Time to Invest in Thailand?

In yet another demonstration that markets don’t give a fig one way or another about democracy, the Stock Exchange of Thailand closed Thursday night at 694.72, just 7.84 points, or hardly more than 1 percent, below its Tuesday close, hours before the Thai military drove Prime Minister Thaksin Shinawatra from power. The Thai baht closed at 37.57 to the US dollar, only marginally lower (from 37.69) than Tuesday.

How long that sanguine situation will last is a different question. Investment bank economists around the region are expressing caution—but it is focussed on macroeconomic factors rather than Thailand’s bumpy politics. In particular, oil prices and interest rates have already cut into private consumption and the sustained political upheaval of the last nine months, during which Thaksin simultaneously duelled with the military and representatives of King Bhumibol Adulyadej, didn’t help.

However the events of late Wednesday night and Thursday, during which the king pledged support for the coup leaders headed by Army Lt. Gen Sonthi Boonyaratklin, and Sonthi pledged a return to civilian rule within two weeks, have calmed fears of a protracted period of instability to the point that some Bangkok residents started referring to the “smooth-as-silk coup.”

Whether the country is democratic or not isn’t the issue for business. Business hates uncertainty. Like Bangkok’s restive citizens, most economists see the coup as having resolved the continuing political crisis for better or worse. In addition, the macroeconomic factors that have cut into investor and consumer confidence are swinging in Thailand’s favor.

Crude prices have dropped dramatically over the last few weeks as world oil stocks and refinery capacity grow. Net exports have begun to rise in the third quarter of 2006 and inventories have fallen. With the US Federal Reserve now putting rate cuts on hold, Southeast Asia will probably follow suit and Thailand could actually be in a position to cut interest rates in the first half of 2007.

Some constitutional issues provide cause for concern. Two planks of the current Thai constitution probably will go. The two, which were designed to provide long-term stability, made it difficult for lawmakers to jump from one party to another and limited the ability of the opposition to ask for motions of no confidence. Prior to the introduction of the two amendments, Thailand was subject to an endless series of revolving-door governments, and removal of the two probably will turn the parliament into another merry-go-round. It thus appears likely that the constitutional change promised by the coup leaders is going to result in a growing series of weak governments.

But Thailand has a long familiarity with military coups in the 74 years since the absolute monarchy was abolished and turned into a constitutional one. It was almost unheard of for any government to finish out its term. No-confidence votes brought them down. In addition there has been a tradition of lawmakers jumping from party to party, usually in return for cabinet positions that enabled them to raid the treasury. Given the country’s long-standing strong economic performance, marred by occasional stock market panics and other problems, the political situation has rarely impacted the economy for very long.

Most analysts expect the market to trade sideways for awhile although some are arguing that it’s a good time for investors to jump in and fill their boots. Morgan Stanley, for instance, points out that the bloody events of 1992, when the army led by former general Suchinda Kraprayoon murdered hundreds of protesters, knocked 10.9 percent off the SET—which was immediately followed by a 20.6 percent rally when the market reopened.

“In the current instance a more muted market decline seems likely, at least until Thaksin’s reaction and the timetable for a return to democratic government are established,” according to a fresh Morgan Stanley report. “After this, we think the case for significant upside in the Thai market remains strong.” The market already trades at the lowest valuations in the region.

And, as CLSA economist Tony Nolte points out in a September 21 analysis: “It is worth remembering that not long ago (Thaksin’s) policies were being held up as an example to the rest of the region. Specifically, policy was aimed at shifting the economy from over-reliance on exports to domestic demand-led growth. This involved empowering the rural sector in order to raise its contribution to overall growth.

“Our hope is that a new government is in place sooner rather than later and that Thaksin’s policy direction is maintained.”

That is a serious question. Reports are making the rounds that the Bangkok establishment is seeking constitutional subterfuges to nullify the voter strength of Isaarn, the populous north of the country that formed Thaksin’s power base. And, if that happens, Bangkok could go back to its age-old practice of simply ignoring the poor in Thailand’s northern provinces, to the country’s detriment.