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Thailand: heading for extended military rule

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Thailand is heading for extended military rule, as the National Assembly rejected the proposal for a new constitution paving the way to early elections. Economic growth remains relatively weak, forcing the government to revert to populist economic policies.

Strengths (+) and weaknesses (-)

(+) Well-diversified and competitive economic base

The Thai economy comprises various large and strong sectors, which increase its resilience to external and domestic shocks.

(+) Strong external position

Thanks to stable current account surpluses, Thailand has ample 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 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 5,938 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. 

Key developments

1. Military will stay in power until at least late 2017 following rejection of draft constitution

Thailand is heading for extended military rule at least until late 2017 following the rejection in September 2015 of a draft constitution by the military-appointed legislature. This brings with it rising risks of a regression towards Myanmar-style authoritarianism, in which the military retains considerable political influence, and a further deepening of the rift between royalists (Yellow Shirts) and supporters of former prime minister Thaksin Shinawatra (Red Shirts). A new Constitutional Drafting Committee under the leadership of Meechai Ruchpan, a drafter of an earlier constitution that allowed a military leader to become prime minister in the 1990s without parliamentary majority, plans to present a new proposal by April this year. If accepted by the legislature and subsequently in a referendum by the general public, nation-wide elections could be held by mid-2017. However, neither meeting the deadline nor sufficient public approval for the possibly contentious draft constitution can be taken for granted. The military government will likely look for ways to extend the drafting process as long as possible while including elements in the constitution that obstruct the return to power of former prime ministers Thaksin and Yingluck Shinawatra. Despite the military’s delaying of the return to democracy and increased legal action against the Shinawatras, Thailand’s political situation remains relatively stable. While the military strictly suppresses any opposition, politicians on both sides of the political divide called upon their supporters to adopt a wait-and-see approach. Still, violent tensions might re-erupt swiftly if the government fails to engineer a marked strengthening of economic growth, postpones the return to democracy for too long, or mishandles the process of reconciliation with Shinawatra allies while removing the Shinawatras themselves from Thailand’s political landscape. The eventual passing of the highly-revered, but ailing, 88-year-old King Bhumibol Adulyadej, would remove an important arbiter between Thailand’s opposing political forces. His likely successor, the reportedly unpopular Crown Prince Maha Vajiralongkorn who has alleged ties to self-exiled Thaksin Shinawatra, will probably struggle to enjoy the same level of respect from both sides of the political divide and therefore heavily depend on the military for legitimacy. On the one hand, his relatively weak position will prevent him from fulfilling his father’s reconciling role in politics. On the other hand, it may reduce risks that he grants a royal pardon to Mr. Shinawatra and allow him to return to Thai politics. Hence, the death of the current king could significantly add to instability risks, as political leaders could feel less restraint to challenge military rule once the likely lengthy mourning period has passed. A renewed escalation of political tensions could spark large capital outflows, which would put pressure on so far ample foreign exchange reserves and the exchange rate, and lead to a cessation of foreign direct investment inflows. The resulting pressure on the balance of payments could be exacerbated by a heavy-handed military response to political turmoil, as the EU and the US might impose sanctions that would hit exports and weigh on economic growth. 

Figure 1: Growth fails to pick up…
Figure 1: Growth fails to pick up…Source: Macrobond
Figure 2: …as foreign direct investment falls
Figure 2: …as foreign direct investment fallsSource: Bank of Thailand

 2. Economic growth held back as investors remain wary of political uncertainty

Notwithstanding current relative political stability, Thailand’s military government has so far failed to engineer a strong economic recovery amid considerable domestic and external headwinds. Growth continued to hover around 3% y-o-y through the first three quarters of 2015 in spite of the adoption of sizeable fiscal stimulus measures in the fields of public infrastructure investments and income support for poor farmers reminiscent of previous ousted Shinawatra-led governments. Given low agricultural commodity prices and low water levels in key reservoirs, particularly the less affluent northern regions face economically challenging times, forcing the government to reinstate populist polices as it strives to prevent social unrest and weaken support for the Shinawatras. On the domestic front, growth is held back by the combination of policy uncertainty and overcapacity undermining private investments. Net foreign direct investment (FDI) inflows declined from USD 2.9bn in 15Q1 to USD 486m in 15Q3, while net applications for future FDI tumbled by 75% y-o-y in Jan-Nov 2015, as foreign investors carefully assess Thailand’s political outlook. Meanwhile, private consumption growth remains muted, as high private debt levels (about 80% of GDP) and lower farm income partly offset the positive impact of lower commodity prices and fiscal stimulus. On the external front, net exports’ growth contribution remained positive thanks to rising tourist arrivals (mainly from China) and low oil prices, but goods exports continued to contract amid the regional growth slowdown. Barring a more predictable policy outlook, economic growth is expected to hardly improve from last year’s 3%, which remains relatively low compared to pre-crisis growth levels. Should political tensions escalate, however, growth may collapse, which could bring with it rising risks for Thailand’s financial sector. Given the risk of social discontent, further boosts to public spending remain likely, which would lead to a widening of currently-low budget deficits and a consequent deterioration of so far solid public finances. For the time being, however, Thailand’s policymakers have stayed true to the country’s traditionally conservative fiscal and monetary policies, which have helped to keep public debt and foreign exchange reserves at acceptable levels. 

Factsheet of Thailand
Factsheet of ThailandSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

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 the country’s nominal GDP per capita at PPP of roughly USD 16,000 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 an oftentimes sizeable structural trade surplus. Thailand’s external position is strong, as foreign debt remains relatively low at about 35% of GDP and foreign exchange reserves covered about 200% of debt service costs in 2015. In contrast to its relatively 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 support the royalist administrative and military elite. The less-affluent Red Shirts mostly support former Prime Minister Thaksin Shinawatra, who was ousted in 2006, and his sister and former Prime Minister Yingluck Shinawatra. Both camps tend to stage mass protests, which negatively affect the economy. After various coups since 1932, the country’s military has been known to intervene if deemed necessary. It did so again in May 2014 after 6 months of protests by the Yellow shirt movement. The endorsement of the coup by the widely-revered 88-year-old King Bhumibol, an important figure of reconciliation in Thai society, gives the military government some legitimization in the eyes of many Thais. However, there is a lingering risk of sizeable unrest unless the current administration succeeds in re-igniting economic growth and preparing democratic elections.

Economic indiators of Thailand
Economic indiators of ThailandSource: EIU
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Author(s)
Fabian Briegel
RaboResearch Global Economics & Markets Rabobank KEO
+31 30 21 64053

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