Despite the return of democracy, Thailand is still locked in a struggle between a populist government and a conservative establishment
Ineffective civilian rule followed by botched military regimes has characterized Thailand’s volatile political history since 1937, with a total of 23 coups and attempted putsches.
The past 18 months have seen this cycle operating with renewed urgency: in September 2006 the army overthrew the government of prime minister Thaksin Shinawatra – ostensibly on the grounds of corruption, but also aiming to destroy his Thai Rak Thai party’s popular hold on power.
Once in office, the military regime failed to ensure political stability and instead mismanaged the economy through regressive amendments to the foreign business act, forcing a mass exodus of investment and further denting consumer and business confidence; meanwhile the controversial imposition of capital controls did little to boost faith.
Then, in a dramatic turnaround, Thailand’s People’s Power Party (PPP) swept to power last December in what represented a severe blow to the military’s authority. The victorious party moved swiftly to appoint Samak Sundaravej – widely regarded as deposed Thaksin’s proxy – as prime minister.
Thailand’s economy has often been the victim of such instability. Successive governments have failed to address structural deficiencies, including over-reliance on exports, weak investment and low productivity.
Short-term boost
The resumption of democratic rule has provided a near-term boost to the economy. In February, the government swiftly abolished short-term capital controls imposed in December 2006 with the aim of preventing baht speculation and protecting exporters. In anticipation of the political transition, domestic demand and strong export growth lifted year-on-year GDP to a seven-quarter high of 5.7% in the fourth quarter of last year, up from 4.8% in the previous period.
As a result, the PPP has benefited from a modest feel-good factor in the country. The party is also capitalizing on the seething public discontent over perceived neglect by the political establishment – traditional political parties, the army and bureaucracy. “We want to prop up people in rural areas who have been left behind for so long,” Noppadon Pattama, Thailand’s foreign minister and deputy secretary of the PPP tells Emerging Markets. “There is disparity between rich and poor – the income gap is very wide.”
Economic policy has become a main proxy in this battle between the old guard and the new populist order, amid widespread resentment over the perceived disconnect between the establishment and the rural poor. “The great lesson of military rule last year was that they can’t win the game in the rural area any more in terms of politics,” says Michael Montesano, a south-east Asian studies specialist at the National University of Singapore. “It was a real eye opener.”
Adds Noppadon: “Thailand has suffered, and people will not support political instability.”
In response, the new government has resurrected so-called Thaksinomics – named after the former prime minister whose economic policies bestowed patronage on rural areas – by priming the fiscal pump to expand state healthcare, build public housing, capitalize village funds, and launch large infrastructure projects.
Noppadon, a former legal adviser to Thaksin, argues that pro-rural policies will be the government’s central policy platform. “In capitalism you need money to survive, so you need to bring capital in order to bring opportunity to people. Some may call this populism, but this is our philosophy.”
Spending for mass transport systems and healthcare alone is projected at $46.5 billion in 2008.
The government is also hoping to provide soft loans to small and medium-sized businesses, and impose a three-year debt moratorium on farmers. In addition, it has introduced sweeping tax cuts worth 40 billion baht for low-earning individuals, listed companies and the retail sector.
“Taking on the losses of government-owned corporations, boosting capital of state-owned banks to help agriculture, and generally increasing spending – they are clearly trying to repeat Thaksin’s economic legacy,” says Michael Spencer, head of Asia-Pacific market research at Deutsche Bank in Hong Kong.
Given these spending plans, the government’s projected fiscal deficit by September this year is 2.5% of GDP.
The price of prudence
But rumours of a further supplementary budget of 100 billion bhat ($2.9 billion) calls into question the administration’s fiscal prudence. “They are likely to find growth weaker than they realize – forecasts of growth this year alone are 5.5–6%. This is around 100bp above consensus. The risk is that growth will fall short of expectations and the government’s spending plans,” says Spencer.
