The future of the Thailand’s economy may well depend on the direction of the country’s judiciary going forward.
The economic picture for Thailand has been overwhelmingly positive since the end of 2012 when President Obama visited the country to begin discussions on including Thailand in the Trans-Pacific Partnership. Strong domestic consumer demand is set to compensate for diminished export earnings. Thai businesses are particularly well positioned to take advantage of the lifting of sanctions on neighboring Myanmar. However, in recent weeks a few political stumbling blocks have led some to question if the optimism in the Thai economy is justified.
Until a few weeks ago, Thailand was among the highest performing equity markets in the world. The exchange traded fund iShares MSCI Thailand Capped Investable Market Index Fund (THD), which tracks the Thai stock exchange, had a phenomenal return of 37.7% in 2012. Between January and March 2013, THD had already increased by 9.5%. After hitting an all time high on March 16th the exchange traded fund (ETF) plunged by 6%.
The drop off was attributable to the interplay between two political issues at stake in the government of Prime Minister Yingluck Shinawatra. The first was a $68 billion infrastructure spending bill, passed by Shinawatra’s cabinet, that the opposition party contends is potentially a violation of the Thai constitution. The second issue is rumors of a potential indictment of Shinawatra on corruption charges.
There is very little dispute that Thailand’s exporters need the critical infrastructure upgrades offered in the bill. Much of the money is allocated to expanding the country’s severely underdeveloped railroad network. Currently exporters must rely on poorly maintained roads to uphold an unreliable supply chain. The $68 billion bill is also potentially a huge deal for holders of THD, 40% of which is weighted to the infrastructure sector.
Despite political turbulence Thailand’s economic fundamentals remain strong. The Thai economy is predicted to grow at 5.3% for 2013. Growth will be fueled by increased domestic demand. The director-general of Thailand’s Fiscal Policy Office reported that private consumption is expected to grow by 4.6% for 2013. Private investment is projected to grow by 9.3%.
A common criticism of some emerging market ETFs, like THD, is that their fortunes are tightly bound to state-backed projects and vulnerable to unpredictable political shifts. The lack of transparency in the allocation of infrastructure funding, like the bill in Thailand, puts foreign investors at a disadvantage to local insiders. Foreign investors have a great deal at stake on the course of action taken by the Thai judiciary.
The Constitutional Court of Thailand is a very active player in the country’s political life. In 2008 the court outlawed the political party of Shinawatra’s brother after he was ousted in a military coup. The court has also forced out two democratically elected premiers since 2008. In response to what many in the media view as judicial overreach, the Prime Minister is proposing a series of constitutional amendments to limit the power of the judiciary.
The future of Shinawatra’s $68 billion infrastructure bill, and perhaps the broader outlook for the Thai economy, depends on the direction of this legislative and legal battle. The situation has the potential to unravel into the kind of protracted unrest that has plagued Thailand in recent years. Yet, it seems as though the will of the Thai public leans in the direction of stability, as many are wary of repeating recent struggles and eager to continue the country’s rapid growth.