March 12, 2010 / 10:47 AM / 10 years ago

SCENARIOS-Will Thailand's government ride out the storm?

BANGKOK, March 12 (Reuters) - Thai “red shirt” protestors began a series of demonstrations on Friday aimed at overthrowing the government, a scenario that has hit consumer confidence and may force the central bank to keep interest rates in Southeast Asia’s second-biggest economy at a record low [ID:nSGE62B0AZ].

Analysts say the protest by the United Front for Democracy Against Dictatorship (UDD), which backs former Prime Minister Thaksin Shinawatra, could lead to more instability that could impact growth and dent Thailand’s investment image. (For the main story [ID:nSGE62B017] and Q+A [ID:nSGE62B059])

Following are possible scenarios:

GOVERNMENT RIDES OUT PROTESTS; STOCK MARKET RISES

The protests could deliver a strong message of public discontent but fail to topple a government with sizable backing from the powerful military and establishment elite.

The “red shirts” failure would prolong an uneasy status quo that has proved favourable to financial markets in the short term, with investors continuing to pour money into Thailand and other regional markets for the time being.

However, a massive rally would still highlight the deep polarisation that has made investors think twice about longer-term expansion in Thailand, reinforced by the likelihood that another pro-Thaksin party will eventually return to power and face protests, or another intervention by the military or the courts, raising the risk of public anger and an uprising.

While foreign investors are piling into Thailand's stock market .SETI, foreign companies are less enthusiastic, cutting investment pledges this year by 15 percent from last year [ID:nSGE622072].

This scenario is most likely, according to most analysts, and Thailand's stock market .SETI, one of the cheapest in Asia, would likely stay in positive territory in the short term.

VIOLENCE ERUPTS BUT QUELLED; NEAR-TERM MARKET VOLATILITY

Tensions are high and violence breaks out, either triggered by “red shirts” or outside agitators keen to stir-up trouble to discredit the movement. This could cause near-term volatility in Thai stocks with likely selling from local retail investors.

Any selling may be offset by buying on dips from foreign investors focused on longer-term economic fundamentals in a region bouncing back from the financial crisis. Foreign investors helped to drive a 63 percent rise in Thai stocks last year — a period that saw violent riots in April.

Bond yields TH5YT=RR would likely fall on expectations the Bank of Thailand would keep its benchmark rate at a record low of 1.25 percent until June or later, causing economists to change their current forecasts calling for a rate rise soon.

The likely scenario would see security forces breaking up the rally, handing a public relations victory to the government and denting the reputation of “red shirts”, who were already vilified after riots last year.

Short-term political stability would prevail, with a perception that the UDD might lose some support or struggle to find funds to continue its campaign.

A measured response by the government could bring confidence to investors in the short term but, again, political divisiveness would likely prevail and continue to cloud an uncertain long-term investment outlook, particularly with an election scheduled to take place by the end of next year.

RALLY GATHERS STEAM, COALITION CRUMBLES; MARKETS TAKE HIT

A robust rally and huge opposition to the government could raise questions about whether it can survive, sparking a flurry of behind-the-scenes negotiations and deals among political parties and factions, with Thaksin likely involved.

Prime Minister Abhisit Vejjajiva’s already disgruntled coalition partners could break away, with money politics prevailing, leading to pledges of switches of allegiance to the pro-Thaksin opposition, the Puea Thai Party, which remains popular in the vote-rich countryside.

In this scenario, Puea Thai would table a no-confidence motion against Abhisit and cabinet ministers, which gets the backing of the house, forming a new alliance led by Puea Thai.

Markets would fall on concerns about instability that could prevail given the likelihood that a Puea Thai-led government would anger the potent “yellow shirts” movement, increasing the risk of another pro-Thaksin government being toppled and the prospect of a backlash by backers of the new administration.

This scenario remains unlikely due to the staunch backing Abhist enjoys from Thailand’s army, royal advisors and business elites. Coalition partners may not be entirely happy with Abhisit but the likely promise of bigger budgets will keep them onside.

PROTESTS TURN VIOLENT, PM DISSOLVES PARLIAMENT; MARKETS FALL

Violence ensues, security forces are unable to control the crowd and a state of emergency is declared. Bangkok is paralysed, government buildings are targeted. A crackdown by the military leaves many casualties.

Abhisit is no longer able to govern and announces parliament has been dissolved. He serves as a caretaker until new elections.

This scenario, highly unlikely, would prompt mass selling by local and foreign investors fearful of heightened instability and potential for more stalemate and unrest.

Faced with the possibility of a pro-Thaksin government winning the election, and the strong chance of another intervention by Thaksin’s powerful opponents, foreign investors would target other regional markets with recovering economies and shun Thailand long-term. (Editing by Jason Szep and Alex Richardson)

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