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Thai political unrest: impact of emergency on economy
In all human affairs one notices, if one examines them closely, that it is impossible to remove one inconvenience without another emerging.
- Niccolò Machiavelli, Florence, 1517 
I have never seen a situation so dismal that a policeman couldn’t make it worse.
- Brendan Behan
Since our last update, which was published just as the ‘Bangkok Shutdown’ began, the situation has developed considerably both on the streets of Bangkok and in the financial markets.
On Tuesday 21st January, the caretaker cabinet imposed a state of emergency on Bangkok and outlying areas, effective for 60 days. This gives the authorities power to impose a curfew, limit people’s movement, as well as censor the media.
On the face of it, this seems like a drastic measure in the long-running battle between the government and protesters. Government officials have stated that they have no plans to crack down on protestors, as yet, but merely wish to unblock access to government offices and banks.
Even before the state of emergency was announced, there had been a strong outflow of capital from Thailand, prompting the cost of protecting the kingdom’s debt to soar. Wells Fargo, for example, has removed over USD 4 billion from Thai stocks on bonds since 31st October of last year. Pacific Investment Management Co., Goldman Sachs Group Inc. and Kokusai Asset Management Co. had already reduced their holdings before the protest movement took hold in late October – although the multi-tiered relationships of some of these providers with Thailand make this a more complex series of simultaneous transactions than it may appear at first sight.
As of 20th January, global funds had sold USD 2.8 billion more local stocks than they had bought and a net USD 1.4 billion worth of bonds since 31st October, data from the stock exchange and the Thai Bond Market Association show. 
The BoT’s monetary authority meanwhile has reduced its 2014 growth forecast from 4.8% to around 4%, suggesting the unrest will hurt investment and business confidence. On 16th January, Thailand’s finance ministry cut its prediction for the second time in a month, reducing it to 3.1% after lowering it to 4% from 5.1% on 26th December.
Credit-default swaps insuring Thai debt against non-payment for five years rose to 160 at one point on 20th January, according to CMA prices, hours before the government’s emergency declaration. That was the highest since June 2012. Since the protests began, the price has increased by 53 basis points – fellow ASEAN members Indonesia and the Philippines have seen increases of 30 and 19 points, by comparison. One senior analyst at European financial group Nordea suggests that Thailand’s debt may reach 200 – the highest point since November 2011.
Debt in US dollars sold by Thai companies has made a loss of 1.2% loss since the protests began in late October, according to JPMorgan Chase & Co.’s Asian Credit Index. This means that Thailand is the region’s worst performer after Indonesia.
There is concern that some banks in Thailand are getting into financial difficulty: staff at the state-owned Bank for Agriculture and Agricultural Co-operatives (BAAC) wore black clothes to work at the bank's headquarters on Monday, as a symbol of opposition to a rumour that senior managers are considering using the bank’s liquidity to finance the government’s THB 270 bn rice-pledging scheme.
Of the bank's THB 180 bn worth of liquidity, it needs to maintain reserves worth THB 60 bn, in line with the Bank of Thailand's capital-adequacy ratio. Another THB 80 bn is reserved for lending to farmers and the remaining THB 40 bn is for deposits.
On Wednesday, the caretaker government was cleared to take out a THB 130 bn secured by the BAAC, which raises concerns about other government-owned or partly-government owned banks, should they be coaxed into similar agreements.
As far as the state-owned and the smaller banks are concerned, it is never easy to assess their actual health. MBMG favours the strongest, largest institutions, noting that investor protection rules in Thailand guarantee a THB 1 million deposit insurance per person, per bank.
The value of the baht against the US dollar fell 5.6%in the period and touched THB 33.08 to USD 1 on 6th January, the weakest since February 2010. The Thai stock exchange, (SET) on the same day reached its lowest point since August 2012 and a 15% drop since 31st October of last year. A recovery has taken place, however, of around 5% by the time the markets had closed on Tuesday.
There has been talk of the baht being falling to THB 36 to USD 1 or even weaker, as well as the SET dropping further in value. For this to happen, it may require a major event to occur. To paraphrase an old adage: a week is a long time in politics… and an even longer time in Bangkok’s capital and currency markets!
With prices relatively low – and even if the currency and stocks were to weaken to the levels of the most pessimistic forecasts – this could be seen as a time of opportunity or of risk. We’re talking to many clients about this at the present time – please let us know if you’d like to know more.
This pessimistic mood hasn’t been lightened by the perceived bias and over-dramatising of the situation in foreign media coverage. In a recent event held by the Foreign Correspondents’ Club of Thailand, foreign journalists came in for some criticism, notably the BBC and New York Times correspondents. One measure of overseas perspectives was when a foreign visitor asked a Bangkok-based journalist on social media, “What time does the curfew start?” despite the fact that no such restriction has been imposed yet.
One indication of the current situation is that Thailand’s sovereign credit ratings haven’t altered since the blockades began. They remain at BBB+ with Standard & Poor’s and Baa1 at Moody’s. Despite recent events, according to one Moody’s analyst speaking last week, there is very little chance of their rating changing.
Broadly speaking foreign governments’ advice since the state of emergency was declared has been merely to stay away from political rallies and large gatherings. That said, the government of the United Arab Emirates has advised its citizens against all travel to Thailand since before the Shutdown began.
As for tourism, Chidchai Sakornbordee, chairman of Thai Tourism Business Association told the press that the invoking of the emergency decree could cost the sector about THB 10 bn in lost revenue. Around 30 flights to Bangkok from China and at least 10 flights from Russia had been cancelled, he said. Judging by the discounts Bangkok hotels are offering, there could potentially be some great deals around the long weekend of Makha Bucha festival on 14th February.
By MBMG Advisory
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