Vital Time


Economic News

22 Jul 2010
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A new wave of protests threatening Thailand's political stability is also at risk of undermining the country's economy, with the possibility that the ripples could erode the gains made by key sectors.

On August 29, the government of Prime Minister Abhisit Vejjajiva invoked the Internal Security Act (ISA), legislation designed to allow officials to block the staging of public demonstrations, to prevent supporters of former premier Thaksin Shinawatra, the so-called "Red Shirts", from holding a rally in Bangkok's Dusit district the following day.

Though the provisions of the ISA were lifted on September 1, the government says it will reimpose them if the United Front for Democracy Against Dictatorship (UDD) goes ahead with plans to call further protests calling for new elections leading up to September 19, the third anniversary of Thaksin's overthrow by the military after his administration was engulfed in allegations of corruption.

According to the deputy prime minister, Suthep Thaugsubhan, the situation would be closely monitored.

"Whenever the government views that the movement will create chaos, the prime minister can call for an urgent meeting to impose the ISA," said Suthep, whose responsibilities include security affairs, told local media on August 31.

While the prospect of further protests could weaken the government's position, experts also believe that the possibility of renewed unrest will have a very real impact on the economy.

Addressing a conference in Bangkok two days after the ISA was activated, James McCormack, the head of Asia-Pacific sovereign ratings at Fitch Ratings, said Thailand's political crisis could hamper the economic recovery.

With Fitch having lowered Thailand's sovereign credit rating by one level to BBB and its local currency rating to A- soon after a round of protests in mid-April, McCormack said the economy could be subject to further political setbacks.

"In terms of structural issues, for us it goes back to politics," he said. "We just don't think it's fully or completely resolved in Thailand. For the rating to move back up, we would need to see a meaningful medium- to long-term solution to the political issues that we see in Thailand. We don't think we have seen that yet."

There have been indications that Thailand's economy is strengthening. Though manufacturing production fell 7.3% in July, this was the lowest rate of contraction for nine months, while the decline in both exports and exports is also easing.

Analysts are predicting the Thai economy will contract by between 3% and 3.5% this year, before posting modest growth of around 1% in 2010. However, for that to happen consumer and investor confidence need to be shored up, which is unlikely to happen in a climate of political turmoil.

The spectre of renewed political disturbances could cast a long shadow over the country's already embattled tourism industry, which saw overseas arrivals plummet after Bangkok's airports were occupied by protestors. It suffered another dip in April, when antigovernment rallies caused the cancellation of a summit of Asian leaders.

The airport closures added to the woes of the sector, which has seen arrival numbers drop by 15.5% to 7.7m in the first seven months of the year compared to the January to July period in 2008, though industry leaders said there had been a rise in bookings as of late July.

This improvement could be short lived if politics spill over into the streets, as was highlighted by Suthep at his press conference, with the deputy prime minister saying that businesses in the sector, "neither want to see military personnel on the streets nor the Red Shirts burning the city".

There are also concerns that a surge of unrest could delay or even derail the government's economic stimulus programme, which foresees the state spending $40bn, much of it directed towards infrastructure projects.

On September 1, Panithan Wattanayakorn, a senior aide to Prime Minister Abhisit, said opposition groups were looking to destabilise the government before the effects of the stimulus programme were felt.

"This month and the next one will be crucial for the government's survival because the Red Shirts will try to fault and topple the government before the economic recovery starts to kick in," he said.

Political tensions are expected to peak around September 19, the anniversary of Thaksin's removal from office. This tension will be compounded by the fact that his successor will be out of the country, with Abhisit attending the opening session of the UN in New York, as Thaksin was doing three years before when he was overthrown.

Politically and economically, September could be a critical month for Thailand.

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