May 21, 2010 / 8:28 AM / 8 years ago

SCENARIOS-Where is turbulent Thailand headed?

By Bill Tarrant

BANGKOK, May 21 (Reuters) - The eruption of violence in Thailand over the past week has deepened rifts in Thai society that have smouldered for decades in the "Land of Smiles".

The crisis broadly pits the rural poor and urban working class against what they call an "establishment elite" of big business, military brass and the educated middle class.

While an uncertain peace has returned to Bangkok after unrest killed 81 people and wounded more than 1,800 in the past nine weeks, Thailand seems to be heading for more convulsions ahead.

Here are some scenarios on how the crisis may unfold.


Red shirts shrug off their leader’s plea to stop rioting [ID:nSGE64J0C5] and mobilise local insurrections, as on Wednesday when they set three townhalls ablaze. They attack banks and other symbols of wealth and power, and organise blockades at airports. They try to stop police and military troop convoys by blocking railways and roads. A flow of arms and insurgents into the countryside spawns fears in foreign capitals that Thailand, a geostrategic country with a long-standing military relationship with the United States, is verging on anarchy.

This scenario is the greatest fear of the Thai establishment and military, who call ex-premier Thaksin Shinawtra, ousted in a 2006 coup and the prime leader of the "red shirt" movement, a "terrorist" masterminding "organised violence".

Its likelihood depends on whether efforts are made to seek compromise and offer concessions to the red movement.


The impact on growth in Southeast Asia’s second-largest economy could be significant. The government has already cut its 2010 GDP growth project by 0.3-0.5 percent and says political turmoil could shave two percentage points off GDP if it keeps up the rest of the year. The protests have decimated the tourism industry, which accounts for 6 percent of GDP and employs 15 percent of the workforce. Domestic consumption, which accounts for more than half of GDP, has already been hit, with the consumer sentiment index declining the past two months, despite strong economic growth (8 percent year on year) in the first quarter. Foreign direct investors would start pulling out. Andor von der Luehe, chairman of the Joint Foreign Chambers of Commerce of Thailand warned of the danger that "armed elements could start a guerrilla war in Bangkok and around the country".

"If such a scenario happened, it would drive businesses away from Thailand," he told Reuters.

Thailand’s main industrial export hub, however, is away from red shirt strongholds. The global upturn will give Thailand -- Asia’s most export-dependent economy after Hong Kong and Singapore -- a significant boost whatever happens with politics.


The curfew in Bangkok and affected provinces, with the military patrolling the streets, cools passions. The government has already rounded up most of the "red shirt" leadership, and has taken steps to stop financial transactions it believes are funding the movement. Under domestic and international pressure to heal Thailand’s wounds, Abhisit puts his "roadmap of reconciliation" back on the table and calls a November election. Thaksin’s political vehicle, the Puea Thai party, agrees knowing Thaksin-affiliated parties have won every election since 2001.


Thailand’s export-oriented economy is likely to recover fairly quickly if stability reached over the past 24 hours is maintained, Finance Minister Korn Chatikavanij said on Friday. [nTOE64K01H]

The crippled tourism industry, however, would take longer to recover. Thailand’s image as a safe place to do business would also take a long time to repair. Thailand would still be seen as underperforming other emerging markets in Southeast Asia.

Peace would allow Thai stocks, now among the cheapest in Asia at 10.5 times 2010 earnings, to rise. Bond yields TH5YT=RR would fall and credit default swap spreads would narrow. Yields have been closely correlated to violence during the crisis.

Spreads on Thailand’s five-year CDS THGV5YUSAC=MG, used to insure against sovereign debt default, have risen steadily since the protests turned violent on April 10 -- much higher than the Asia ex-Japan index ITAIG5Y=MP for that period. Spreads would begin to narrow during a prolonged period of political peace.


The military-backed coalition decides Abhisit has to be made a sacrificial lamb after the unprecedented violence. He steps down and is replaced by a caretaker premier who keeps the government afloat until a national budget is passed in September allocating a huge stimulus spending package for the provinces. More crucially, it allows an annual rotation of top military commanders -- with power, prestige and control of army-linked businesses -- to take place unimpeded in September. Elections are then held by the end of this year.


Markets won’t mind a short-term caretaker government as long as it keeps the peace. The economy would benefit if it stopped the debilitating protests, as in the second scenario.


Talks with civil society groups yield agreement to form a caretaker government comprised of figures from the current government, the opposition, and technocrats. This government would oversee elections to be held by the end of the year.

While possible, this seems unlikely. The military wants nothing to hinder the reshuffle and a government with Thaksin supporters would be inconvenient. A national unity government might ensure fair election rules, but would almost certainly bring a pro-Thaksin government to power.


It would take time to form a caretaker government and that in turn could delay the 1.43 trillion baht ($44.2 billion) stimulus plan with its knock-on impact on growth and consumption.

Foreign investors might reconsider their plans, given the political risks it could pose over policy. Even before the latest violence, the Board of Investment forecast foreign investment pledges this year could fall 15 percent.

Stocks might climb, and bond yields could fall in the short term on the perception the current wave of violence has been controlled. But the potential for violence to resurface before or after a new election would keep many investors sidelined.


Rising violence provides the pretext for the military to attempt a coup for the 78th time since a constitutional monarchy was created in 1932. Martial law is declared, order is restored and the military chiefs install a compliant government.

This is unlikely. The military would much prefer to wield influence than to try to govern itself. It wants to keep this government in power until it completes the September reshuffle.


A coup would cause stocks to drop, the baht to slide, and instigate capital flight, unless it came after a period of severely worsening violence. The army-installed government after the last coup in 2006 clumsily imposed capital controls, before withdrawing them. Concerns about fiscal mismanagement, poor governance, and a public backlash -- even civil war -- would curtail long-term investment. (Editing by Andrew Marshall)

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