Continuing Unrest Could Undermine Thailand’s Economy

International New York Times | 30 Jan. 2014

Thailand's continuing political unrest is taking an economic toll as antigovernment protesters occupy streets in Bangkok's central shopping and business districts. Wally Santana/Associated Press

HONG KONG — Thailand’s economy tends to bounce back vigorously from the coups, street protests and natural disasters that trouble it every few years. This time, however, could be different: As the nation’s once buoyant growth is slowing, investors and businesses are growing increasingly frustrated with the current political gridlock.

The unrest comes just as investors are pulling their money from emerging markets worldwide. Turkey, Ukraine, Argentina and other economies are reeling from the end of cheap money as the United States Federal Reserve dials back its bond-buying stimulus program.

“Back in 2010, Western investors were ready to buy almost anything Asia-related,” said Frederic Neumann, a head of Asian economics at HSBC. “Now, they are asking a lot harder questions and are a lot less tolerant of political uncertainties.”

The disaffection with Thailand, a hub for tourism and multinational company headquarters in this region, stems from a years-long power struggle between supporters and opponents of Thaksin Shinawatra, who was ousted as prime minister in a 2006 military coup. Street protests that began in Bangkok in November have escalated, and last week, the government declared a 60-day state of emergency for the capital and surrounding areas. An election on Sunday is almost certain to be won by the governing party but is unlikely to resolve the infighting.

The risk for Thailand is that investors will choose to send their cash to other places, like neighboring Myanmar, which is emerging from five decades of military dictatorship, or the buoyant Philippines. The Thai stock market has fallen more than 10 percent since November and concerns are growing that tourism will fall, companies may not locate in Bangkok and ambitious infrastructure projects will be delayed.

Many companies, already wary of slowing growth in Thailand, have scaled back their advertising budgets and delayed product introductions in recent weeks. The Thailand chief of Toyota, which manufactures more than 800,000 cars a year at its sites in Thailand, warned this month that the company might have to reconsider its plans to invest 20 billion baht, or about $600 million, in the country if the political unrest persists.

“We’ve seen a slowdown across all sectors, both from international and local companies,” said Wannee Ruttanaphon, president of the Media Agency Association of Thailand. With sales at many companies slow this month and expected to be weak next month, “They are adopting a wait-and-see approach.”

Developers have held off putting new properties on the market this month, and sales of condominiums in central Bangkok have slowed. “We’re still doing business and getting inquiries for office space rental, for example, but things have slowed down,” said James Pitchon, executive director at the real estate firm CBRE in Thailand.

Hotel and flight bookings to Bangkok have plummeted as the weeks of turmoil have stretched into months, prompting governments around the world to advise their citizens against travel to the city, and dealing a severe blow to one of the world’s most popular tourist destinations. To make matters worse, the protests and casualties have coincided with the peak travel season around Christmas and the Lunar New Year, which begins Friday and usually brings an influx of travelers from China and Hong Kong.

“Usually, flights to Bangkok, or just about any popular destinations, before Chinese New Year are very full,” said Cloris Yip, an agent with Jolly Holiday, a travel agency in Hong Kong. “This year is a different story. Right now we have zero bookings to Bangkok, and even though people still go to Phuket, many of them insist on direct flights to avoid connecting flights at Bangkok.”

During the past crises — among them unrest that left more than 90 people dead in 2010 — these sectors recovered swiftly. Tourists were badly spooked by the bloodshed in 2010, but quickly returned once calm was restored. Total visitor numbers that year were 12 percent higher than in 2011, and the Thai stock market ended the year more than 40 percent higher.

Four years ago, during the last spasm of unrest, stimulus measures around the globe helped spur not just robust export growth, but also firm demand within Thailand as consumers took advantage of low interest rates and tax breaks to stock up on electronics, cars and other goods. The political troubles were quickly forgotten, as Thailand enjoyed growth of 7.8 percent, its fastest pace in more than a decade.

“We can survive only until the end of the first quarter,” said Sisdivachr Cheewarattanporn, the president of the Association of Thai Travel Agents. “But if things get prolonged until the second quarter, we will all be dead.”

The current crisis comes at a tougher time for Thailand’s economy than most of the country’s previous bouts of unrest: Thailand’s recent growth momentum is waning. And the turmoil is causing big delays to the public investment plans and economic overhauls that many economists say Thailand urgently needs to secure future growth. “The starting point of the economy was already quite weak before the current turmoil began,” said Euben Paracuelles, Southeast Asia economist at Nomura.

One effect of the stimulus efforts, however, has been that households are now significantly more indebted, and less able to splurge on goods, than they were just a few years ago. The political turmoil and much-reduced revenues from the tourism sector — which accounts for about 7 percent of the economy — have further dampened confidence among both consumers and businesses. Even if the turmoil was resolved quickly, consumer spending would be unlikely to rebound as rapidly because of the household debt, Mr. Paracuelles said.

The backdrop of the global financial markets has also changed. Investors are factoring in the prospect that the Federal Reserve will further scale back the huge bond purchases that helped keep interest rates low worldwide in recent years. The prospect of higher rates in the United States has made it less attractive for investors to seek out returns in emerging markets, and undermined a crucial driver of capital inflows into places like Thailand.

All of this means that state-driven investments and economic overhauls have become more important for Thailand’s ability to shore up growth and preserve its competitive edge within Asia. Plans to roll out antiflooding projects and spend 2 trillion baht on high-speed rail lines and other infrastructure projects were approved by Parliament last year. The political bickering means that many months are likely to pass before construction gets underway.

“Amid all the uncertainty we have in Thailand right now, one thing that is certain is that the infrastructure projects will not get going until late this year at best,” said Santitarn Sathirathai, an economist who covers Thailand at Credit Suisse, and who recently lowered his growth forecast for this year to 3 percent from 4.5 percent.

All this has many economists worrying that the impact of the current turmoil could last much longer than that of previous crises. The longer the infrastructure projects and measures to improve productivity among Thailand’s rapidly aging population are held up, economists fear, the more Thailand risks losing out to some of its regional neighbors.

“Myanmar is opening up, Indonesia is making progress on infrastructure, and you have the Philippines, which is a real bright spot in the region right now,” said Mr. Paracuelles, the Nomura economist. In the long term, he said, “Thailand risks losing its international competitiveness. That’s the real worry.”

Back in Bangkok, Mr. Pitchon, the real estate executive, said he had not seen any businesses leaving the city yet, even though inquiries from companies seeking to establish a presence in the city had slowed. Thailand is a very resilient place that is used to turmoil, he said. But, “The longer this goes on, the more worried people get.”