It has been six months since our initial Asia-Pacific Global Research Group report on Thai political unrest and its potential impacts on investing in Thailand. In this blog we continue our analysis of the situations in Thailand and highlight some issues as they became illuminated during the past six months, as well as identifying further potential issues. We think it is helpful to use the concept of tail risk as a framework for the analyses because, as the recent media coverage about Thailand has demonstrated, events unfolding after our report six months ago appeared quite extraordinary, i.e. beyond the concept of normal distribution or acceptable standard deviation. They are, more or less, what portfolio theorists may describe as “fat tails”.
1. The Recap
In the non-bell curve world that is Thai politics in the past six months, there are at least four fat tails. To recap, as we noted in our initial report, protest politics has rarely been about “playing by the same rule”: In this case, the rule of the game at issue is the current election process, which brought decade-long landslide victories to a party controlled by former Thai prime minister Thaksin Shinawatra, a polarizing figure that the anti-government protesters sought to demolish from Thai political landscape. Thus, the protesters, led by ex-deputy prime minister Suthep Thaugsuban, are seeking “reform measures” to ensure this end before they will participate in any election, the current process of which the protesters perceived as being the “unfair rule” of the game, a view noted by many scholars as too extreme because the turnout rate in the February election shows that Mr. Shinawatra’s party can be beaten at the polls. As every game has an umpire, in Thailand’s case this role has been assumed by the Thai military, albeit somewhat reluctantly because of its long history of intervening in politics with mixed results. As up to the date of our last report (November 30, 2013) there has been no violent incident between the government and protesters, we then concluded that such incidents would have negative impact on both Thai politics and the country’s economy.
2. The Fat Tails: What caused the 2014 coup d’etat?
This leads us to the first unexpected factor: a series of violent incidents that happened to the anti-government movement, which started with the shooting of student protesters at Ramkhamhaeng University and continued with a series of bombings and shootings that resulted in numerous injuries and death tolls, including the nation-shaking deaths of three children. The second unfortunate event that has unforeseeable consequence is the mismanagement of the rice pledging policy that led to the government default on payments due to farmers participating in the policy. This is perhaps the most fatal blunder by the government because it goes to the heart of how it frame the battle with the protesters: rural populists(the government) vs. the elite establishment(the protesters), i.e. it is rather difficult to claim to fight for farmers while breaching their trust at the same time. Thirdly, the Thai constitutional court has issued a series of “surprising” rulings against the government: a) nullifying the February election that the government had insisted to hold, despite suggestions otherwise from many independent organizations, including the Thai Election Commission, b) rendering unconstitutional the process initiated by the government to pass a bill that was aimed to finance a large-scale infrastructure development project, and c) holding that certain members of the government, including the prime minister Ms. Yingluck Shinawatra, must be removed from office as a result of their abusing of power by interfering with the transfer of a civil servant. Finally, there are signs of imminent clash in the week preceding the coup between the anti-government, who declared to “reach an endgame” in their rally that week, and the pro-government group, who had gathered at the periphery of Bangkok. Rumors about the stockpiling of heavy artilleries abounded during that period (some confirmed much later by press reports of arrests made in connection with the stockpiling in many locations). Following three days of this tense confrontation, the Thai military declared the Martial Law on May 20, and staged the coup on May 22, 2014.
3. How will the capital markets react to these events?
As we observed in our previous report, amidst deteriorating circumstance, the Thai capital market in the long term has rarely been affected. This view is shared by many investors especially those with extensive long-term exposure to Thai political risks. In the previous blog, we also observed the rise of “protest culture” and the rise in the Thai SET Index over the decade, and concluded that there seems to be no obvious negative correlation between the two. So this time we observe what happened in Thailand during the past six months and arrived at more or less the same conclusion: Investors seemed to get accustomed to Thai political risks and already priced them into their long-term expectation. For instance, while the political situation seemed to worsen every day for the past six months, the SET index had indeed plummeted sharply in January but regained its value to a little above (about 7 points, or .5%) of where it was six months earlier. In addition, although Moody’s has repeatedly warned investors about the escalation of political conflicts that could affect Thailand’s sovereign credit rating, the rating agency also noted in late April 2014 that the conflicts were not at a point “where they would prompt rating downgrades” while identifying Thailand’s core strength as stemming from its monetary policy. On the day of the coup, Standard & Poor cautiously delivered a similarly optimistic but cautious note, affirming the country’s current ratings while expecting Thailand to maintain its “external, fiscal, and monetary strengths in the face of the current political turmoil.” In short, despite a series of bad news, the Thai capital market is still viewed as remarkably resilient, albeit with expected near-term volatility.
4. What are key factors for Thailand investment outlook?
So, are we closer to business as usual in Thailand? In short, we are closer to it than the last six months. But the real bad news still is, as we noted in the previous blog, the Thai economy’s continuing contraction in real sectors and a series of challenging global factors. To return to stability there are few things to scan for the next time news involving Thailand come up. The first is an election date that all parties/factions can agree upon. The prerequisite to such election is how the Thai military will lead to unite all sides to decide and agree in a peaceful, non-violent fashion. The sooner Thailand can return to democracy, the better for its economy. Secondly, Thailand must find a way to resuscitate its struggling tourism industry. As we noted previously, the industry has been a roaring engine in a generally lumbering economy. That has changed. With tourism declined almost 10% year-on-year in March and almost 2% in April 2014, according to the Macroeconomic Assessment report by the Bank of Thailand, the overall growth outlook will be much weaker this year if the sector remains unfixed. Thirdly, among the officials appointed by the military to oversee economic policy, it is safe to assume that such officials should work to present a united front with the banking and financial regulators to preserve the key strengths that credit rating agencies have found so valuable in Thailand: the fiscal and monetary policy. Finally, as the world started 2014 with several new concerns such as geopolitics, “re-shoring” of capital as well as manufacturing bases, or the faded allure of emerging market investments, Thailand must be domestically equipped before it can tackle and thrive in this ever challenging global environment. Now that the umpire broke his silence, the world is watching where he will lead the second-largest economy in Southeast Asia.
Kemavit Bhangananda is a U.S. attorney (licensed by New York Office of Court Administration) based in Bangkok, Thailand, and a former vice president of Lehman Brothers.