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ANALYSIS - Stubborn political crisis hangs over Thai economy

BANGKOK (Reuters) - Foreign investors are wading back into Thailand despite a three-year political crisis, stoking stock and currency gains, but economists say political unrest will limit how fast and how far Thailand pulls out of recession.

Thailand's Prime Minister Abhisit Vejjajiva speaks during a news conference after the opening of the 42nd Association of Southeast Asian Nations (ASEAN) Ministerial Meeting in Phuket July 20, 2009. REUTERS/Sukree Sukplang/Files

The extent of damage to the broader economy depends on how long fugitive former Thai Prime Minister Thaksin Shinawatra challenges Prime Minister Abhisit Vejjajiva, and whether his campaign backed by thousands of red-shirted street protesters undermines the confidence of investors and consumers.

“It can be a source of concern ahead,” said Euben Paracuelles, an economist at the Royal Bank of Scotland. “Our clients are starting to ask again about politics.”

So far this year, the market toll from political unrest is minimal. The baht has gained 2.32 percent against the dollar, the second-best performer among Asian currencies after Indonesia’s rupiah. The benchmark stock index is up 42.3 percent, turning around from a 47.6 percent fall last year.

Foreign investors, net sellers of Thai stocks in January and February, turned net buyers between March and July.

And in what some see as a vote of foreign confidence, Thailand received net foreign direct investment of $25.2 billion in three years to 2008, lower only than Singapore’s $35.3 billion and far more than Indonesia’s $6.5 billion and the Philippines’ $3.5 billion, according to data compiled by HSBC.


But political uncertainty has hurt Thailand’s $260 billion economy in other ways since Thaksin was ousted in a military coup in September 2006 -- from bond market investments to tourism.

Despite investing in Thai stocks, foreign investors have largely abandoned the small Thai bond market. An army-appointed government imposed capital controls in late 2006 to try to curb a rise in the baht. Even though they were lifted in early 2008, foreigners account for only 1 percent of bond trade.

And while stock markets in emerging Southeast Asia, including Thailand, are once again on the boil, Thailand is the region’s second-worst performer this year -- extending a trend that dates to 2006.

Thailand’s SET Index has lost 10.5 percent since early 2006, during which time indices in Indonesia, the Philippines, Malaysia and Singapore rose between 11.7 percent and 100.1 percent.

Hardest-hit has been tourism, an industry that employs about 1.8 million people out of a population of 67 million and has also suffered from swine flu scares and the global financial crisis.

Tourist arrivals look set to plunge 30 percent this year from 14.1 million in 2008, tour operators said, shrinking tourism’s projected contribution to the economy to about 4.7 percent of GDP this year, down from 5.9 percent in 2008.

“We should by now have 60-70 percent of year-end high-season bookings, but so far we have only 30 percent,” said Apichart Singka-aree of the Association of Thai Travel Agents. “Things will improve if Thaksin stops what he is doing.”

The billionaire former telecoms tycoon, who has been convicted of corruption, demonstrated he can still influence Thai politics from his self-imposed exile, orchestrating a rally last Monday of 20,000 red-shirted supporters who petitioned the country’s revered King Bhumibol Adulyadej to pardon him.

It was the fourth show of support for Thaksin since April, when the Thai military was brought in to end violent anti-government protests.

“It’s OK so long as there is no violence or announcement of a state of emergency,” said Kusa Panyarachun, head of World Travel Service, referring to the government response to street riots in April and airport blockades by anti-Thaksin protesters in 2008.

Kusa’s firm now handles about 300 high-end clients a day, a fraction of 1,000 to 2,000 in the past.

Economists say the trouble in tourism is one reason Thailand’s economy has grown more slowly than its neighbours. Thai gross domestic product growth averaged 4.2 percent during 2006-2008, below the 5.6-6.0 percent achieved by Malaysia, the Philippines, Singapore and Indonesia.


“I think politics will slow the recovery in Thailand. In contrast, regional peers have no such problems and can therefore focus on fiscal support,” Paracuelles of the Royal Bank of Scotland, said.

The Bank of Thailand forecasts the economy will contract 3.0-4.5 percent in 2009, its worst performance since Asia’s financial crisis in 1998.

“Investors are still worried about politics in Thailand,” said economist Carl Rajoo of Forecast in Singapore. But he added that non-violent protests such as Monday’s rally were largely priced into markets and should have little short-term impact.

Thai stocks lost 3.59 percent on Monday when Thaksin’s supporters rallied at Bangkok’s Grand Palace, but analysts blamed the fall on outside factors -- from a big setback on Wall Street to trouble on China’s stock market -- that triggered heavy losses across Asia. Thai stocks rebounded 1.3 percent on Tuesday.

Thaksin and his red-shirted supporters, the majority rural poor, show no sign of pulling back from their challenge to Abhisit and his allies, the urban elite centred in Bangkok who wear the king’s traditional colour of yellow at protests.

Analysts say Thaksin is trying to stop Abhisit from consolidating his power, hoping to cause enough problems for him to call a snap election which could take place next year.

“What we need is policy continuity and a stable business climate,” said Mangkorn Thanasansin, an executive of the Sahapat Group and vice president of the Federation of Thai Industries.