Thailand's economy has been showing signs of recovery at the end of 2009 after facing many difficulties in the current global economic crisis. Thailand now faces new challenges as a result of internal political unrest and world views on the country.
On 19 May 2010, Thai security forces stormed the rally site that has been occupied by red shirt protestors around the commercial area in the heart of Bangkok city. The battle had resulted in bloodshed among civilians and security forces. The main objective of the government at that time was to disable the movement of protestors and weaken their ability to continue to demonstrate. Although the government achieved its objective, but there is a possibility that the red shirt group will organise more rallies in the future, hence that would be difficult for the country’s economic recovery.
However, government officials are optimistic to achieve 2010’s economic growth rate of 3.5% - 4.5%, a reduction from the original target of 7%. It is not easy for Thai government to achieve the target unless additional funds are injected into the economic system to generate stronger economic activity.
The Government’s economic forecast differs from that of Bank of Thailand (BOT). BOT in a press conference held at the end of May stated that the rate of GDP should be in the range of 4.3% - 5.8%, a higher target. According to BOT, the target can be achieved through by stimulating the country’s export sector to offset the decline in the tourism sector as well as domestic spending.
Thailand’s target is for the export sector to register year-on-year growth of as much as 14%. However, the increase in export earnings may be affected by the European debt crisis.
As the impact on the economic crisis in Europe has yet to show clear signs of recovery, it will be difficult for Thailand to grow its market share in the continent.
The other sector of the economy of Thailand that was severely affected is tourism. Protests organised previously regardless of hosted by pro or anti-government, including those organised by the yellow shirt group at the end of 2008, resulting in the closure of Suvarnhabumi airport, has clearly affected the country’s tourism sector.
In April 2010, the sector suffered a month-on-month contraction of 18%. It is likely Thailand needs a lengthy period of time to restore tourists’ confidence who previously saw Thailand as a safe destination.
Direct cost incurred as a result of the political protest by red shirt in Bangkok is estimated about 200 to 500 billion baht (RM 20 – 50 billion). This includes the cost of physical damage during the protests, loss of business, and expected loss in tourism sector and other sectors. Thailand’s Finance Minister has issued a statement that the effect of the demonstration will reduce the rate of economic growth this year of 1.1%.
Thai Government now had to face the challenge of restoring the confidence of the international community that Thailand is still a destination for investment and tourism that are attractive and safe. Thai government also needs to win the hearts of supporters of former Prime Minister of Thailand, Thaksin Shinawatra (majority of them are farmers and the poor). This group views that Prime Minister Abhisit is not able to defend their future as Thaksin has done before.
Many see Abhisit’s government capability is very limited. Most of the efforts by the government now are focused to the recovery of investors’ confidence i.e the situation in Thailand is back as ever, but these are only temporary or short-term efforts. Foreign investors still consider the risk of political stability in Thailand is still high and they should be more cautious in making decisions involving investment.
General View
The path ahead remains uncertain. Damages especially in terms of lost tourism revenue would come to 0.5-1.0% of GDP. However, the strong 1Q GDP growth (12% YoY) means that the economy could expand faster than the current growth forecast for 2010 provided that global expansion is sustained. Although Thai government is optimistic that the country’s economic foundation is still strong (based on its export-generated revenue), many economists are of the view, the economic slowdown in Europe will bring adverse effects on Thailand’s economy. This will also dampen exports. Furthermore, the domestic demand is beginning to be affected as a result of internal political turmoil in the country.
As it is growth decelerated in April, after strong performance in March. Fewer working days and political unrest adversely affected tourism and confidence. Tourist arrivals dropped to 1.1 million in April from 1.4 million in March. Consumption also fell 0.9% month-on-month. Business sentiment was down from 55.7 to 46. It is expected May numbers should worsen.
Industrial production (IP) growth dropped from 32% YoY to 21.3% YoY and fell 2.0% month-on-month, partly from acceleration of production in March. Capacity utilisation dropped to 62.3% versus 75% in March. Crop production expanded 5.4% YoY from rice, oil palm and rubber. But the outlook should be dimmed by the drought. Investment remains strong, rising 20% YoY and 1.3% MoM from increases in automobile and electronic imports.
