Political worries cloud Thai economy

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Political worries cloud Thai economy  
By Gavin Stamp
Business reporter, BBC News  



Thaksin Shinawatra's business affairs have caused controversy
The coup attempt in Thailand is likely to bring further difficulties for an already faltering economy.

After the Prime Minister declared a state of emergency, the Thai baht fell sharply against the dollar as investors bought the US currency to protect themselves from further instability and volatility.

Stock, bond and currency markets are likely to be extremely nervous about the unfolding situation, especially in light of the political uncertainty of recent months, analysts said.

It is too early to say what the outcome will be and whether Thailand's troubles will have an impact on other economies throughout South-East Asia, analysts added.

"This is not going to bode well for investor sentiment but people will need to see a clearer picture to react properly," said Michael Every, a strategist with RBC Capital Markets.

Tsunami effect

Earlier this month, the Asian Development Bank downgraded Thailand's growth forecast for 2006 and 2007, citing "political uncertainty, higher oil prices and rising interest rates".

It believes the Thai economy will grow just 4% this year, lagging behind its regional rivals such as Malaysia and Indonesia and some way off the 7% growth forecast for the whole of Asia.

Ironically, Thailand's economy was beginning to recover from the body blow of the 2004 tsunami earlier this year when political problems began to hinder its performance.

The 2004 tragedy was a major setback for the Thai economy, severely hitting tourism in the south-west of the country, one of country's major sources of revenue.

It had a dramatic effect on economic performance, knocking back growth in 2005 to its lowest level since 2001.

As tourists returned to Thailand at the end of 2005, the economy began to pick up, seeing growth of 5% in the second half of the year.

But the economy has found itself increasingly hampered by rising inflation and falling investment, something which the government has struggled to deal with.

Oil and inflation

Like many Asian economies which are major oil importers, soaring global oil prices have hurt Thailand.

Inflation, driven by rising energy costs, accelerated last year to 4.5%, its highest level in seven years.

When the government reduced fuel subsidies in July 2005 - in order to save it more than $2bn a year - pump prices rocketed.



Tourism has steadily recovered after the 2004 tsunami

The effects were quick to filter through and overall consumer prices rose by an average of nearly 6% in the first half of 2006.

Concerns about inflation prompted the Bank of Thailand to raise interest rates four times in the first half of 2006.

At the same time, the country's public finances have been deteriorating.

Thailand's trade balance swung into deficit in 2006 for the first time since the Asian financial crisis of 1998 as costly fuel imports also forced its current account balance into deficit as well.

The Thai government's attempts to kickstart its economy this year have been hampered by the ongoing political uncertainty that was sparked by the Prime Minister's business dealings.

Prime Minister's Thaksin Shinawatra's decision to sell his family's investment in telecoms company Shin Corp to a Singaporean business last year was hugely controversial and sparking widespread protests.

April's annulled election and uncertainty about next month's planned poll have hit both domestic and foreign investment, while consumer confidence has dropped.

Budget hiatus

Thailand's caretaker government in place since Spring has been unable to pass a budget for next year, the prospect of which is now receding further.

This hiatus has had a major impact on economic prospects since ministers were looking towards a series of multi-billion dollar construction projects to boost the country's economy.


Soaring oil costs have hurt Thailand

About $42bn was earmarked for schemes to build new roads, housing, schools and boost water resources, many of which now must be in doubt.

Attempts to privatise mainly state-owned companies, a cornerstone of Mr Thaksin's economic policy, have also begun to founder.

The sale of $800m in shares in EGAT, the state electricity generating firm, were abandoned after protest by unions and consumer groups.

Drinks firm Thai Beverage was also forced to abandon a $1bn flotation on the stock market after protests from anti-alcohol groups, a development which eroded confidence among foreign investors.

Although Thailand continues to see strong export growth and has high hopes for a free trade agreement with the US, most observers believe its economy is facing challenges needing stability if they are to be solved.

"For Thailand generally and the region as a whole, they are very vulnerable to global economic trends," said Wesley Fogel, an economist with Lombard Street Research.