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SpirE-Journal 2010 Q3

Weathering the storm: Thailand’s economy after the clashes in Bangkok

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Weathering the storm: Thailand’s economy after the clashes in Bangkok

The old adage that with rising affluence comes rising politicization has never been more true than in today’s emerging economies. As incomes and urbanization have grown, citizens have become more active in expressing their political views, be it through the ballot box, social media or mobilization on the streets. The political disturbances in Bangkok in April and May 2010 were a test case of whether political conflict deals a body blow to the economy and business.

Thailand in the world

Thailand, the world’s 20th most populous country and the second largest economy in Southeast Asia, has long been regarded as a pillar of the emerging world. While its economy has been prone to growth spurts followed by recessions, it is widely seen to have developed stable, export-oriented sectors and healthy domestic demand in the post-1998 decade. At over USD 3,000, its GDP per head is fast approaching the USD 5,000 level at which it is said that countries tend to transition towards more open societies with more accountable governments.

However since a military coup ousted the former Prime Minister Thaksin Shinawatra, and even shortly before, Thailand’s politics has been polarized between two well-entrenched factions – the pro-Thaksin, populist “Red Shirts” and the purportedly anti-Thaksin and conservative “Yellow Shirts.” These political difficulties came to a head in the violent street protests, and their violent suppression, in mid-2010. Kasikornthai Research Center (KRC) predicted that these events would lower the growth of Thailand’s economy by about 2.3 percentage points year on year.

But how severe has the fall-out really been? And what lessons can other emerging economies draw? In looking at these issues, our starting point should be a review of the events leading up to April 2010.

Chronology of Thailand’s Political Crisis

Since 2008, the two sides in Thailand’s conflict were the People’s Alliance for Democracy (PAD/Yellow Shirts) and the People’s Power Party (PPP/Red Shirts), linked to the governments of past Prime Ministers Somchai Wongsawat and Samak Sundaravej respectively. The conflict continues between the present Democrat Party government of Prime Minister Abhisit Vejjajiva and the National United Front of Democracy Against Dictatorship (UDD/Red Shirt). It is a continuation of the 2005–2006 political crisis, wherein the PAD protested against the Thai Rak Thai (TRT) government of Prime Minister Thaksin Shinawatra.

In a nutshell, the genesis of the crisis lay in former Prime Minister Thaksin’s perceived corruption in avoiding tax for the sale of his telecommunications company Shincorp to Singapore’s Temasek Holdings (among other grievances). This provoked a backlash, particularly from politically literate Bangkok residents, whereas Thaksin drew most of his support from the rural masses who had benefitted from his fiscal stimulus measures in the villages.

A series of new violent protests in April 2010 by the Red Shirt opposition movement led to clashes with security forces, resulting in 87 deaths and 1,378 injured. Most of the victims were civilians, with some military casualties. During the time of the Red Shirt protests against the government, there were numerous grenade and bomb attacks against government offices and the homes of government officials.

The crisis culminated in an offensive by Thai security forces to over-run the Red Shirt encampment in downtown Bangkok, so as to put an end to the cycle of occupation and protests that had worsened since 12 May. On 19 and 20 May, amidst fierce street battles, government forces completely over-ran the Red Shirt positions. Key Red Shirt leaders surrendered to government forces, while others attempted to destroy commercial properties in Bangkok such as the iconic Central World shopping mall. By late May the government had regained the capital, defeated the Red Shirt organization in Bangkok (at least for the moment) and promised fresh elections to restore political equilibrium.

However damage had already been done in respect of Thailand’s tourism and retail industry, foreign direct investments as well as general investor confidence. The conventional wisdom was that Thailand’s country reputation and perceived risk level had suffered real harm. Was this really the case?

The Sectoral Impact of the crisis

The political crisis in Thailand since the Red Shirts escalated their protests against the government of Prime Minister Abbhisit Vejjajiva in 2009, and culminating in the Bangkok battles of May 2010, had distinct impacts on different sectors of the Thai economy.

Tourism: Thailand’s tourism industry was hard hit by the crisis, as evidenced by tourist arrivals. In 2009, the total number of tourist arrivals was recorded at 10.9 million, down from 14 million in 2008. The worldwide media coverage of the military face-off with civilian protesters on the streets of Bangkok discouraged many foreign tourists from travelling to the kingdom in 2010. A number of countries also issued travel advisories against visiting Thailand. As a result, many tourists were diverted to destinations in nearby countries such as Indonesia (Bali and Yogyakarta) and Malaysia. This wreaked havoc with companies dependent on the tourism sector, particularly SMEs.