Export growth was strong at 34.6% YoY. But trade and current accounts recorded small deficits of US$190 million and US$420 million respectively due to a surge in imports and lower tourism revenue. With sizable net capital inflows, the balance of payment (BoP) surplus rose to US$3.7 billion, possibly from bank inflows and repatriation of Thai investment in Korean bonds. Thus, the BoP is expected to worsen in May due to a sizable (approx $1.5 billion) outflow from the stock market.
To-date, there is no guarantee that there would be no more political protests by parties that are not satisfied with the present government. Furthermore, the anti-Government forces have shown that they have strong influence on the Government machinery such as police and military whose members are said to are partial to the protesters and showed reluctance in taking instructions from the government in containing the situation. Feedback from un-officials report indicates that at least 70% of the police force in Thailand are supporters of the red shirt. The military is equally split. In the armed forces, there are groups that support Thailand’s tactical military expert, Major General Khatiya (who was perceived as betraying the incumbent government by supporting the red-shirt movement and was shot dead by unknown sniper). Collectively, these factors casts doubt on Thailand’s ability to contain future civil unrest engineered by anti-government forces, which indicate that Thailand’s political stability will not return anytime soon.
Thailand's retail sector will also be affected if there is no strong guarantee that the anti-government protests will not happen again. This is because consumer confidence began to decline. According to the Thai Retailers Association, in the event of another anti-government demonstration, effect on the retail sector will be felt starting in the fall of profits of companies such as supermarkets, major retail stores and lastly the suppliers.
President and CEO, AAPICO Hitech Plc, Mr. Yeap Swee Chuan, raised his concern over protesters’ capability in disrupting the manufacturing and logistics sectors. If this happened, it will affect the movement of manufacturing products such as automotive parts and components. The government guarantees that the manufacturing sector, including automotive will be given greater attention in terms of security protection. Information obtained from the Malaysian-Thai Chamber of Commerce (MTCC) reveals that there are more than 50% of industrial sector workers in Thailand are pro to the red shirt.
Precedent set during Thailand’s political history since 1932 indicates that it generally takes about 5-7 years of political turmoil before the transition from one political equilibrium to another was complete. If history repeats itself, a new political equilibrium may not be established until 2011-13 (because the current political turmoil had the military coup of September 2006 as the starting point). Such a political equilibrium is reached when an arrangement is agreed upon that would allow political power to be shared amicably among those having legitimate claims to such power.
The defeat of the red shirts gives the government the opportunity to further consolidate its power which includes aggressive prosecution of the red shirts. But this needs to be properly balanced with genuine efforts towards reconciliation. Otherwise, the “brittle divisions in Thai society” could worsen, making the current political calm temporary. We see the following as key political signposts to watch for in the coming months.
• The lifting of the emergency rule. To be able to say that normalcy has been restored, the current emergency rule over Bangkok and 25 other provinces needs to be lifted. It would be a good sign if the government could lift the emergency rule within 2-3 months. That is, the ability to lift emergency rule would be a sign that progress has been made towards reconciliation.
• Equal treatment of the red and yellow shirts. Prosecution of the red shirts is likely to proceed aggressively given their destructive actions. Meanwhile, the red shirts will surely raise questions about treatment of the yellow shirts. The yellow shirts have yet to be charged for their occupation of the airport in Nov-Dec 2008. The cry of “double standard” was an important reason that drove the red shirts onto the streets.
• Impartial investigation into civilian casualties. The government has responded to the red shirts’ demand for an impartial investigation into the more than 80 civilian deaths and over a thousand injuries from the protests. The key here would be the perception that there has been accountability for tragic loss of life. Red shirt satisfaction or otherwise of the results of the investigation would be a key factor in reducing political polarisation in Thailand.
• Political reforms. PM Abhisit promised to implement his five-point road map for political reform. Genuine reform that addresses the concerns of the disenfranchised would be an important development towards national reconciliation. Here again, the challenge is to produce tangible political reforms quickly.
• Political accidents. There are two events that could upset the stability of the Abhisit coalition government. First, the possibility of a Constitution Court ruling to dissolve the Democrat party for misuse of Election Commission funds. Second, conservative elements could still prevent amendment of the constitution sought after by coalition partners that could threaten the unity of the coalition government.
Thailand’s economy will be restored only if all conflicting parties agreed to negotiate and compromise and then focus on economic recovery initiative. Currently, Thailand should focus on the consolidation of a society that has been badly split. As long as there is no guarantee that political protest will no longer occur in the future, economic development efforts will be difficult.
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