Thailand’s generals are back in charge. Little more than six years after returning to their barracks, a junta led by General Prayuth Chan-Ocha announced on May 22 that the military had once again seized power from a civilian government.
The coup followed months of protests that had paralysed the caretaker administration of Yingluck Shinawatra and latterly Niwatthamrong Boonsongpaisan and sent the economy reeling.
Thailand’s first-quarter gross domestic product (GDP) contracted by 2.1% as investment, tourism and consumption collapsed. Board of Investment (BOI) applications plunged by 42% in value from a year earlier.
Prayuth cast the coup in part as a necessary response to these problems. “We want to return happiness to the people,” he said, in one of his first public appearances following the takeover.
Yet it looks a long stretch for the generals to end the lengthy political crisis that has polarised the country, particularly as Thailand’s economy is spluttering and international patience with the country’s protracted internal squabbles and human rights’ record is wearing thin.
“Make no mistake. The political and economic stakes for this country are extremely high,” says one foreign banker. “I pity the generals if it all goes wrong.”
The National Council for Peace and Order (NCPO), the new administrative body running the country, has several important items on its economic ‘to do’ list. Bankers and investors are urging the NCPO to implement national reconciliation, end damaging populist handouts, tackle widespread corruption and implement across-the-board political and economic reforms.
Other domestic problems include rising national and household debt (Thailand’s household debt to GDP reached 82.3% in the first quarter of 2014) and a plunge in fixed investment. Plus the NCPO is drawing fierce criticism of the coup, particularly from the US and Australian governments, who are increasingly concerned about arbitrary detentions and severe curbs on civil liberties. It’s a daunting set of tasks.
Yet Thailand is no stranger to coups or political, financial and natural disasters.
“I have been through the ‘Tom Yam Kung’ crisis [in 1997-98] when Thailand was bankrupt,” recalls Yeap Swee Chuan, president of the Malaysian-Thai Chamber of Commerce. “After the floods [of late 2011], everyone predicted that Thailand would not recover but it did. This country is very resilient. If it goes down 10%, in my experience it will come back by 15%.”
It’s in the junta’s power as to how long such a rebound will take, if indeed it happens at all. They need sensible, coherent policies. They need to be part of the solution to Thailand’s problems, not a symptom of its ills.
Fast-tracking reform
The junta’s first priority is to set up an interim government. This new administration is expected to take at least one year to carry out national reforms before calling elections.
In a sign of how seriously the generals view financial and economic reform, they have already appointed economic heavyweights to an NCPO advisory board.
Pridiyathorn Devakula, a former governor of the Bank of Thailand and finance minister, will act as vice-chairman of the NCPO’s advisory team. Also on board are Somkid Jatusripitak, a well-respected finance minister under controversial former prime minister Thaksin Shinawatra, and Narong-chai Akrasanee, an ex-commerce minister and renowned economist.
“A coup gives tremendous opportunities for efficiency,” says Andrew Stotz, an independent regional financial adviser and former managing director of international business at Maybank Kim Eng Securities (Thailand). “The military has the power to transform the political and economic landscape with absolutely no recourse whatsoever.”
In a taste of what may lie ahead, the junta has already moved from purging opposition groups to reviving the economy. Key measures include settling Bt92bn ($2.89bn) of debts to rice farmers, approving the Bt2.57tr fiscal 2015 budget, capping the price of diesel and cooking oil, and appointing a new 18-member Board of Investment in a bid to accelerate investment projects worth more than Bt700bn.
They have also pledged to review large-scale infrastructure projects, implement tax reforms and encourage state banks to lend to small and medium enterprises.
On paper it all sounds good. Yet the junta shouldn’t be too quick to implement its own populist policies to blunt opposition. Many foreign bankers bitterly remember the sweeping capital controls introduced in December 2006 by then finance minister Pridiyathorn under the previous military-appointed government. The ill-thought-out measures sent the stock market plunging 15% in a day and forced the government to make an embarrassing U-Turn.
