By: Elspeth Ong
Thailand has a complex story to tell. It has been one of the Asian Tigers with its impressive economic growth, and yet it has also been plagued consistently by political turmoil. In recent times, these have been exacerbated with the succession of governments. These massive changes have had a definite impact on many sectors of society. However, Thailand has also been able to weather these with its strong economy, and will continue to do so as long as the political situation is kept under control.
The opposition political parties have proven themselves a force to be reckoned with, in political as well as economic terms. Most notably, the foremost opposition party, People’s Alliance for Democracy (PAD), has the potential to cause great disruption to the economy due to the wide-ranging influence of its leaders. Media mogul Sondhi Limthongkul is able to stir up mass dissent, as evidenced by a 2006 protest which drew over 40,000 people. Military affiliates such as Pallop Pinmanee and Chamlong Srimuang ensure that their threats against the PPP are backed up with brute force. Some of them had in fact been appointed to the temporary military government after the coup in 2006. The collective wealth of the PAD means that its members can effectively lead a bank run that could stabilize the Thai financial system – a threat they had already made to force now former PM Samak Sundaravej to quit. As long any group affiliated to Thaksin remains in power, these remain real risks to the Thai economy. Already, the attacks by the PAD have caused the Thai government to declare a state of emergency. PPP’s current tack seems to be stolidly pro-Thaksin, having installed Thaksin’s brother-in-law, Somchai, as Samak’s successor. Unless a compromise is found, the political climate will remain highly unstable and investors will stay away.
Already, the investment forecast for Thailand is looking bleak. Investor interest has dropped significantly, and the continuing political uncertainty is likely to exacerbate this. In a 2007-2008 study about investments made by international companies, Thailand was ranked one of the lowest among Asian countries. It was selected by only 1 per cent of the respondents, compared to 10 per cent by jointly third-ranked Singapore and Hong Kong. This does not bode well for Thailand, whose competitiveness is being eroded by the strong showings of other Asian countries. On top of that, the political turmoil is most likely to deter new investors. Investment growth plunged from an annual average of 12% in the boom years of 2003-05 to 3.8% in 2006 and 1.4% in 2007 due to the political turmoil. Should this continue, more vital injections into the economy will be cut off and growth will be slowed down.
On top of that, the domestic economy is likely to be hit. The unstable social situation leads to uncertainty by businesses and consumers, and hence reduced spending. According to the Thai Board of Investment, consumer confidence has plummeted in recent times, reaching a 10-month low of 69.9 in September 2008. With more uncertain times ahead, consumers are likely to save more, and local businesses will also cut back on investment. While the government has unveiled measures to help citizens cope with the rising cost of living, this may not be sustainable. Its economic stimulus package includes bearing the cost of utility bills and transport costs, and relief packages for small to medium enterprises. The intention is to offset the burden of paying for necessities so that economic growth in other areas can continue. It assumes that consumers and businesses would be encouraged to spend more and earn more, and any loss in government revenue would be offset by an increase in tax revenue. However, the political instability might override this assumption and cause consumers and businesses to rein in spending. Businesses and consumers who are uncertain about the state of the economy due to political changes are more likely to wait out the situation before making investments, especially in big ones such as property and corporate development.
The political uncertainty will continue to deter tourists, and lead to a drop in tourism. Tourism is one of the biggest industries in Thailand, and is an important contributor to Thai GDP at 6-10%. The Thai Board of Investment has said that the political stand-off has already caused an estimated loss of at least 42 billion baht in tourism revenue. During the 2006 political crisis, more than 60,000 Chinese and Singaporeans alone cancelled their trips to the kingdom. With more of this coming up ahead, Thai GDP will be hit. In particular, should tourist arrivals drop drastically, companies in the resorts and leisure business would have less funds and incentives to invest in and upgrade facilities. This would be a great loss to Thailand in the long term.
There are some factors that work in Thailand’s favor, however. Despite the political transitions, the government has shown some consistency in implementing economic policy. Most notably, Somchai decided to continue with the economic plan outlined in July 2008 under Samak’s aborted term. Considering the unhappiness that the opposition has shown with the reigning PPP even after this change, Thailand would do well to prepare for more political rearrangements or other changes in the political system. The commitment the current government has shown may help to stabilize the current economy. It is important, however, for Thailand to sort out the fundamental political problems that could undermine any benefits the plan might bring.
Thailand also has solid economic fundamentals that could see it through the crisis as well. Thailand has a strong export sector that is not greatly affected by political problems. The private sector is also not involved in political issues and existing industries will likely be sustained. The automobile, electronics and rice exports in particular are very established industries that are unlikely to be shaken by the political issues, as industry contacts deal directly with each other. They are also not affected by a drop in domestic demand. While economic analysts expect export growth to decrease later this year, this is due to a reduction in global demand rather than political instability.
However dire the political situation in Thailand is, it is clear that this does not necessarily translate into a death sentence for the economy. While the domestic economy may be affected by more conservative spending, a strong export sector will help to offset this. In order to maintain growth however, it is necessary for Thailand to resolve its political situation. This will help Thailand attract new investments and ultimately create a stable environment for its economy to thrive unhindered.