The Global Rail

March 19, 2010

The current political crisis in Thailand has its roots in the country’s economic structure.  Unless the country’s governing institutions become more durable, internal tensions could cross-over and affect the country’s markets and export infrastructure.

This week, approximately 100,000 “red shirt” protestors took to the streets in Thailand to demand a new government.   It is the latest installment in a prolonged political battle since a new government was installed by military force in 2006.   The main players in the battle are “red shirts,” a group of rural, relatively poor seeking a return to the previous administration and “yellow shirts,” groups representing the views from more prosperous Bangkok.

The Thai stock market seems to be in another, separate world.  Its performance has been resilient amidst these protests.  Since the date on this post, the Thai stock market has risen in 6 straight sessions, increasing its value by more than 7%.   “Crisis is opportunity,” a confident market trader in Bangkok was quoted as saying this week by Bloomberg.

These two separate worlds communicate 2 different, conflicting messages.  The prolonged protests without resolution communicate instability and uncertainty.  The markets communicate confidence and optimism.

The roots of the current political crisis are found in economics that extend farther back from the military coup in 2006 to before the financial crisis of 1997.  Through the early 90’s Thailand was the economic beneficiary of cold war chess.  With its neighbors darkened by the shroud of Soviet-styled communism, Thailand became one of few choices in the region as an export base.  Thailand became an export leader in the region, and was commonly referred to as a tiger economy.  It benefitted from U.S. aid in order to stop communist expansion.  As a result, its economy rocketed along, with the capital city of Bangkok receiving the lion’s share of that growth, prior to a crushing currency devaluation that sparked the Asian financial crisis in 1997.   Since the military coup in 2006, Thailand’s economic growth has underperformed the regional average.  Using data from the World Bank to compare Thailand with neighboring countries, Thailand’s average annual growth rate in that time has been 3 points less than the regional average of 5.6%.   For Thailand, that figure approximates a GDP economic growth gap of $8 Billion lost.  That gap is primarily due to a loss in domestic consumption.  Export levels have maintained solid growth rates above the regional average, but its rate of import growth was among the worst regional performance this past year.   Not much roar in the tiger of old.

This growth gap represents increased income inequality in the country, fueling the current political stalemate.  On one side are the “red shirts.” They are comprised of mainly rural, relatively poorer, who make their living in agriculture.  They favor a return to the Thaksin administration, whom they voted in power and who was overthrown in the 2006 coup.   Living in exile since, Thaksin is the main source of continual motivation for this group who is staging this week’s protests.   The group of “yellow shirts” are the other side of this stalemate.   Comprised of the more urbane, educated residents of establishment Bangkok, with their group of “yellow shirts,” backing the current prime minister.

The current economic situation suggests reasons for the divergence between market performance and political impasse.   The underlying optimism of the Thai stock market is externally driven, buoyed by a healthy export growth and a gradually improving economic picture in the US, one of its largest trading partners.    The political tensions are stoked by slower domestic growth and widening economic inequality.  But there are signs these two worlds may collide.   As just one sign, Thailand’s foreign direct investment – a key engine of future export growth – has declined for 3 straight years.  This is not the case for Thailand’s neighbors.

Thailand’s governing institutions stand at the bridge between these two worlds.  They are currently fragile.   As a reference point, Thailand has had 17 constitutions since 1932 (see this chart).  The current constitution is 3 years old.  Between 1971 and 1992, Thailand experienced 7 coup attempts (see a timeline), most of them successful.   Thailand’s government history is pendulum that swings from democratic attempt to autocratic rule.  After a brief respite, the tennis match has begun anew.  While the near-term focus remains on the resolving the current crisis, it is the longer-term vacuum of durable institutions that poses the greater risk.   Without it, the increasing risk premium for the country – fast money or slow – will divert dollars away from Thailand to now emerging alternatives.

If you are an investor, in the market or in assets on the ground, don’t be tempted into the blind optimism of others.  Be cautious and look to the durability of the country’s institutions as a guide to its future.