The country is banking on a pick-up in domestic consumption – projected to grow by 4% this year compared with 1.7% in 2007 – to offset an export sector likely to be dragged down by sluggish growth in the US and Europe. “It is plausible that the government will introduce supplementary budgets if the politicians want to be popular, so public finances will suffer,” says Chris Bruton, head of Bangkok-based business advisory firm Dataconsult. “This is bad given our vulnerability at the moment – slowing exports to the US.”
Deutsche Bank’s Spencer believes there are real doubts that Thailand will benefit from strong investment or buoyant export demand this year to justify its ambitious spending plans. All bets are off given the downside risks in the global economy and shaky financial markets, he says.
Yet some analysts believe the PPP’s targets are achievable, since the very existence of a government is a welcome net benefit compared with the disasters of the military regime. The fiscal stimulus will also help to prop up the economy in the short term, it is argued. “I don’t think a few percentage points of fiscal deficit will break the back of the camel,” says Nicholas Kwan, head of Asia research at Standard Chartered. “It is not something we would encourage in the long run but as a stop-gap measure. It may not be totally negative.”
Capital concern
Fiscal expansion could also compromise domestic capital markets. Although plans have yet to be finalized, the government aims to issue bonds on behalf of state-owned enterprises and government-backed banks, in order to allow off-budget spending, in part to compensate for revenues lost from tax cuts which covers around 0.45% of GDP.
Although it is unclear how much bond issuance is on the cards, Spencer says such plans could suffocate fixed-income markets with the oversupply of paper. “There are scary numbers coming out. This creates real concerns over how much the government is going to have to borrow on behalf of these funds and the subsequent effect on domestic liquidity,” he says.
Taking this spending off the federal government’s balance sheets also distorts the real scale of its Keynesian adventure. But the move represents another kick in the teeth for the military, which last year bought off-budget credit programmes back onto the public books at a cost of 150 billion bhat ($4.4 billion).
Investors maintain that Thailand is structurally well placed to stimulate growth while warding off unpredictable political events and outside pressures: its current account surplus of $15 billion last year provides a cushion for investment and domestic imports, while 20% of its exports are commodity related. What’s more, even without an effective government, investment and spending over the next two years is possible, ensuring moderate growth over the medium term, says Dataconsult’s Bruton. “Consumers and businesses were too scared to make long-term plans during the military government, but there are now signs that they will adapt and get used to the political uncertainty,” he says.
But for now, the government’s economic policy direction may be too short term, providing a short-lived stimulus that will erode public finances, damage markets and undermine medium-term sustainable growth. “The systemic problems in the Thai economy are not going to be helped with the band aids and all these palliatives that the government is trying to use,” says Montesano.
With further disruption expected in the short term, the political capital and domestic support required to enact crucial long-term structural reforms may be even harder to generate as the months go by.
Political instability
But Montesano concedes that the real threat to Thailand’s investment recovery so critical to multi-year economic growth is further political instability. Dark clouds hang over the political horizon, with new charges of corruption and electoral fraud levied against senior members of Samuk’s administration. Most ominously, courts are now mulling over the possible dissolution of the PPP, with a final ruling due at the end of the summer. “The likelihood of this government surviving in the next one or two years is highly doubtful,” says Dataconsult’s Bruton.
As a result, the prospects for badly-needed structural reforms and sustained investment are in doubt, as a power vacuum and elections next year grow increasingly likely. “It is entirely possible that the PPP would choose to dissolve parliament and call for elections by the end of this year. Such political volatility will be disappointing and will increase investor doubts and reluctance,” says Supavud Saicheua, chief economist for Bangkok-based Phatra Securities, and a former adviser to the ministry of finance.
To forestall a possible erosion of power, the PPP is looking to modify the constitution in order to bolster the institutional status of political parties and introduce a fully-elected senate.
The conflict boils down to a power struggle between the elected populist government and the old guard – the bureaucracy and army – which is hostile to the PPP’s rule. “It’s been shocking to the army, bureaucracy and nationalists that Thaksin has essentially stolen a constituency that they essentially believed was theirs. The high political classes are not prepared for this popularity,” says Montesano.