Emerging Markets: Thailand prepares to see if it has mended rifts

Emerging Markets, May 6 2011

Thailand will dissolve its parliament next week, setting the stage for a July election that will judge whether the government has succeeded in tackling the issues that led to violent protests last year.

Areepong Bhoocha-oom, Permanent Secretary of the Ministry of Finance, told Emerging Markets that the final cabinet meeting had taken place on Tuesday and that formal dissolution was waiting on the signature of the country’s king, who is in hospital. Once parliament is dissolved, the election will take place in 60 days, suggesting early July.

“Up to now the main issue is about the wealth of the people and inequality of income,” Mr Areepong said. “The government is attacking this issue to narrow the gap.” He said that specific measures included reducing the influence of loan sharks so as to lower people’s debt burdens, and widening the country’s social safety net. “We have about 40 million people in the labour force, but only 10 to 15 million – not more than 30% – are in the system” of unemployment benefits and retirement funds, he said. New laws aim to broaden coverage of social security.

He also highlighted development of microfinance to increase financial inclusion, and investment in irrigation to support the country’s farmers who were the backbone of last year’s protest movement. “A massive amount of money needs to be put in,” he said. “Thailand is already the top exporter of rice; in the future, if we do this, we can do alternative agricultural products and be much more productive.”

The question is whether these measures are enough, or in time, to convince the doubters who will go to the polls in July. “It takes time,” Mr Areepong said. “There are definitely certain groups of people where the message has not got through enough. That’s why there will be an election: we will see how we have done.”

While Thailand has had a volatile time socially, its finances have rarely looked better and it remains well-regarded by foreign investors. Its stock market was up 34.3% in the 12 months to May 3, the best in the Asian region and the best of any significant market worldwide bar Argentina. Thailand grew 8% (Areepong refers to “real growth” of 9.7%) in 2010 – the year that included much of the unrest – while both FDI and foreign portfolio investment have remained strong. As a food exporter Thailand was on the right side of commodity price rises, although oil price hikes have had to be insulated through a subsidizing oil fund. Also, crucially for Thailand, tourist numbers have revived. “If this peace keeps going on, this year we will register good growth,” Mr Areepong said.

The oil fund is not, though, a sustainable measure in its current form. “At inflationary times, this kind of mechanism is helpful,” Mr Areepong said. “But the fund will run out if this keeps going on. Hopefully by that time the Middle East will settle down and the oil price come down.” If not, he said, a task for the new government would be to tackle that issue. “We have started saying the price will have to reflect costs more.”

Oddly, analyst attention on Thailand has focused less on the election, or Thai-Cambodia border conflict, than the Japan tsunami. Thailand’s automotive industry is closely linked with Japan’s. Nomura analyst Tomo Kinoshita said he had worked out a simulation of the impact of a 50% reduction of automobile production by Japanese auto manufacturers in the second quarter and found that real GDP would be cut in Thailand by 1.3 percentage points if it happened. Mr Areepong acknowledged that car manufacturing would be hit, and that a previous target of producing two million cars this year would not be met, but expected to produce 1.8 million nevertheless.