Instability threatens Thai
economy By Federico Bordonaro
Thailand's political instability is
increasing, dragging down the country's economic
prospects in the process.
A growing
economy had renewed Thailand's attractiveness to
foreign investors, many of whom had shied away in
the wake of the 1997-98 Asian financial crisis.
But the recent political crisis, coupled with
increasing insurgent activities in the
Muslim-majority southern provinces, will seriously
undermine Thailand's prospects for the foreseeable
future.
For the umpteenth time, global
economic players are discovering how big an impact
political trends can have upon a national
economy. Until recently,
Thaksin Shinawatra's style of strong leadership
had cast Thailand as an oasis of stability in an
otherwise tumultuous region. Recent political and
social unrest, fueled by competing elite interest
groups and deeply entrenched religious conflict,
have now shaken that stability.
On Monday,
the Constitution Court annulled the general
election held on April 2, ruling that the Election
Commission had violated the constitution. Protests
against corruption in government resulted in
Thaksin stepping down as prime minister after his
Thai Rak Thai party overwhelmingly won the
election, which opposition parties boycotted.
Since January 2004, a Muslim insurgency
rooted in the country's three southernmost
provinces of Narathiwat, Pattani and Yala has not
only intensified its hit-and-run assaults, but
more recently has upgraded its tactical
capabilities, including the increased use of
improvised explosive devices.
The conflict
has been long underestimated by Bangkok's
authorities, who have grappled futilely for ways
to combat the shadowy insurgency. The government's
misadministration in such areas has contributed to
Thai Muslim resentment, and allegations of torture
and abuse by authorities have indirectly boosted
popular support for militant groups' activities.
A feared expansion of insurgent activities
from the three provinces further up the coast into
other regions with large minority Muslim
populations, including Phuket and Krabi provinces,
could have a severe impact on one of the brightest
spots in the economy: tourism. Tourist arrivals
are up a whopping 21.7% in the first quarter of
this year.
Bombings on Indonesia's resort
island of Bali, where hundreds of foreign tourists
were targeted and killed, show how isolated
incidents of terror can quickly reverse the
fortunes of the entire hospitality businesses.
After recovering strongly from the December 2004
tsunami, which killed more than 2,600 foreign
tourists, the last thing Thailand's tourism
industry can afford is a terror attack
orchestrated by opportunistic Muslim militants.
That said, Thaksin's recent political
problems have distracted Bangkok and impeded its
ability to implement a more effective
counter-insurgency strategy. The recent
Constitutional Court annulment of the snap April 2
polls means Thailand probably will not have a new
functioning government until early August.
For all his recent political troubles,
Thaksin and his Thai Rak Thai party are still
expected to win another large majority -
underscoring the opposition's enduring inability
to present itself as a viable alternative.
The political vacuum, along with spiking
global oil prices, is sucking the life out of both
consumer and business confidence. The main
consumer confidence index fell to a four-year low
in April, coinciding directly with the heightened
political tensions. Industrial production, while
still growing, fell off from 12% year-on-year
growth in February to 8.2% in March.
Overall export figures are up, growing a
robust 17.9% in the first quarter with
particularly strong performance in the US and
China. Still, China's rise as a low-cost leader in
low-end manufactures is doggedly chipping away at
the competitiveness of many Thai industries,
increasingly in the critical electronics sector.
Thailand recently signed a free-trade
agreement with China, but Bangkok needs to land
upon other innovative ways quickly to promote more
bilateral trade and investment to ensure that
Beijing presents more of an opportunity than
threat to Thai business.
And hopes that
the Association of Southeast Asian Nations
(ASEAN), of which Thailand is a key founding
member, will be able to forge a cohesive economic
bloc to compete with China's massive integrated
market still seem far-fetched.
Economics good, politics
bad Barring political and security
turbulence, Thailand's economic fundamentals are
still in the main appealing. Economic growth has
recently decelerated, with gross domestic product
(GDP) growth dipping from more than 6% in 2004 to
about 4% last year.
Interim policymakers
need to find ways to convince local business
leaders that previously promised growth-promoting
policies, including massive state spending plans
on new infrastructure projects, are indeed still
in the pipeline. If not, declining business
confidence could shave more than a full percentage
point off this year's GDP growth, from more than
5% to less than 4%.
Indications are that
foreign investors, considering an increasingly
skilled workforce and improving infrastructure,
still want to look on Thailand's bright side. The
local currency, the baht, has surprisingly
strengthened during the recent political fiasco,
due partially to the lower interest rates on offer
in neighboring Malaysia and Singapore. The Thai
stock market surprisingly surged after the
Constitution Court announced its decision to annul
election results.
Still, there are
lingering concerns that a newly elected
government, which will be charged primarily with
overseeing political and constitutional reforms,
will lack the mandate to implement long-term
economic policies.That's bad news, because the
investment horizon is already dimming. New
business venture applications were down 52% year
on year in the first quarter of 2005, according to
the government-run Board of Investment (BOI).
Now a combination of rising interest
rates, an appreciating baht and political
instability threatens to discourage new
investments from the private sector further,
according to caretaker Finance Minister Thanong
Bidaya. The private investment index decelerated
in line with political tensions to 1.4% year on
year, down notably from 5.3% in February.
Most foreign investors have adopted a
wait-and-see posture in response to recent
political wrangling. Still, some big Western
investors are looking for opportunity in crisis.
France, the third-largest European
investor in Thailand after the United Kingdom and
Germany, has moved aggressively to enhance trade
relations, particularly in the transport sector,
during the recent political hiccup. President
Jacques Chirac had his eye on landing
infrastructure-related contracts for French firms
during his February 18 visit to Bangkok. China is
also ramping up new Thailand-based ventures,
heedless of the deteriorating political
environment.
That's certainly not the
market consensus, however. The coming months will
be crucial for Bangkok to restore confidence and
bounce back from its institutional and political
crises. Even with the recent judicial intervention
and a plan to hold new elections, uncertainty will
be the dominant theme in Thailand for the rest of
2006.
Federico Bordonaro is
senior analyst with the Power and Interest News
Report. He can be contacted at
fbordonaro@pinrNOSPAM.com.
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