Thailand on the Mend?

Notwithstanding the relative calm that Thailand has experienced since the April riots, most observers of the country have got used to the idea that it is on a slippery slope to ever more dysfunctional domestic politics, and many foreign portfolio investors have written the country off as a political basket case not worth the effort to sort out.

Such conventional wisdom risks missing what may finally be a window of opportunity that has opened for Prime Minister Abhisit Vejjajiva to put Thai politics and policy back on a more stable footing, and in turn to help unleash long-stalled dynamism in the economy and reduce the political risk premium in Thailand's financial markets. Thai stock prices have outperformed regional competitors over the past three months by a significant margin, anticipating what we believe are the first baby steps to a more mature era in Thai politics.

This is not to say that politics are heading back to the halcyon days of the 1990s when the military stayed on the sidelines and Thailand appeared to be graduating to the ranks of the mature democracies. But it is important to note that the relative social and political stability of the era that preceded ousted Premier Thaksin Shinawatra wasn't particularly "healthy" either as it reflected a suppressed social and political debate that festered and finally found voice (thanks to Thaksin) in the dysfunctional extra-constitutional politics of the past few years.

There will be inevitable social and political noise going forward in Thailand, but rather than being a sign of a slippery slope to mob rule, it appears increasingly likely that Abhisit has a chance to lead a transition to a fundamentally healthier, albeit noisy, era of electoral politics in Thailand, reflected in a more robust public discourse about social polarization in the country.

Mr. Abhisit is now in firmer control than anyone in the Thai political class could have ever expected when he came into office earlier this year, thanks to his deft handling of protests in April by Thaksin's supporters. Meantime, the "battle royal" taking place between competing color-coded elites has turned out quite differently from what any of the participants had in mind. Instead of one group or another ending up the clear victor, and thus being able to call the shots on who will be the new winners and losers in a post-King Bhumibol political landscape, each of the primary competing elite groups, (the Red Shirts, the Yellow Shirts and the military) has been fundamentally weakened by a combination of over-reaching and mismanagement in their attempts to determine a new post-monarchy political order in Thailand.

Instead it is Abhisit who has emerged as the unlikely Thai leader who now has a chance to facilitate what we suggest is a new more mature era in Thai politics. One thing is certain, however: if Abhisit is serious about turning a temporary political respite of the past few months into something more durable, he will have to successfully manage a volatile group of mercenary partners in his ruling coalition, including the increasingly cranky Bhum Jai Thai Party led by a former key member of Thaksin's Thai Rak Thai Party, Newin Chidchob.

The best way for Abhisit to keep his coalition partners in line is to build public support for his government by showing quick results in managing and implementing effective economic policy. Two key factors suggest he is up to the task. For one, he has a world class monetary policy-making partner in the Bank of Thailand. For another, his Democrat Party has a deep bench of sophisticated, overseas educated MPs and advisors who understand the nuances of modern economic policy making -- and Abhisit fits this mold himself, being Oxford educated and policy-savvy.

The proof will be in the pudding: Abhisit must achieve a meaningful improvement in parliamentary seats for his Democrat Party (up from 164 seats out of 480 it holds today) in the next national elections – which he has promised to call before the end of the year but some experts expect he could delay calling until as late as mid 2010.

Thailand has suffered badly from the global downturn—GDP fell a stunning 7.1 percent compared to the year earlier period in the first quarter of 2009. But the country is relatively well positioned to weather additional storms, given the fact that the private and public sectors are minimally leveraged, reflected in a strong capital adequacy ratio in the banking sector and a minimal uptick in non-performing loans despite the plunge in the domestic economy.

This is due in part to the dumb-luck of political dysfunction over the last few years that limited the ability of Thai companies and financial institutions to participate in the excesses of the global credit boom. Dumb luck isn't the whole story, however, as the Bank of Thailand has also distinguished itself as one of the most independent and best-run central banks in the world, both in terms of its conservative approach to monetary policy and its tough banking and financial sector regulation, which has been consistent during both the global credit boom and now through the bust.

While fiscal policy presents a number of immediate challenges to the Abhisit government, it also offers the potential for enormous political gains. The Abhisit government has endured some political damage from recent fiscal policy decisions, including the decision to increase sin taxes in the face of collapsing tax revenues as well as to push a major new 400 billion baht borrowing plan required to fund the government's multi-year 1.4 trillion baht Stimulus Package 2.

The opposition Pheua Thai Party has made political hay with the assertion that the Democrats are on a tax and borrowing binge that will hurt the economy and mortgage Thailand future.

However, Abhisit can turn temporary adversity into advantage on the fiscal front. For one, the government is smart enough learn its lesson from the political damage caused by the new sin taxes; no new tax hikes are likely until the economy gets its sea legs back. This is possible because the government is starting with a relatively strong balance sheet with debt to GDP a manageable 41 percent. A couple of years of high deficits could push debt to GDP close to the 50 percent limit the government would like to remain below, but for the foreseeable future Thailand is in decent fiscal shape.

Meantime, the Stimulus Package 2 is well designed to boost public support for the government. This is because the government has taken a very pragmatic bottom-up approach focusing on shovel ready projects aimed at high visibility areas of the economy, especially in public infrastructure projects such as highways and rural irrigation. Recent economic data suggests that government stimulus measures are already having an effect on consumer confidence, which rose for the first time in five months in June.

Walking or driving around Bangkok, it is not hard to see the effect of what has been a declining trend in public investment as a percentage of GDP over the past several years caused by the political background noise. The whole city looks like it could use a fresh coat of paint. Therefore, it shouldn't be hard for Abhisit and his team to begin showing quick results to the Thai public on new projects in the second half of the year; if this happens then the recent political blows it has taken as a result of criticism from the Pheua Thai party for tax-and-borrow policies can be turned into positive political capital and momentum ahead of the next election.

Now that Thailand's color-coded elite conflict has effectively knocked itself out and Mr. Abhisit's own political star is on the rise, providing him with the political space needed to hold together a mostly mercenary ruling coalition, it is time for him to roll up his shirt sleeves and return the country to a semblance of political normalcy, which he can do with a self-reinforcing cycle of savvy politicking, clean government and wise economic policy-making.

Sam Baker is director of Asia research for Trans National Research Corporation, a US-based political and economic consultancy specializing in global emerging market research.