Chaos worsens Thailand's investment image problem

By Andrew Marshall, Asia Political Risk Correspondent - Analysis

SINGAPORE (Reuters) - Whether Thailand's government stands or falls, the country's latest bout of political chaos has further damaged one of its most precious economic commodities -- its image as a stable place to do business.

The power struggle between supporters of deposed Prime Minister Thaksin Shinawatra and his royalist-backed opponents will continue to polarize Thailand whatever the immediate outcome of the standoff, analysts say. The country has been tumbling in most political risk rankings since the crisis began in 2005.

While Thailand's political problems are nothing new, analysts say the storming and shutting down of Bangkok's international airport by anti-government protesters represents an escalation that is particularly damaging to Thailand's image and will have long-term implications for investment and tourism.

With several countries telling their citizens to stay away,

and flights in and out of Bangkok paralyzed, a nation long seen as a safe and business-friendly "Land of Smiles" is increasingly being viewed as one of Southeast Asia's basket cases.

"Perception is hugely important," said Robert Broadfoot, managing director of the Political and Economic Risk Consultancy (PERC) in Hong Kong. "Where companies put their money is based on perception. The changing perception of Thailand is going to make it a lot harder for the country to attract investment."

The tourist industry, which accounts for 6-7 percent of Thailand's GDP, will be the most immediate casualty, analysts say. December and January are Thailand's tourism high season. "If you have protesters bursting into the airport, of course it's going to be damaging for the economy. It's hardly the best way to promote your tourism industry," said Chris Bruton, Thailand director for corporate advisory company Dataconsult.

"But it's not the people stranded in the airport who are the big problem in terms of their view of Thailand. It's the people who now won't come in December or January for their holidays. It's the business people who will be cancelling meetings and deciding against investment projects here."

OUTLOOK WORSENING

Tourism-related shares tumbled on Thailand's stock exchange on Wednesday, and the benchmark index hit a five-year low.

But analysts say the stock market downside will be limited by the fact that foreign portfolio investors have already largely pulled their funds out of Thailand -- due partly to political uncertainty but mainly because of a general flight from emerging-market risk caused by the global financial crisis.

Foreigners have about 90 billion baht ($2.55 billion) invested in Thai equities, down from 238 billion at end-2007.

Usara Wilaipich, senior economist at Standard Chartered Bank in Bangkok, said the immediate macro-economic impact of the crisis would also be contained, and saw no risk of capital controls.

She said even in a worst-case scenario where foreigners pull the rest of their equity investment out of Thailand and the country loses $2.5 billion in tourism revenues, this would still only be equivalent to 5 percent of Thailand's foreign reserves.

Analysts say the more worrying impact of political turbulence will be that foreign direct investment -- already shrinking as the world's economy falters -- will increasingly go to competing countries now regarded as less politically risky.