Thai Economy Ready for Liftoff

After claiming for months that the election would ease political uncertainty, the business community gave a decidedly lukewarm reaction to the People Power Party’s decisive victory on Sunday.

The party, comprised of loyalists of deposed Prime Minister Thaksin Shinawatra, won 233 seats in the 480-seat legislature, prompting its bumptious leader Samak Sundaravej to declare that he will be prime minister “for sure.”

Immediately afterward, Santi Wilassakdanon, chairman of the Federation of Thai Industries, told the Bangkok Post that a Samak-led government would lead to more protests and prolong the political crisis.

Santi and others in Bangkok’s business community preferred Abhisit Vejjajiva, the Oxford-educated leader of the neo-liberal Democrat Party, to head a coalition government. This is not so much because the Democrats have such a different vision for Thailand, but more because it’s not as polarizing as PPP and seems more acquiescent to the royalist political establishment, therefore making it less likely to stir up massive street protests or invite yet another coup.

On a policy level, the differences between the Democrat’s “People’s Agenda” and PPP’s Thaksin-inspired populism are miniscule. In addition to pumping money into rural areas, both parties are proponents of free trade deals, privatization and foreign investment.

Business leaders are not necessarily opposed to PPP, even though many people question Samak’s managerial competence. The business community was thrilled when telecom tycoon Thaksin brought a CEO style to Government House, which stood in stark contrast to the slow working style of the Democrat government that ruled during the late 1990s.

Business support for Thaksin only eroded when executives realized that the street protest movement and pushback against Thaksin from the bureaucracy and judiciary had become so great that he could no longer govern effectively. That hurt their bottom lines.

The problem now for industry groups is that the election did not produce a winner that could bring stability. The Democrats swept Bangkok and did much better than expected with 165 seats, but they would have to work with four other parties to produce a coalition with a maximum of 247 seats, producing a very weak government.

“If all goes well, a new government would be put in place by early March,” wrote Supavud Saicheua, an economist at Phatra Securities, in a note after the election. “Our central scenario calls for a coalition of PPP and three smaller parties adding up to slightly over 300 MPs, which would be a stable government. On the other hand, a coalition that leaves PPP in opposition would have only [247] MPs at most, making it far less stable since a defection of less than 10 MPs would bring the government down.”

With all the opposition parties combined barely cracking the 240 mark, PPP is clearly the only party that can produce a stable government, even though it also holds the potential of re-igniting a fight between the military and pro-Thaksin forces.

A weak, unstable coalition government is exactly what the junta wanted when it drafted the new constitution with the aim of preventing the emergence of another strong party like Thai Rak Thai. Moreover, the charter’s half-appointed Senate is sure to include members from the military-appointed legislature that have pushed laws to restrict foreign investment. The many clauses in the charter seeking to define economic policy will surely be used to challenge any policies that anti-government groups oppose.

But while the military can still thwart the elected government’s agenda, its poor job in managing the economy in the 15 months since the coup means the next government should improve things by default.

“It didn’t make sense for the military government to create confusion by going after one person. They created a big mess,” said Kongkiat Opaswong-karn, CEO of Asia Plus Securities, Thailand’s third-largest brokerage firm.

After the coup, the military-appointed government said it would adhere to “sufficiency economy,” a vague philosophy invented by King Bhumibol Adulyadej that could be tweaked to fit nearly any economic ideology. The coup-makers sold it as an alternative to Thaksin’s populism, which included subsidized health care, cheap credit and debt forgiveness.

Investors struggled to understand if sufficiency economy meant that the country would turn inward, and each time the government tried to clarify the policy more questions were raised. The uncertainty never quite cleared up as the government sought to twist certain laws specifically to go after Thaksin, and its competence quickly came into question.

In late December 2006, the government without warning shoddily imposed strict capital controls designed to stem the baht’s surge against the falling dollar, sending the stock exchange to its worst one-day fall since the first Gulf War. The market eventually recovered after the central bank exempted equities and other securities, but the public’s trust in the appointed government was permanently damaged.

The confusing debate on changes to the Foreign Business Act, a knee-jerk reaction to the Thaksin family’s sale of telecommunications firm Shin Corp to Singapore’s Temasek Holdings in January 2006, further reduced investment and soured the overall business climate. The bill died in the military-appointed legislature, but the debate alone was enough to damage the economy.

Despite the painful year, the fundamentals are solid and every political party more or less shares the same economic policies. While many things could go wrong, everything is already in place for the economy to take off.

“The new government doesn’t have to draw up any new plans or anything,” Kongkiat said. “They just need to come in and push the button.”

For starters, all the parties campaigned on policies that mirrored Thaksin’s populism, so these programs, which were watered down or eliminated after the coup, should be resumed fairly quickly. More village loans and agricultural price supports should boost domestic demand and increase confidence among local investors.

Although the junta spent lots of energy demonizing these programs as fiscally unsustainable, Kongkiat downplayed those concerns. “After the financial crisis we spent more than one trillion baht bailing out companies that defaulted on loans,” he said. “The village fund program cost may be 70 billion baht, and the default rate is very low. There is no comparison. Any government that comes in will have to lift the GDP per capita of low-income earners as they comprise 80% of the population.”

Secondly, firms are just waiting to invest. Industrial capacity utilization is now averaging about 80%, according to statistics from Thailand’s central bank. This is the highest level since just prior to the 1997 economic crash, when firms over-expanded. Now the private sector needs to invest to grow, but businesses are waiting for political stability before spending.

Thirdly, plans for massive public infrastructure projects initiated during Thaksin’s government have already been drawn up and are just waiting to be implemented. The military government has already secured financing for at a new subway line, and more are planned for the future. Moreover, large investments in power plants, highways, logistics services and a new industrial estate along the country’s southern seaboard have already been planned and just need approval.

The increased public investment should boost imports and ease Thailand’s ballooning current account surplus, which will take some pressure off of the baht. The elected government will likely do away with capital controls, as they have had only a marginal affect on the currency caught between China’s pegged yuan and the falling US dollar.

Despite all the positive signs, investors are likely to tread cautiously for a few months. If the PPP manages to form a government as expected, rumblings from the military or other parts of the pro-coup political establishment could again keep the economy from firing on all cylinders.

“People in the urban areas, especially the middle class in Bangkok, will feel very untrusting of a new PPP-led coalition government,” said Sompob Manarangsan, an economist at Chulalongkorn University. “It’s not only economic policy itself that’s a factor but political problems are also a prominent obstacle for the Thai economy.”

This is where the outspoken Samak could be a problem as prime minister. A PPP government that focuses on economic issues could do away with the military government’s murky economic policies and establish clear-cut laws and regulations, restoring the confidence of investors and reinvigorating the economy. But if Samak pushes too strongly for Thaksin’s return and the dissolution of the junta-led investigation into his financial dealings, then the coup-makers might get antsy.

So far, it looks as if the People’s Alliance for Democracy (PAD), which spearheaded the movement against Thaksin in early 2006, will not make a comeback. The criminal court just sentenced key PAD financier Prachai Leophairatana to three years in jail for share manipulation, and fiery publisher Sondhi Limthongkul also just received three years in jail for defaming Thaksin during the protests.

Analysts are hoping the country can move beyond the fight over Thaksin and instead unite to boost the country’s competitiveness. While the army has spent valuable time and energy debating the word “sufficiency” and combing through Thaksin’s business dealings with little to show for it, businesses have shifted investment to other countries in the region, most notably Vietnam.

Now Thailand has a chance to win back the trust of the global business community. But, as Sompob said, “It will take a leader who looks forward instead of backward.”