“I hope Pridiyathorn has learnt his lesson,” says one hedge fund manager. Others go a step further. “The danger is that by trying to keep everyone happy the ‘men in green’ end up pleasing no one,” says a foreign banker.
Infrastructure projects
Some policies are an easy sell. Back in February 2013, the government of then-premier Yingluck Shinawatra launched an ambitious Bt2tr infrastructure programme covering everything from high-speed trains to mass transit systems, four-lane highways and water resource developments. The plan aimed to lower logistics costs, which at 15.2% of GDP are higher than many other countries in the region. But the plan backfired when the Constitutional Court ruled on March 12 that the borrowing bill to finance the programme was unlawful.
The generals should review these projects and only implement those that offer economic benefits in a transparent and cost-effective manner. Some are obviously good ideas, particularly expanding Bangkok’s mass transit system from 87 kilometres of track to 460km, replacing Thailand’s ageing single-track national rail network with dual tracks and adding motorways to connect the capital with adjacent cities.
But the controversial Bt800bn high-speed rail project linking Thailand with neighbouring countries should be scrapped, as it lacks commercial logic.
The generals then need to root out corruption, which according to some estimates eats up more than 20% of the budget for the so-called megaprojects.
“The military is adamant that they will cut out obstructions to growth, be it corruption or the amount of time it takes to complete projects,” notes one investment manager.
The generals must also secure the necessary funding to cover the Bt2.4tr in projects that they expect the country to roll out between 2015 and 2022. It won’t be easy.
Thailand’s public debt to GDP ratio reached 46.1% in February 2014. By law, this figure cannot exceed the annual budget-deficit cap of 50%.
“We believe that the NCPO will face a tough trade-off between fiscal discipline and the need to boost the economy,” says Passakorn Linmaneechote, an analyst at Macquarie Securities. “In our opinion it is possible that the NCPO might put priority on the economic measures in order to restore confidence and gain popularity, which could make the public debt to GDP breach the limit very easily.”
Given rising public debt, the generals should consider other funding alternatives. One sensible option would be public-private partnerships (PPPs). According to law firm Tilleke & Gibbins, a PPP law enacted on April 4, 2013 should shorten the time between initial investment and project implementation and provide greater clarity for private-sector participation.
Accelerating the establishment of infrastructure funds to raise capital would also help to relieve pressure on government finances.
If and when the megaprojects move forward, the economic spin-offs could be considerable.
“Infrastructure spending will revitalise private spending, which has significantly lagged other Asean (Association of Southeast Asian Nations) countries like Indonesia and the Philippines,” says Adrian Dunn, chief executive of the Brooker Sukhothai Fund. “We expect that infrastructure spending may add 1% to Thailand’s GDP.”
Repealing populist policies
Besides fast-tracking infrastructure projects, the generals also need to wean Thailand off costly populist public programmes.
Top of the list is the country’s notorious rice-pledging scheme.
In a bid to build a voting base among poor rice farmers in the populous north-east and northern regions, the Yingluck government agreed to buy rice from farmers at Bt15,000 per tonne, about 40% above then-market prices.
Far from driving up world prices as anticipated, however, the corruption-plagued scheme has sent prices plunging to around Bt10,000 per tonne.
The Ministry of Finance believes total losses from the programme could reach $15bn, and it could take years to settle on the final amount.
The failed scheme was just one of a list of ground-breaking schemes championed by Yingluck and her brother Thaksin. Others include a One (PC) Tablet per Child policy, a One Village One Product scheme and a first-time car-buying subsidy programme.
The schemes were costly and inefficient, offering little long-term economic benefit. They were also popular with many of Thailand’s poorer citizens. Dismantling them will not be easy. But the junta must do so, and redistribute the money into more worthwhile schemes.
