Markets fear weak Thai government

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Markets fear weak Thai government

Analysts anticipate a cautious coalition after upcoming elections, but the removal of capital controls is on the cards

A weak coalition government is likely after Thailand’s general election on December 23, analysts have told Emerging Markets. This could jeopardize sustained economic growth, but foreign investors may receive a short-term boost if capital controls are removed.

“The next coalition government will not have the power, mandate, efficiency, or coherence to enact proactive and sustainable economic policies,” predicted Cem Karacadag, Asia economist at Credit Suisse.

That said, the very formation of an elected government will “be a net benefit, at least if the government does not actively pursue a backward agenda,” he added.

This is the first election since the military coup that ousted prime minister Thaksin Shinawatra in September 2006. Opinion polls suggest Thaksin-affiliated People’s Power Party (PPP) will be the largest in parliament. But its arch-rival, the Democrat Party, led by Abhisit Vejjajiva, will probably win sufficient support from smaller parties to form a coalition government, analysts say.

The formation of a Democrat-led government could encourage foreign investors, according to Sriyan Pietersz, head of research at JP Morgan in Thailand. He believes the party will deliver on a pledge to reverse draconian capital account controls, even in a fractious coalition. These controls were imposed in December 2006 to prevent alleged speculation causing excessive baht appreciation.

“In a coalition scenario, the easiest and quickest option will be adopted, and the removal of these capital controls and abandoning proposed tighter restrictions on foreign ownership are easy ways to boost investor confidence,” Pietersz told Emerging Markets.

The controls forced 30% of foreign investment funds to be locked in central bank accounts for at least a year, and imposed penalties for early withdrawal. The military government also proposed amending the Foreign Business Act to restrict foreign ownership of Thai businesses.

But the next government also needs to address “the arcane laws that discourage competition and corporate mergers and acquisitions, or the quality of education,” said Supavud Saicheua, chief economist for Bangkok-based Phatra Securities, and a former advisor to the ministry of finance.

Political instability and restrictive investment policies have left Thailand’s economy languishing, with GDP growth of 4.5% in 2007, compared with an aggregate of 8.5% for Asia as a whole.. Foreign investor sentiment has been eroded after the imposition of capital controls, consumer confidence is at five-year lows and domestic consumption is stagnant.

Supavud is sceptical on whether either of the two main parties is ready to enact reforms that would bolster Thailand’s export competitivenes, in an environment of baht appreciation and high oil prices. He has based his forecasts for 2008 on “an unexciting acceleration in private investment,” rather than “a leap to 20-30% growth characterized in previous upcycles.”

“This is predicated on the belief that investment will recover largely without much support from policies and reforms initiated by the new coalition government,” he warned.

Both parties share a similar, populist agenda aiming to increase spending on public programmes that would reduce utility costs, increase agricultural subsidies, and boost infrastructure investment.

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