Food: The crisis generally did not affect the food industry. Food production and processing generally takes place outside downtown Bangkok and was not affected by the Red Shirt-Yellow Shirt conflict. While the cultivation of rice and other cash crops was slightly impacted by the movement of many farmers to Bangkok to join the Red Shirt encampment, the numbers involved did not generate any material impact on agricultural output. Fishing, the dairy industry and food processing were impacted even less. Factory and retail stores continued to operate as usual, with the exception of some retailers in downtown Bangkok for some portion of the time in April and May. Some players in the food industry are targeting 15 to 20 per cent revenue growth in 2010.

Telecommunications: Telecom service consumption contributes three percent of Thailand’s GDP7. Revenues and development in the local telecommunications industry seem little affected by the political crisis. The drivers of change appear to be the roll-out of new technologies and investments by carriers. In 2009, 3G and WIMAX were two of the key drivers in the sector. In particular, 3G is expected to see investments totaling some $1.5 billion over the next three years. One of Thailand’s telco carriers, Telenor Group (which controls Thailand’s second-largest mobile phone carrier, TAC) revealed that they remain confident about the Thai market. Sigve Brekke, head of Telenor Asia, said in late April 20109, “Telenor Group [takes] a long-term view on our commitment to Thailand. The recent political development in Thailand does not affect our investment policy for this market.”

Car Sales: The political crisis did not slow vehicle sales in Thailand. In April 2010, with the crisis in full swing, General Motors reported a sales increase of 62 percent over the same month of the previous year. With the increase in demand, General Motors is exploring increasing output at its Rayong plant to 76,000 vehicles per year with an investment of USD 467 million to improve facilities and build a new diesel engine plant. Toyota increased shipments in April by 43 percent to 92 000 units. Isuzu, a big player in pick-up trucks, reported growth of 44 percent to 46, 071 units.

Foreign Direct Investment

It is a truism that the growth of investment in a country is heavily influenced by political conditions. Some would go so far as to say that foreign investment is a bet on the future stability of a country.

It is therefore very instructive that portfolio investors are still investing in the Thai market. Foreign portfolio investment inflows helped push the stock market to a 22-month peak and the baht to a 20-month high in May. Foreigners bought a net of USD 1.6 billion in Thai shares between February and late May. One attraction was that Thai stocks appeared to be cheap.

The picture for foreign direct investment (FDI), however, is more complex. The Board of Investment said that FDI in 2010 could fall 15 percent to 300 billion baht. Japanese companies, Thailand’s biggest investors, have expressed concern and may look elsewhere if the underlying Red-Yellow Shirt conflict is not speedily resolved.

Automotive Investment: Investment in the automotive industry has been hurt by the crisis. Indian auto manufacturer Tata Motors cancelled its eco-car project in Thailand, which was worth seven billion baht (about USD 150 million). However, according to media reports, it was the tweaked excise duty structure coupled with the financial commitment of the big investment that was to blame, not the political crisis per se.

On the other hand, automotive manufacturers like Ford, Toyota and General Motors remain optimistic about achieving healthy profits during this period. Ford, for example, is committed to long term investment. “Our business in Thailand remains strong, as does our view of the long-term prospects for the growth and development of Thailand’s economy. Our long-term commitment to Thailand has not changed,” said an executive of Ford Motor.

Electronics Manufacturing investment: One of the largest electronics manufacturers in Thailand, Seagate, does not think that the political crisis is a threat to its business. Seagate has no plans to move their plants out of Thailand. Both its factories are not in the “red-zone” (the area of downtown Bangkok most affected by the battles of April and May) – one is in Samut Prakarn, on the outskirts of Bangkok, and the other is in the northeastern province of Nakorn Ratchasima.

The government: planning to get Thailand back on track

Immediately after the defeat of the Red Shirts in May, Prime Minister Abhisit Vejjajiva commented that the government needed about six months to restore the economy and map out plans for political reconciliation before calling a general election. Providing aid to businesses and workers who were adversely affected by the Bangkok disturbances and rebuilding the international community’s confidence in Thailand were the key priorities, said Mr Abhisit.

The government’s main focus in the near future is on the tourism sector – a logical move given its important role as a job creator in Thailand as well as the severe damage it suffered. The Thai government has promised to extend tax incentives, host seminars, and provide soft loans to local companies involved in the tourism sector.

The government has also announced plans to increase popular access to education, public health, social security and employment, so as to slash the income gap. However, much of the government’s broader economic development agenda may be contingent on a successful resolution to the political tension in Thailand through elections, constitutional change or some other means. Otherwise, future clashes may surface and the reputation of the country in the eyes of tourists and investors may not recover.

Political crises and economic development

Many Asian countries are at or fast approaching the USD 5,000 level of income per head at which it is thought that the citizenry become more politicized and start to demand more political openness and accountability. Thailand is a cla

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