ASEAN’s Lost Leader

A regional leader four years ago, Thailand’s ranking has slipped, but investors seem unperturbed

"As the Thai military engaged in sporadic armed clashes across Bangkok in May, business at Thailand’s large industrial estates on the eastern seaboard surged."  

Since the September 19, 2006 coup that ousted then-Prime Minister Thaksin Shinawatra, the perception of Thailand as a regional leader has deteriorated, helped in no small part by a string of domestic debacles including Suvarnabhumi, Pattaya, and Bangkok’s recent demonstrations.  Thailand, domestically-occupied, has appeared less internationally assertive since these crises began. 

At a time when the Obama administration has sought to rebuild US relations in South East Asia, PM Abhisit skipped a recent Nuclear Security Summit in Washington, DC as the conflict intensification in Bangkok.  Instead, Foreign Minister Kasit attended, staying long enough to make controversial off-the-record comments regarding the monarchy during a speech at Johns Hopkins SAIS.  Other initiatives launched by Bangkok stalled under the previous military administration.  A regional grouping of Thailand’s neighbors intended to boost development in Cambodia and Laos stagnated.  

Thailand’s loss can be seen as other South East Asian states’ gain.  Indonesia’s thriving democracy is attracting ever-increasing attention from the United States.  Just five years ago Thailand’s clout in ASEAN allowed it to persuade Burma to pass on its ASEAN Chairmanship, currently held by Vietnam. Today, its ranking in the regional hierarchy has slipped. 

The effect of domestic political instability and a foundering international perception of Thailand’s economy is not always clear.  As the Thai military engaged in sporadic armed clashes across Bangkok in May, business at Thailand’s large industrial estates on the eastern seaboard surged.  

Car sales increased 60 percent over the previous year as fires coursed through Bangkok’s banks and shopping centers.  External demand for Thai exports supported over six percent economic growth throughout the crisis and the first half of the year.  Despite tumbling numbers of foreign visitors to Thailand, growth held steady.  Investors bullish on the Thai economy have helped the Baht perform among the best of all Asian currencies.  

Not all indicators of Thailand’s political and economic health have been quite as upbeat.   

Thailand has fallen ten places in the World Economic Forum’s Global Competitiveness Index since the 2006 coup, mainly due to declining ratings of social unrest and political stability.  While the absolute fall may not seem extreme, Thailand, now 38th, has certainly lost relative standing compared to regional neighbors like Vietnam, which surged from 75th to 59th in the last year, following Indonesia’s leap from 54 to 44th.

Political crisis has undoubtedly hurt Thailand economically;  the 2008 airport closure shaved three percent off nominal GDP alone.  The country also suffers from suppressed levels of consumer and business confidence.  Yet the level of foreign direct investment (FDI) into the country has remained steady at between US$7-9bn annually since Thaksin’s military ouster.

Thailand’s political neuroses can seem to have little impact on economic indicators.  Examining the time horizon of investments and long-term sensitivity to risk may help to reconcile the yawning gap between Thailand’s politics and economy. 

Supply chains which incorporate Thailand’s industrial and automotive manufacturing sector were established during times of political stability and are difficult to alter in the short term.  Investors with a low appetite for risk halted construction of new facilities following the 2006 coup and 2010 protests, but a developed sector remained in place.   So far, firms have seemed willing to endure occasional crises and increasing political risk. Violence by protestors has also been directed at banks and commercial retail destinations far removed from export production centers.  Should the level of political risk continue to rise, or should damage occur to facilities which operate as part of supply chains, investors would certainly reassess their positions in Thailand and would likely alter physical capital investment to other locations.  The effect of that slow draw down on export growth, coupled with weak domestic demand and a lack of other competitive industries with growth potential, would result in anemic future growth.  

A government preoccupied with domestic instability runs the risk of distraction, but also has the potential to undermine future growth.  The 2007 constitution, written under military administration, outlined new benchmarks for businesses operating in the country.   

In December 2009 Thailand’s Supreme Administrative Court upheld a ruling suspending industrial projects at the Map Ta Phut industrial zone for failing to comply with environmental and health impact assessments – affecting both PTT Group and Siam Cement, the country’s largest energy and industrial conglomerates respectively.  It is such incidences, alongside the unfolding constitutional dispute over 3G licensing that has undermined the ‘security of expectations’ that Thailand can offer investors. 

The current administration’s continued preoccupation with Thaksin has lead to a deterioration of investments across borders as well.  In a move seen by many as a rejection of Thaksinite policies, Foreign Minister Kasit announced last year the termination of a Memorandum of Understanding between Thailand and Cambodia.  The agreement authorized joint oil and gas exploration and development in a section of the Gulf of Thailand disputed by both states.   Clearly, past domestic spats are having international consequences.

Thailand’s economy, ultimately, is operating on borrowed time.  Political stability and a booming economy in the early 1990s and the first half of this decade were central to long-term investment projects that continue to buoy Thailand’s economic growth.  This sector has also paradoxically been one of the least-affected by the recurrent and often-violent political strife which has continued to play out in Bangkok.  

The World Bank recently noted that the Thai economy runs on one engine: exports driven by external demand.  This engine thus has two characteristics.  It is detached from domestic political affairs, and it has a long-term investment horizon.   Because of this disconnect, Thailand’s beleaguered political system seems to have surprisingly little effect on macroeconomic indicators.  The question though, is how long Thailand can continue to operate with ever-increasing levels of political risk and continue to attract renewed investment based on manufacturing for export?  If firms decide that regional players with more stable political conditions—such as Vietnam—are safer investment destinations, then Thailand will be left with sagging domestic demand and a battered tourism industry. As regional economies become more robust, Thailand may also miss out on a rising tide of intra-ASEAN investment. It is always difficult to estimate just how long the short-term is, and how soon investors will decide to seek greener pastures or avoid initial investments entirely.  

For Thailand’s current administration, this pressing question takes precedence. BRT

This article first appeared in Business Report Thailand, Issue 1, special focus report on 'Thailand's ASEAN Economy', October 2010.