As Thailand slips into the seventh month of political protests, Prime Minister Yingluck Shinawatra has been found guilty of abuse of power this Wednesday, and has been ordered by a court to step down. What does this all mean for the markets, and economy, of the ‘Land of Smiles’?
For markets, the immediate impact was negligible. The SET Index (Thailand’s stock exchange) took the news in its stride, edging down by only 0.1%; this is due to the fact that Shinawatra’s Cabinet have not been ordered to follow her, giving investors hope in political stability (prior to the news, stocks fell by 1.1% in fear of such an outcome). Following this trend, the Baht barley moved (stabilising at 32.37/US$).
With the Cabinet still in place, at least for now, the sting has been taken out of the blow to supporters of the ex-Prime Minister. This is very important, as how the turmoil evolves will have a significant bearing on the short-term future for ASEAN’s second-largest economy. Up to this point, whilst fierce, it has largely consisted of peaceful protests, pitting the middle class (and royal establishment), against the poorer, rural class (who support Shinawatra following cheap healthcare and loans). If this turns into a violent situation, investor confidence will inevitably plummet – though analysts see such an outcome as unlikely, at least for now.
However, as Tim Condon points out, markets seemed “comfortable with the political situation” before the ousting. This was due to a relatively stable, and predictable, caretaker government led by Shinawatra, which had most of its powers stripped. Whether this will continue, until elections set for the 20th of July, is unseen, which has left many investors hedging Thai assets whilst they reassess positions (though, as of yet, this impact has not amounted to much).
In fact, as data from Thomas Reuters highlights, there has been an inflow of capital into Thailand, in spite of the political crisis; March and April alone saw gains of $932mn. But this masks a deeper trend of falling confidence in the Thai market, and over the past year the SET Index shed 11% of its value. Following this, some have begun to see Thailand as the “sick man of the region”. Whilst Thailand has overcome challenges before, with ‘business-as-usual’ a defining aspect of the country during unrest, current turmoil is amid a larger trend of falling competitiveness for the economy.
Although foreign direct investment has been falling amid the turbulence, many see this as linked to just that; in fact, as research published by the World Economic Forum illuminates, this is not the case. Thailand’s advantage used to be in low-cost manufacturing, but neighbours such as Laos, and Myanmar, are eroding this. Alone, this does not spell doom for the country, though the lack of indicators of a move to higher-productivity output do. With an education and infrastructure investment deficit, along with poor institutional mechanisms, Thailand is simply not ready to move beyond its traditional sources of income.
How does the political crisis tie into this? Whilst not the cause of such challenges, it certainly does not help; markets from real estate to golf have seen material impacts of such uncertainty arising from the disorder. More important though, is the test of confidence for investors and businesses alike, which could project into the longer-term. Institutional investors, such as Calamos Investments, have been prompted to reduce exposure in Thailand, and growing opportunities in neighbours could make the move a permanent shift. Adding on to this is a lack of confidence in the government by Thai citizens, and this will not cease when one side ‘wins’. The impact of this can be seen in recent developments regarding the country’s 200,000 tonne rubber stockpiles; with authorities wanting to sell them (as their value is plummeting), rubber farmers are instead demanding inaction – costing the government, and putting its ability to govern into question.
On face value, the ousting of Shinawatra may not change everything; indeed, the situation is very complex, and animal spirits can often be erratic. However, the underlying trend of Thailand’s competitive-spiral cannot be ignored. Whilst protestor’s pursuit of political gain may prove fruitful, the lack of attention to institutional factors may eventually lead to the country’s downfall. What happens over the next few weeks will be a deciding factor in whether this is countered.