Thaksin Shinawatra, Thailand’s prime minister of five years and the billionaire owner of Shin Corp, one of Asia’s biggest firms, was forced to step aside last month amid accusations of corruption. Yet his departure is far from the end of the story: the shock waves have not only dampened investor sentiment – concerns are now growing within the country over Thaksin’s legacy to Thailand’s economy, which faces rising world fuel prices and increasing competition from China.
Thaksin blazed many a trail in Thai politics, becoming the first prime minister to govern without a coalition when his Thai Rak Thai party first swept to power in 2001, soundly beating the Democrat party, which led Thailand after the 1997 Asian financial crisis. He was the first Thai leader to “speak straight”, according to one member of the Democrat government at the time. In 2005 he became the first Thai prime minister to lead his party through one four-year term and into another, and now he has become the first forced to resign by popular protest.
But the April 2 general election leaves uncertainty about whether Thaksin has a political future. Thai Rak Thai won enough of a majority to remain in government, but with only 57% of the popular vote – despite an opposition boycott – the scale of the protest vote led to his tearful resignation.
Still, the former police chief remains hugely popular with the rural poor, who make up nearly 70% of Thailand’s population, whose loyalty he won with initiatives such as the suspension of farmers’ debts, Bt30 universal healthcare, Bt1 million ($23,000) loans for each village, and the 2003 war on drug gangs, in which around 2,500 alleged dealers were assassinated.
No going back
“Politics will never be the same,” says one foreign observer, a consultant who has been in the country for 40 years.“He has raised people’s expectations, and any politician will now have to meet them ... he’s been innovative, and you have to give him credit for that.” However, his policy gimmicks and rural hand-outs alienated urban Thailand “from the clerical level up”, he continues.
“They know that all this is being paid for with their taxes.” Thaksin, he says, has “split Thailand between the rural and urban areas, where it had been the people versus the military”.
Outrage over the Shinawatra family’s tax-free sale of their $1.9 billion stake in Shin Corp to Singapore’s Temasek Holdings was the final straw. The People’s Alliance for Democracy opposition coalition has organized 10,000-strong demonstrations in Bangkok since last year.
Thaksin stands accused of muzzling the media, both directly and by withholding advertising from his myriad business interests; of using patronage to control appointments to institutions that might investigate him, such as the constitutional court and the national counter-corruption commission; and of using his power to benefit his business empire, while publicly denouncing corruption.
On the one hand, Thailand’s economy appears to have fared reasonably well under Thaksin, with GDP growing at about 6% a year, exports running at around $110 billion, and inflation low, but rising. Many of the reforms that were put in place by his predecessor, Chuan Leekpai, following the Asia crisis – including the sale of company assets, bank restructuring and writing-down non-performing loans – set the stage for Thailand’s growth.
Populist tendencies
Although the painful reforms made Thaksin popular in opposition, in power his populist initiatives have undone some of the good work. For one, Thaksin has extended low-interest personal loans to low-income people in both urban and rural areas, getting them into habits that will hit hard when interest rates start to rise.
“The economy would have done even better without him,” says a former minister. “He is inflicting long-term damage on the fiscal side and to the competitiveness of the economy. He’s encouraging people to spend more and build up debt instead of saving and driving more investment.”
A central bank official agrees that there was “some concern” over the increase in consumer loans and household overspending, and that the Bank of Thailand is “watching it carefully”. But he pointed out that household lending represents only 10% to 12% of total bank lending in Thailand, of which only 2% to 3% was credit card lending.
Market disruption
More problematic, he says, were the government’s attempts to interfere with the market mechanism in recent years, with price supports and export incentives for products like rice and sugar cane, that would benefit its rural support base. “This sort of thing acts as a disincentive to market players,” he says. The incentives led to over-production of rice, which the government had to buy up. “This kind of support can also turn into bad debt,” he says. “It could disrupt the overall macroeconomy.”
Awards of contracts in education and infrastructure to companies “related to the government” have also increased opposition to Thaksin’s proposed mega projects. These involve investing over $50 billion in public works, including roads, public transit, and a new international airport. The roll-out of these projects has been delayed by opponents who think the projects might be awarded unfairly, and this has in turn delayed building infrastructure needed for economic growth. “We have to resolve the transparency issue quickly,” says the central banker.
Robert Penazola, chief executive of Aberdeen Asset Management Thailand, which has $1.6 billion invested in Thai securities, says that the delay in awarding the projects has worsened the outlook for some key Thai companies, resulting in a “lacklustre” 2006.
Investor caution
“Business and consumer sentiment is likely to remain soft ... until a clear picture emerges of who’s going to run the Thai government and what policies will be in place,” he says.
The unfolding political crisis has also made investors cautious about investing in the Thai stock market. But, adds
Penzola: “We like Thailand longer term,” pointing out that now is a good time to buy cheap Thai stocks, particularly companies that export to China, the US and Japan. Aberdeen’s Thai Fund returned 10% in the first quarter of 2006, compared to 2.73% for the Thai stock exchange.
One worry for Thaksin’s critics is the influence he may continue to exert over Thailand’s politics – especially given the strong links the leader forged between business and government: “I think he has just stepped away to wait for things to cool down,” says the ex-minister. “He is by no means gone.”
In the April 19 Senate election, Thai Rak Thai won more than half the 200 seats. “He had a majority in parliament when he resigned,” points out the foreign consultant, predicting that many beneficiaries of his patronage within his party and the Senate will continue policies that serve Thaksin’s business interests. “Whether he stays or goes, he will pull the strings for a while yet.”