ASIA HAND From political darkness, economic optimism
By Shawn W Crispin
BANGKOK – After nearly two years of political doom and gloom, suddenly
Thailand’s economic prospects are brightening. Foreign investors have ushered
in the 10th anniversary of Thailand’s spectacular 1997 collapse with a buying
binge, recently bidding up the local bourse and currency to 10-year highs. But
should foreign punters be so optimistic?
Foreign capital is rushing into the country, with foreign equity inflows so far
this year exceeding US$3.7 billion, including an
inrush of US$600 million over the last fortnight. Foreign direct investments
(FDI) has also exceeded expectations, and some economic analysts believe those
capital inflows could accelerate in the months ahead as the government approves
more foreign applications to produce so-called “eco-cars”.
Political uncertainty and policy miscues have this year weighed against the
Thai bourse’s performance, which on a price-equity ratio basis has lagged badly
most other global emerging markets. Now with deposed Prime Minister Thaksin
Shinawatra fading from view, and the ruling military junta that ousted him
sticking to its promise to hold democratic polls by year’s end, investors see
new clarity in the country’s political outlook.
“It’s clear now that Thailand is not going to fall off the cliff anytime soon,”
says Cem Karacadag, an economist with Credit Suisse. “And it’s the cheapest
market in Asia.”
To be sure, the economic recovery hasn’t yet shown up in the statistics.
Private consumption, private investment and new bank lending are either
stagnant or contracting. Consumer confidence fell for a seventh straight month
in May, dragging local sentiment to its lowest level since February 2002. The
crucial construction sector continues to contract.
Yet a consensus is clearly building among foreign investors that the local
economy has nearly bottomed and that a domestic demand-driven cyclical upturn
will coincide with when general elections are held later this year. Phatra
Securities economist Supavud Saicheua notes in a recent research report that
the Stock Exchange of Thailand (SET) has rallied in the run-up and immediate
aftermath of eight out of the past nine democratic elections in Thailand -
regardless of which party won.
Foreign investors, perhaps ironically, also drove up the SET in the direct
aftermath of last September’s coup, where the military seized power from
Thaksin’s pro-business government. They were later spurned when the
junta-appointed interim administration unexpectedly imposed capital controls on
all foreign equity, currency and bond transactions, in an effort to stem the
local currency’s recent rise against the US dollar.
Foreigners were also irked by the military government’s stated intention to
implement King Bhumibol Adulyadej’s “sufficiency economy” concept, which
prescribes a more inward-looking approach towards economic policy. In
retrospect, the military’s pronouncements were more rhetorical flourish than
guiding principle, and most market analysts have since discounted the risk of a
possible lurch towards more market protectionism.
Instead, foreign investors are now focusing on Thailand’s increasingly strong
economic fundamentals, which on many fronts have never looked quite so good.
Reflecting on the country’s 1997 financial implosion, US credit rating agency
Moody’s Investor Services said in a recent report that record foreign exchange
reserves, robust current account surpluses and moderate inflation have greatly
restored economic stability.
Moreover, underlying risks are now immediately reflected in the free floating
baht, which was fixed in the run-up to the crisis and hence allowed economic
distortions to build up undetected. The credit rating agency – which like
others wholly failed to predict the region’s spectacular 1997-98 collapse –
also says Thailand’s once lax and corrupt banking systems have now established
more sophisticated and rigorous risk management systems.
Revisionist history
All of these factors, economic analysts say, have underpinned the rally on the
stock market and strengthening of the baht - despite the junta’s recent
economic policy miscues. So, then, how much does the ruling junta owe to
Thaksin’s economic legacy for the present bullish sentiment?
Thaksin famously took political credit for the country’s economic turnaround
and restoration of the national finances during his five year tenure. But many
economic analysts now argue that the populist leader’s economic legacy was - at
best - a mixed bag. They say he deserves credit for implementing fiscal
policies that revived the moribund housing sector and helped to restore
consumer confidence.
Although well-marketed and popular, Thaksin’s various populist policies aimed
at the grass roots economy in reality contributed scarcely to real gross
domestic product and were dwarfed in comparison to the hundreds of billions
worth of baht his government opaquely and selectively allocated to bail out his
indebted business cronies.
Revisionist economic history will show that Thailand’s post-1997 economic
recovery owed chiefly to disciplined export-oriented corporations, whose global
competitiveness was enhanced by the baht’s sharp devaluation, and who
studiously de-leveraged their foreign debt exposure, a process that began in
1998 and persists in Thailand even as other crisis-hit regional countries
resume leveraging.
Economists say that those trade surpluses [1] did more than any government
policy to restore the national accounts and stabilize the banking sector,
economists say. It is often forgotten that Thaksin rose to political power on a
nationalistic Thais-love-Thais ticket and that after taking power he moved in
populist fashion to undo many of the market-oriented reform measures the then
ruling Democrat party implemented to contend with the crisis.
Thaksin’s critics - including most significantly the military junta who deposed
him – have alleged that he allowed and even encouraged the corrupt official and
business practices that contributed to the country’s 1997 collapse. Yet there
are growing indications that senior junta members are sustaining rather than
eradicating those alleged corrupt practices, either through skimming secret
budgets or exerting undue influence as board members of state-owned
enterprises.
Many foreign analysts anticipate that the Democrat Party will notch enough
votes to form the core of the next democratic government, and hope that its
leaders will have enough electoral clout to resume many of the market-friendly
reforms they initiated nearly a decade ago. But the Democrats notably also have
a storied history of official corruption, for which they were driven from power
in 1995. And the military – either through direct representation or political
proxy – will also likely be heavily represented in the next ruling coalition.
Now - as in the past - foreign investors are willing to pay a premium for
perceived political stability and overlook poor governance for fast financial
returns.
Note
1. Exports currently account for nearly 70% of Thai GDP, a higher ratio than
the 55%-60% experienced during the 1980s and 1990s when rapid
manufacturing-oriented, export-driven growth catapulted the country among the
ranks of the world's fastest-growing economies.
Shawn W Crispin is Asia Times Online's Southeast Asia editor.
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