It may come as somewhat of a relief to most long-suffering Bangkok residents, already affected by eight years of almost continuous street protests and sporadic violence, that the Thai military declared martial law on May 20 and subsequently imposed a 10pm to 5am curfew on May 22.
On a personal note, a stroll through Sukhumvit Road last Sunday, one of Bangkok’s main thoroughfares popular with tourists, did not give the feeling of a country under martial law nor later in the evening, when a stroll through Chinatown after dinner showed a city still bustling with activity. In fact, closer to 10pm, the notorious Patpong redlight district, although quieter, was still filled with people.
From observation, most people, locals and tourists alike, seemed nonchalant about the curfew, which was revised to midnight to 4am from May 28. While quite a number of street vendors selling assorted knick-knacks were closed, others along Rama IV Road were still open.
What is interesting is the absence of the military except for strategic locations such as the MBK shopping centre in the Pathumwan district. Visitors may not even notice that the country is under martial law or that since last November, the Thai capital has been the focus of pro- and anti-government activists.
These activists have been congregating at various locations amid a gridlock in national politics stemming from the 2006 ouster of billionaire former prime minister Thaksin Shinawatra, whose family’s involvement in politics have ignited periodic violence. His sister Yingluck Shinawatra was dismissed as prime minister by the Thai constitutional court on May 8 for abuse of power.
The United Nations, the European Union and the United States have all voiced their reservations on the coup and have not taken too kindly to the National Council for Peace and Order, as the military junta under General Prayuth Chan-ocha, is called.
Most analysts view the military coup as another unknown factor in Thailand’s volatile politics. A senior Thai media executive points out that the country is living in dangerous times. “We must be on guard, as power feeds on power,” he tells StarBizweek, adding that not much is known of Chan-ocha, beyond what is publicly available.
Not all investors take a dim view of the coup. Templeton Emerging Markets Group executive chairman Dr Mark Mobius says in an email reply that the coup has created a more stable environment for the country. “Regardless of the macroeconomic or political climate, we are bottom-up stock pickers and continue to look for opportunities to invest where we see potential on an individual-company level,” he says.
The Thai economy contracted 0.6% year-on-year in the first quarter while compared to the previous quarter, gross domestic product (GDP) shrank 2.1% as political uncertainty since last November took a toll on spending and investment despite a survey by AC Nielsen showing that consumer confidence was still stable at 108 points (down one point from the previous quarter) in the marketing research firm’s first-quarter Global Survey of Consumer Confidence and Spending.
Mobius does not expect much disruption in existing company operations but expects some on-going short-term market volatility. “The prognosis for Thailand is positive, in our view, given that direct foreign investors want stability in the country. The reality of the situation as we see it is that an elective government seems difficult to achieve today,” he observes.
Mobius will continue to take a wait-and-see stance on Thai politics for now. “From a long-range view, we think many companies will be able to survive and prosper in Thailand. We do believe cooler heads should prevail over time, and the more positive economic trends Thailand has seen before the coup could return, including rising per-capita incomes,” he says.
Mobius says in terms of sectors, banks are the most important sector now as the economy is doing fairly well and in good shape while property is also doing well as demand in Thailand is stable and strong. “Certain stocks may take a temporary dip but the long-term perspective remains good,” he adds.
Nevertheless, Moody’s Investors Service analysts say that the move declaring martial law “is credit negative because it represents a continuation of the political impasse that began in late 2013 and which has deterred consumption and investment and caused the economy to contract”. Thailand’s sovereign credit rating was reaffirmed at Baa-1 with a stable outlook by Moody’s as recently as Feb 21.
“The period immediately after the 2006 coup was marked by policy drift. Although the country’s economic and financial fundamentals held up relatively well, political turmoil and uncertainty stymied more dynamic development of the Thai economy. Consequently, Thailand’s sovereign credit quality has remained static, as indicated by our Baa1 rating both during military rule and since,” they say, comparing the country’s sovereign rating with that of China, South Korea, Indonesia and the Philippines, which have all been upgraded between 2006 and 2014.
They pointed out that should the political impasse persist for the rest of the year, the estimated economic cost will be significant, slicing off two to three percentage points from the pre-crisis forecast of 4.5% real GDP growth or even more.
They noted that the Office of the National Economic and Social Development Board (NESDB) also recently cut its view for full-year 2014 GDP growth to 1.5% to 2.5% from an estimate of 3.0% to 4.0% in November 2013, when the latest anti-government political turmoil first surfaced.
“Even if the political turmoil subsides, there is no assurance that the military government can remove uncertainty from the investment environment. The NESDB in its May 2014 economic outlook said that a decline in Board of Investment applications and approvals since the second half of last year threaten GDP growth,” they say.
The previous administration had formulated a multi-year infrastructure program worth 2 trillion baht (US$60bil, or 15% of GDP), which Thailand’s constitutional court declared invalid in March. Even if that program were reinstated, public infrastructure expenditure without an increase in private-sector investment may not be able to sustain investment levels sufficient enough to ensure significant economic growth.
Hwang Investment Management Bhd equities head Gan Eng Peng says in a report dated May 29 that the priority of the interim government is likely to be political reform, although they have taken steps to alleviate the economic slowdown by repaying farmers for the previous government’s rice pledging scheme. “The road ahead is expected to be bumpy and it is uncertain if the election can be held within a one-year time frame,” he says.
Gan says the difference between this crisis and the 2006 coup as well as the 2010 political protests and 2011 floods is that the economy this time around has been slowing down significantly. “The political crisis has exacerbated this. Thai consumers have become heavily indebted, partly due to the previous government’s populist policies including the first car ownership incentives. Thailand’s consumer debt to GDP exceeds 80%, one of the highest in the region,” he says.
How much does Thailand matter to Malaysia? The latest data showed Thailand was Malaysia’s fifth largest trading partner in the first quarter, accounting for 5.3% of exports and 5.9% of imports. In Asean, Thailand accounts for 19.2% of exports and 22% of imports, making the country the second-largest trading partner in the same period after Singapore.
According to recent news reports, tourists from outside South East Asia usually view Malaysia, Thailand and Singapore as one destination. Therefore, while Malaysia may benefit somewhat from tourists avoiding Thailand and Thai tourists coming to Malaysia, a prolonged period of uncertainty will put off many tourists, especially those from outside the region.
The flow is not just one way. Malaysian tourists were the second largest group after China, to Thailand, with 2.99 million tourists, up 17.29% year-on-year in 2013 according to the Sports and Tourism Ministry. Malaysian tourists make up over 8% of all tourists but the political uncertainty has taken a toll with Malaysian tourist arrivals declining 20.32% in the first quarter.
A Bloomberg report noted that tourism accounts for as much as 10% of GDP.
The crisis has also hit investments, which fell 9.8% year-on-year in the first quarter, the third straight quarterly drop which Citigroup Inc economist Jun Trinidad attributed to a broadening slack and contraction in public investments owing to the protracted crisis.
He says this time around, owing to the protracted political crisis, consumer and business sentiment may take a longer time to recover with foreign investors diverting their money elsewhere.
“We estimate a share of real investment to GDP of 19.4%, slightly higher than the fourth quarter (18.8%). We highlighted earlier that this pattern of sluggish contribution of real investment to GDP may persist with the protracted crisis and breach downside of 20% which we believe would be the start of a mediocre to bleak investment setting,” Trinidad says, adding that a falling investment ratio could reflect near-term production slack but also the start of structural investment decay.
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