s political volatility has not yet seriously threatened the nation’s underlying economic or financial stability.

Real GDP growth has consistently averaged around 3 percent year-on-year from 2008 to 2012 (GDP growth will be above 3 percent again in 2013), and volatility of GDP activity over a longer time horizon is only 3.2 percentage points – only 10 basis points (bps) higher than for Thailand’s rated peers. Additionally, previous episodes of political upheaval have not impacted Thailand’s debt dynamics or resulted in discernible outflows of domestic and foreign-owned capital.

Over time, however, frequent episodes of instability have retarded progress on infrastructure development and inhibited Thailand’s growth relative to its higher-income ASEAN peers.

For several years now, Thailand has been an attractive destination for foreign investors. The country consistently ranks among the top-20 in the World Bank’s “Ease of Doing Business Report,” and policy changes earlier this year lowered Thailand’s corporate income and VAT tax rates while simplifying compliance procedures.

Political incidents, however, continue to have a noticeable impact on investor confidence, tourism and long term economic development.

In response to the current protests, for example, the Baht sunk to an almost three-month low this morning and Thai shares fell to an 11-week low last Wednesday before perking up slightly later in the week after an unexpected interest rate cut by the central bank. Similarly, the issuance of travel warnings by 23 countries last week is expected to detrimentally impact Thailand’s tourism industry for several months.

While Thailand obsesses over the Thaksin family and petty power struggles between rival political factions, badly needed investments in roads, bridges, and overall infrastructure have been stymied. Attempts by PM Yingluck’s current government to inject 2 trillion Baht into the economy through infrastructure projects have been bogged down for months in legal challenges by opposition parties, and attempts to discuss and improve investment incentives overshadowed by political maneuvering.

Credit Suisse, among others, worries that stalling badly needed investments in infrastructure upgrades will continue to threaten Thailand’s economic success relative to its competitors and ultimate endanger its ability to take advantage of the Trans-Pacific Partnership (TPP).

A Struggle for Identity

Regardless of how ongoing and future political disagreements come to pass, competing factions must ensure that Thailand’s long-term economic development does not suffer collateral damage.

After overseeing Thailand’s evolution from an impoverished nation to one of the so-called ‘Asian tiger’ economies, the coming end of 85-year old King Bhumibol Adjulyadej’s reign will inevitably precipitate a struggle over the country’s political identity.

Telecommunications billionaire Thaksin Shinawatra’s tenure as prime minister, for example, featured unprecedented government investment in the development of Thailand’s rural communities, SMEs and the nation’s infrastructure. These semi-populist policies helped liberalize Thailand’s economy while paying back the country’s debt and significantly decreasing poverty nationwide. However, the same policies also upset the country’s traditionally-hierarchical political culture, resulting in political upheaval and Thaksin’s ultimate removal in the 2006 coup.

As the country’s traditional ruling elite increasingly view Thailand’s parliamentary system (subordinate to the nation’s constitutional monarchy) as a potential threat to their post-Bhumibol influence, it remains to be seen whether or not political disputes will continue to be resolved peacefully.

The fact that Thailand’s short-term economic stability has not been seriously impacted by political upheaval is mostly due to the fact that recent political disagreements have been largely peaceful in nature. Even the current anti-government protests were relatively pacific until sporadic violence between rival political camps arose early this morning – and even then on a very limited scale.

Regardless of how the ongoing anti-government protests conclude, Thailand’s political and military heavyweights must remember that the eyes of the world, and foreign investors, are upon them.

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