Recent news coverage about the political turmoil unfolding in Thailand has led to speculations about the country’s future. Given the current political temperature, investors are primed to wonder whether Thailand can continue be a reliable hub of emerging market growth that it has been since the 2008 global financial crisis. This depends on several factors and our analysis of those is highlighted below.
We conclude that (i) although the current political unrest may remind near-term investors of Thailand’s inherent political risk, the medium to long term prospect of Thai economy is less likely to be affected by an outcome of such unrest; and (ii) the real challenge for Thailand going forward is how it can cope with structural changes in its growth model.
1. What causes the current Thai political upheaval?
As followers of Thai politics may note, the ongoing protest movements that led to the current political upheaval revolves around one polarizing figure: former Thai prime minister Thaksin Shinawatra. Setting aside class and income gap analyses, the movements in general contain two opposing camps: his supporters vs. his opponents. While Thailand has experienced political protests before, most notably in October 1973 and May 1992, political protests have not become ingrained in Thai culture until Mr. Shinawatra became prime minister in 2001. Having witnessed Mr. Shinawatra’s party won many landslide elections to form governments between 2001-2006, the first group of his opponents (i.e., the “Yellow Shirt People” group, as manifested by the color of shirts worn by protesters) staged several public demonstrations. Later when an opposing force led by the Democrat Party became the government, the group that supported Mr. Shinawatra (i.e., the “Red Shirt People” group, again as manifested by the color of shirts worn by protesters) then staged several public demonstrations from 2009 to 2010.
2. What is the future of Thai politics as a result of the current upheaval?
The current political upheaval started from a disagreement over an amnesty bill. Proposed by the government led by Yingluck Shinawatra, Mr. Shinawatra’s sister, who became prime minister in 2011, the bill caused outrage among Thais because it would have essentially nullified thousands of corruption cases, among them Mr. Shinawatra’s conviction. As a result, the Thai public then started to protest the bill in a peaceful civil disobedience fashion in October 2013. Perhaps taken by surprise, the government softened its stance by promising not to pursue the bill further if the Senate rejected the bill. In November 2013 all members of the Senate presented unanimously rejected the bill. Ms. Shinawatra’s government has also continued, up to the date of this blog, to handle the protests in a manner that can be described as both stern and even-handed. Thus, the Democrat Party and opponents of the government are presented with the problem of picking a cause as popular as objecting the amnesty bill to keep momentum going in their street protests. Which brings us to the current state where the two sides are currently at the unblinking political standoff. Given a track record of Mr. Shinawatra’s party winning each general election by a landslide in the past decade, it is likely that the Democrat Party may not gain sufficient votes in the next general election to form a ruling government. Or that is supposed to happen if everyone plays by the same rule. But has protest politics ever been about playing by the same rule?
3. How does ongoing political protests affect the Thai capital market?
The short answer is not much, but this gives a sense of false hope. Although almost always punished by near-term investors, political instabilities in Thailand have not really affected the country’s capital market in the past decade. For instance, except the dip during the period of couple quarters after the global financial crisis in 2008, the Stock Exchange of Thailand SET Index has grown steadily from 2003 to more than double its size in 2012 before reaching a record peak at the second quarter of 2013. Many observers may note that this is the same decade where political protests became prominent in Thai culture. However, the SET Index has already climbed down after that quarter due to several trends that caused capital outflows from many emerging market countries, most notably the announcement by the U.S. Federal Reserve to taper its quantitative easing asset-purchase programs, and the breaking news confirming the then much-rumored “China Slowdown” in late May 2013, (i.e., several months prior to the current political standoff). This is not to understate the near-term effect of the political unrest – indeed in the period of one month after the protests against the amnesty bill had started, the SET Index moved massively downward from around 1,450 to around 1,350 points (about -7%). Nevertheless, given the long-term data that has seen sharp cliffs rubbed to shallow hills, it is reasonable to conclude that (i) there has been a decline in investment growth in Thailand for some time, and (ii) such decline was not necessarily caused by the country’s political risk alone. However, if violent clashes occur among protesters and/or the government, it would likely be reflected negatively further in the Thai capital market (i.e., severely delay its recovery from the already much lost ground).
4. What are other developments that investors in Thailand should consider as crucial factors?
There are at least three key global factors: the effect of the Fed QE tapering, China’s economic recovery, and Japan’s Abenomics policies. The most notable of these is the China recovery and Thailand’s place in China’s supply chain. Followers of China and Thailand economic growths may notice some correlation in the rises and falls in the economy of the two countries in the past decade. But this trend appears to end in the third quarter of 2013 where China economy seems to recover, but the Thai economy continues to slow down. Another factor that may render Thailand less competitive regionally is Japan’s weaker yen, and its potential diversifying of its manufacturing bases away from Thailand to neighboring Southeast Asian countries.
Then there are the domestic factors: Rising business costs, and contraction in financial and real sectors. These factors combining with the dynamics of key global factors require Thailand to adjust its growth strategy in order to stay competitive; such strategy may include improving on its export-led growth model, and exploring further option in its service-led growth model. An example of this may be the Thai tourism industry, which is still doing extraordinarily well within the overall domestic contraction, expanding almost 30% year-on-year as reported by the Bank of Thailand in September 2013. A recent survey of flight cancellation in November also shows that Thai tourism industry has yet to be affected by the current political unrest, revealing almost unchanged number of flight cancellations during the industry’s “high season” in November and December.
In summary, although political unrest alone may not have been a deal killer for investors in the Thai capital market, the peaceful resolution to any such unrest, as well as policy initiatives that attempt to address the country’s challenging factors, should make investing in one of Asia’s most dynamic economies less of a bumpy ride.
Kemavit Bhangananda is a registered U.S. attorney with the State of New York Office of Court Administration. A former vice president of Lehman Brothers, he is a graduate of Thammasat University Faculty of Political Science (B.A. International Relations) in Thailand, and Suffolk University Law School (Juris Doctor) in the U.S.