THAILAND: Bangkok dangerous

03/05/2010 | Newley Purnell

Political turmoil threatens Thailand’s nascent economic recovery

The long running standoff between protestors and the Thai government has brought the country perilously close to civil war.

As Emerging Markets went to press, signs of a tentative truce had emerged between red shirt protesters and government forces, as both sides hinted at a compromise after weeks of stalemate that has bloodied the streets of Bangkok and brought the country to a standstill.

Yet even if some sort of compromise is ultimately achieved, Thailand’s worst political violence in 18 years has already exacted a heavy toll – not just the 23 people killed and 800 injured, but through deepening enmity between Thailand’s rural poor and their wealthier urban compatriots.

It is also likely to have done lasting damage to the economy. Before the latest violent turn, the country – home to south-east Asia’s second largest economy – seemed on track to rebound from the economic slump it had suffered as part of the global financial crisis. But on April 19, Fitch Ratings downgraded the country’s long-term local currency credit rating from stable to negative due to the unresolved political uncertainties.

Earlier, Thailand’s GDP grew by 3.6% in the fourth quarter after the country’s first recession since the Asian crisis in the 1990s. Thailand’s finance minister, Korn Chatikavanij, says, however, GDP could still increase by 4.5% during 2010.

The Thai government is proceeding with its Bt1.4 trillion ($443.5 billion) economic stimulus package, a scheme adopted in May 2009. The plan initially called for the government to borrow Bt800 billion to fund new infrastructure spending and other projects through 2012.

The initial Bt400 billion has already been requested and approved to finance the scheme, but the finance ministry said on April 19 that the government did not need to ask parliament to approve the second Bt400 billion payment, and that the first would prove sufficient due to improving economic conditions.

Despite the political instability, the Thai economy should continue to recover from the global crisis. But the violence threatens to undermine the country’s tourism industry, which accounts for 6.5% of Thailand’s GDP and directly employs two million people.

The red shirts’ main protest site is located in the middle of Bangkok’s commercial heart, near several five-star hotels and the city’s most luxurious shopping malls. A Thai government spokesperson says the number of international tourist arrivals has fallen by up to 70% since the violence of April 10.

PACE OF CHANGE

In general, the Thai economy is still improving, but progress isn’t as swift as it would have been without the unrest, says Thanavath Phonvichai, an economist with the University of Thai Chamber of Commerce. He says that unless there is a recurrence of the violence, improvements should continue – albeit at a slower pace than previously expected.

Thanavath believes that tourism will recover if there are signs of negotiation between the red shirts and the government, and when the authorities lift the state of emergency that was imposed on April 7. He says that even if Prime Minister Abhisit Vejjajiva were forced to step down, a new government could choose to continue the country’s current economic policies.

David Cohen, director of Asian economic forecasting at Action Economics in Singapore, is upbeat about the prospects for Thailand’s economic recovery. “The political uncertainty is definitely a concern right now,” he says. “But the Thai economy has been benefiting from the same boost to exports and tourism that we’ve been seeing around the region as the global recovery seems to be gaining momentum.”

Cohen says the violence may have caused people to “take half a step back” from Thailand, but it was unclear what the long-term effect on tourism would be. But the government’s approach to the economic stimulus programme is appropriate, he says. “I think – as is happening elsewhere – that policy-makers are going to be shifting away from stimulus to the normalization of policy.”

The Bank of Thailand, Cohen thinks, may even raise interest rates in the coming weeks or months. “Assuming that the political situation doesn’t get out of hand, we expect they’re likely to hike interest rates in the second half of year,” he says.

Somchai Jitsuchon, research director for macroeconomic development and income distribution at the Thailand Development Research Institute, says that “the political unrest threatens tourism and investments” since investors face uncertainty about the state of affairs.

But exports, he says, “have not been affected”, and the economic stimulus plan is continuing. If a change in government did not lead to additional unrest, “then there would be no need for the government to stimulate the economy.”

“Thailand is going through some difficult times,” says Nandor von der Luehe, chairman of Thailand’s Joint Foreign Chambers of Commerce.

But he remains optimistic about foreign direct investment. “People still believe in Thailand and think it’s a valuable place for investment,” he says. But he worries that decision-makers based

overseas may be put off by the images of violent clashes coming from Thailand. “Foreign direct investment is like a beauty competition,” he says. “The most attractive country gets the money. I don’t think Thailand can claim they’re the most attractive right now!”

In terms of a political solution, it’s imperative to reduce the current tensions, but a dissolution of the parliament cannot be considered a way out, he says. If that happens, rival political groups will simply launch new protests.

MORE THAN SHIRT COLOURS

Thai society remains deeply polarized. The violence in April came after red shirt protesters began sustained demonstrations in Bangkok on March 12. The red shirt leaders are pressing Prime Minister Abhisit to step down, dissolve parliament, and call new elections.

The red shirts, many of whom are farmers and the urban poor from the rural north of the country, are largely loyal to the ousted prime minister Thaksin Shinawatra. He was overthrown in a military coup in 2006 and lives abroad in self-imposed exile.

The red shirts argue that Abhisit’s position is illegitimate, and that he is part of a traditional Bangkok-based elite that does not represent their interests. They say Abhisit came to power in December 2008 only with the help of the military, who assisted him in cobbling together a coalition government.

This came after two subsequent Thaksin-friendly governments were forced by the courts to step down in late 2008, the latter after the anti-Thaksin People’s Alliance for Democracy – a group known as the yellow shirts – occupied and forced the closure of Bangkok’s international airport, stranding thousands of foreign tourists for a week.

April’s violent clash was not the red shirts’ first such brush with the law. In April 2009, red shirt demonstrators forced themselves into a hotel in Pattaya, Thailand, where a meeting of Asean (Association of South-East Asian Nations) leaders was being held. The red shirts then rioted in Bangkok, and their protests were ultimately put down by the government. But deep rifts remained.

Ultimately, much will depend on whether or not Thailand’s leaders – within and outside the current government – are able to reach some sort of compromise.

Thitinan Pongsudhirak, visiting scholar at Stanford University’s Centre on Democracy, Development and the Rule of Law, says that “Thailand’s prolonged political confrontation and brinkmanship emanate from the anxieties and machinations of a remarkable monarchical reign.

“The situation is as much about a democracy in transition as it is about a monarchy in transformation. The six-decades-old constitutional monarchy is being challenged by the very fruits of its success in providing stability and unity,” he says.

“Somehow the ultimate way forward will have to be the constitutionalization of the constitutional monarchy in line with democratic aspirations,” he says. “The noises of electoral democracy also will have to encourage and accommodate a recalibrated constitutional monarchy for Thailand to resettle in a new equilibrium.”

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