An alternative to the rice-pledging scheme, according to Peeradej Tanruangporn at the Thailand Development Research Institute (TDRI), is a price insurance scheme to protect rice farmers from any sudden collapse in prices. The scheme would pay farmers based on the average market price over a fixed number of months.
Another solution would be to cut production costs by lowering the price of fertilisers, insecticide and rice harvesters and giving farmers access to special low-interest loans.
Additionally, the generals should spend money on education and welfare schemes that offer real social and economic gains. That may be less exciting than a car or computer, but it would be a wiser investment.
Capital market
Another priority for the generals will be to keep foreign investors happy and ensure the smooth running of Thailand’s capital markets.
The good news is that Thai listed companies already rank highly for corporate governance. According to the World Bank’s Corporate Governance Country Assessment published in 2013, they achieved an average rating of 82.23 out of a possible score of 100.
Vorapol Socatiyanurak, secretary-general of the Securities and Exchange Commission, is optimistic about the longer-term outlook for the capital markets. He believes that Thailand is uniquely positioned to benefit from connectivity to high-growth neighbours like Vietnam as well as from the launch of new products such as infrastructure funds, real-estate investment trusts and venture-capital funds.
“Thailand can be a capital-market connector to Asean and the countries of the Greater Mekong Sub-Region,” he says. “Right now we have more than 200 companies going through the process of listing.”
One welcome consequence of the coup has been a spate of high-level boardroom shake-ups at major state enterprises, some of which rank amongst the largest listed companies on the Stock Exchange of Thailand (SET).
On June 6, just two weeks after the military takeover, Sita Divari, known to be close to the Shinawatra family, stepped down as chairman of Airports of Thailand. Days later, Parnpree Bahiddha-Nukara, a former deputy leader of the Pheu Thai Party that formed the deposed government, abruptly resigned as chairman of energy giant PTT.
Meanwhile Thai Airways, which has been subjected to some of the worst political meddling in recent years, has been ordered to cut back on benefits, including free flights for board members and their families.
The big question is whether the generals can impose the same financial discipline and accountability on loss-making state enterprises such as the inefficient State Railway of Thailand.
The fear is that one set of ‘cronies’ may simply be replaced by another.
Yet Pakorn Peetathawatchai, the SET’s head of corporate strategy, is upbeat. “Fundamentally Thai companies are doing very well,” he says. “If our policies become clearer, and especially financial infrastructure like tax reforms or legal reforms, the future looks bright.”
Growth prospects
Despite the uncertainties, some analysts are turning positive on Thailand’s economy. According to Pragrom Pathomboorn at KGI Securities, the coup should kick-start growth by expediting the 2015 budget approval process and accelerating government spending, which was held up by months of political turmoil.
“Fiscal measures like speeding up disbursements, stimulating public investments and enhancing private consumption could be the major driving engines to restart economic activities and to replace the monetary measures to support the economy,” he says.
Thailand’s GDP should still expand this year, with Bank of Thailand predicting annual growth of 1.5% despite a 1.9% contraction in the first quarter. Meanwhile, inflation is manageable at 2.6%, and the current account deficit stands at a relatively low 0.7%.
Greater political stability could also pay dividends. “Since 2005, the average term of a government in Thailand lasted around one-and-a-half to two years,” says Vilailuck Patharavanakul, an analyst at Tisco Securities in Bangkok. “With absolute power, the military government might provide greater political stability than any recent civilian administration given the deep-rooted hostility and mistrust between the two major political factions.”
For the media-shy generals, the best news of all came in the first week of June when Moody’s re-affirmed Thailand’s ‘Baa1’ sovereign rating with a stable outlook. It reflected the view that the recent military coup and heightened political uncertainty will not undermine Thailand’s credit strengths over the next 12 to 18 months.
But the generals are likely to find that shutting down the violent protests was the easy part. It requires a very different set of skills to implement lasting political and economic reform, and restore investor confidence.
Many are yet to be persuaded that the generals have those skills in their armoury.