Why Thailand’s political unrest is not business as usual
Political unrest surrounding the recent elections in Thailand casts a shadow on the future of the economy, which has already experienced contractions. Continued political discord will make Thailand a less and less attractive destination for foreign capital.
The Thai general elections took place on February 2, 2014. Voting is divided into eight electoral areas, each with a population of around 7.8 million. Electoral officials estimated that anti-government protestors blocked 500 of the nation’s 6,600 polling stations, preventing some 6 million of the 48 million registered voters from participating. Although voting is compulsory under the Thai Constitution, large areas of the traditionally pro-opposition South had extremely low voter registration.
The political impact of electoral disruptions is as yet unclear. Although the current government—led by Yingluck Shinawatra’s Pheu Thai Party—claims victory, this is likely to be contested from a number of angles in the short term. The opposing Democratic Coalition has already challenged the legality of the results, both on the grounds that polling station disruptions mean a number of areas have not yet voted, and over alleged corrupt practices that include buying votes.
More seriously, it seems the disruptions have prevented Ms. Yingluck’s party from securing the 475 MPs (out of a possible 500) needed to secure a quorum in the National Assembly to form a new government.
It is highly unlikely that any of these objections will produce any significant changes in the political landscape, but they will ensure prolonged political instability and accompanying economic decline.
Key issues behind the unrest
At its roots, the Thai political divide is socio-economic. Anti-government protests began well before the elections in November 2013 over a proposed political amnesty bill that would clear the way for a return of Thaksin Shinawatra, the former prime minister who took refuge in the UK after being accused of a range of corrupt political practices.
The rapid economic growth, which the country has undergone during the last few decades, has given rise to a new middle class pushing for greater political representation, which opposition supporters—the military, royalists, established middle-class and business elites—increasingly fear will challenge the historic consensus over who wields power.
Take for example the agricultural sector, where for the last several decades the government has paid a high subsidy, buying rice products for well above market rates. Government economic policies have encouraged highly geographic and sector-specific growth but, by doing so, have created powerful political interest groups demanding more of the same, while the opposition grows increasingly unwilling to let this continue.
The Thai economy is already showing symptoms of suffering from recent political instability. The stock market has dropped by 10% since November 2013 and contraction in the retail and services sectors has led authorities to reduce their 2014 GDP growth estimates by 200 basis points. The manufacturing sector has contracted by 7% year-on-year for Q4 2013, and political violence had spawned a huge fall in tourism, which is the fourth largest sector in the Thai economy.
The Thai economy suffers from bouts of political unrest at almost every election, with 18 military coups in the last 82 years. In the past, the country has weathered the storm. Indeed, the Thai economy proved remarkably resilient through political violence in the 2008 elections and 2011 flooding, so is this time just more of the same?
Two things are likely to make the economic impact different in the longer-term.
First, this is happening at a time when foreign investment in emerging markets is contracting from the winding down of the Federal Reserve’s bond-buying stimulus program.
Second, there is increased regional competition for foreign investment, particularly with the opening up of Myanmar. Other nations are likely to look more attractive in terms of stability and growth potential.
Toyota and Honda are just two of the major foreign companies that have indicated they are exploring moving operations to neighbouring countries. Toyota, Thailand’s largest car manufacturer, producing around 800,000 cars a year, announced in late January 2014 that it was reconsidering its investment of 20 billion baht ($609 million) for the year and is already moving the production of certain models to Indonesia.
Add to this what certain political commentators see as a ‘snowball effect’—political unrest gets worse every time elections come around if the issues at stake remain unresolved—and it is likely that Thailand will look increasingly unattractive to foreign investors in the long-term.
In its February 2014 report, Fitch Ratings expressed concerns that prolonged instability and consequent economic slowdown could damage Thai banking systems via a deterioration in asset quality: “Thai banks have improved their Tier 1 capital ratio to 12.4% of risk-weighted assets, up from 10.8% in 2008. But a significant and sustained undershoot of growth relative to expectations could start to erode these buffers.”
Although Ms. Yingluck has expressed a willingness to compromise with the opposition, neither side has yet to put forward a tangible proposal that would alter the underlying issues and return the country to a stable political and economic trajectory.