Country Report Thailand
Following the May 22 military coup, Thailand is under firm military control, but the risk of large and potentially violent protests remains present. The democracy is not likely to be restored in the short-term. Whilst in control, the military aims to restore economic growth.
Strengths (+) and weaknesses (-)
(+) Well-diversified and competitive economic base
The Thai economy comprises various large and strong economic sectors, which increase its resilience to external and domestic shocks.
(+) Strong external position
Thanks to stable current account surpluses, Thailand has ample and increasing foreign exchange reserves that cover about 8 months of imports. Foreign debt and associated payments are low.
(-) Ongoing political instability
Politically, Thailand’s population remains deeply divided between the country’s urban administrative and military elite (Yellow Shirts) and the mainly rural less affluent classes (Red Shirts). After months of protests, the military intervened and placed the country under military control in May 2014.
(-) Low income levels and marked income inequality across regions
Thailand’s GDP per capita of USD 5,778 is relatively low and the unequal income distribution between rural and urban areas contributes to lingering tensions between the elite and the less-affluent parts of the population.
1. Months of protest culminate in a military coup
Months of anti-government protests culminated in a military coup in May, in which the military took firm control of the country. Lingering tension between the rural less affluent classes and the urban administrative elite flared up again in November 2013, after the government attempted to introduce an amnesty law that would allow former Prime Minister Thaksin Shinawatra - who lives in exile - to return to Thailand without facing time in prison for a corruption conviction. Supporters of the opposition reacted with mass protests against the government and Prime Minister Yingluck Shinawatra (Thaksin’s sister). Rejecting the calls to step down, the prime minister announced early elections. These elections, held on February 2, 2014, went ahead as planned and were won by Yingluck Shinawatra’s Pheu Thai Party. Later, however, the Constitutional Court declared the results invalid, as opposition protestors had physically blocked the elections in a number of constituencies. Shortly thereafter, Prime Minister Yingluck Shinawatra and nine other cabinet members were found guilty and banned from political office for 5 years on charges of abuse of power - brought against her by the opposition - regarding the appointment of a senior official. Faced with potentially violent mass protests by the opposition (Yellow Shirts) as well as supporters of the government (Red Shirts), the army unilaterally imposed martial law on May 20. After a meeting – called by the army - between the Red and Yellow Shirt leaders did not bring a solution, the army seized power altogether – stating that it did so to “preserve law and order” on May 22. Since, the army has taken firm control of the country. Leaders of the Red and Yellow Shirt movements, as well as political activists and academics, were arrested shortly after the coup. Following the formal endorsement of the coup by King Bhumibol, many of them, including the leaders of both movements, have been released. Led by General Prayuth Chan-ocha, the army has abolished the constitution, dissolved the senate, censured the (social) media and are maintaining a very strong military presence. So far, a strong military presence has been able to largely maintain peace and stability. Mass protests, especially by Red Shirts that saw their government toppled and their democratic rights trampled, had been expected. However, so far the protests that are taking place in spite of the ban on protests being in place have been relatively small and peaceful. The military has also refrained from a strong response against the protests, so far. The military has stated that it plans to remain in power in the short-term, with elections taking place in 14 months at the earliest. In the meantime, the military government wants to restore investor confidence and lead the economy back to growth (also see next paragraph). Whether this plan will be successful, however, remains to be seen. The military coup has not brought a structural solution ay closer. The differences between the demands of the Red and Yellow Shirts movements are very large and stability can thus only be maintained by continued military repression. Meanwhile, the risk of larger protests by Red Shirts and a subsequent violent escalation remains present. Hence, political instability will remain a key risk factor that will negatively affect investor confidence in the foreseeable future.
2. Political unrest has strongly and negatively affected Thailand’s economy
Months of political unrest have had a major negative impact on the economy. As other emerging markets in Asia, Thailand was hit by the effects of tapering in the US. However, capital flows to Thailand did not recover, as was the case in many other countries, due to the political unrest. This has been reflected by the continued depreciation of the Thai currency (bath). Economic activity suffered from a lack of confidence as well and private consumption growth declined to zero. The political crisis also negatively affected government consumption and investment, as the infrastructure investment programme grinded to a halt and expenditures – such as on the rice subsidy scheme – were delayed. In addition, the important tourism sector suffered from reduced visitor numbers, as more and more tourists chose to avoid the political unrest and vacation elsewhere. In all, GDP growth slumped to 0.5% y-o-y in 13Q4 and contracted by 0.6% y-o-y in 14Q1. On a quarter-on quarter basis, the economy even contracted by 2.1% in 14Q1. The military government has made restoring investor confidence and supporting economic growth its priorities. It has stated that it plans to resume the rice subsidy scheme and pay out farmers money still owed under the scheme – an estimated USD 2.5bn – quickly. This would boost demand and thus support growth, but would also help the image of the military government amongst the rural population. The military government also aims to work on the budget plan for 2015, in which it wants to keep government spending “within limits”. In all, we expect the Thai economy to grow at a relatively slow 2.5% this year, but only if there is no new major increase in political unrest.
Thailand ranks among the more developed economies of South-East Asia and, thanks to its attractive business climate, has become a major destination for foreign investment in the region. Even though and the country’s nominal GDP per capita at PPP of roughly USD 10,000 of its 67-million strong population is still relatively low, the Thai economy is highly diversified. While tourism constitutes a major source of foreign exchange earnings, the country’s strong manufacturing sector generates a sizeable structural trade surplus. Thailand’s external position is strong, as foreign debt remains relatively low at about 30% of GDP and foreign exchange reserves covered about 200% of debt service costs in 2013. In contrast to its strong economic base, Thailand’s social situation is tense, as economic development could not bridge a marked divide in incomes between the rural and urban population. On the political stage, this problem has led to the creation of two major political camps, the so-called Yellow Shirts supporting the administrative and military elite, and the less-affluent Red Shirts who mostly support ousted Prime Minister Thaksin Shinawatra, who was ousted in 2007, and his sister Yingluck Shinawatra. Both camps have been known to stage mass protests, which negatively affect the economy. Given the many coups since 1932, the country’s military has been known to intervene if deemed necessary and did so again in May 2014 after 6 months of protests by the Yellow shirt movement. The latest coup was endorsed by Thailand’s widely-respected 85 year-old King Bhumibol, who fulfills an important reconciliatory function. Unlike after previous coups, a return to democracy is unlikely in the short-term, as the coup has not brought a structural (democratic) solution any closer.