A country with a history of social uprising, Thailand's recent state of political unrest continues to cloud sentiment and dominate the headlines.
Political unrest and instability over the last five years has adversely affected Thailand's economy, particularly foreign direct investment (FDI) levels. The unrest culminated in a coup d'état in May 2014 and the implementation of martial law. The military's primary objective upon seizing power was to restore order, in the hope that investor confidence would rebound. Yet concerns over the junta's repression of political dissent, and rumours of new foreign investment law proposals continue to tarnish the reputation of the country's investment environment.
Here, we look to delve deeper behind the headlines of risk in Thailand and assess the window of opportunity for the junta to steer the country back towards its historical position as a regional economic powerhouse.
The trials and tribulations of Shinawatra
Yingluck Shinawatra, sister of exiled, ousted Prime Minister Thaksin Shinawatra, took office in August 2011 after an election that many Thais hoped would heal divisions that triggered street violence in 2010. Thaksin had been responsible for undermining the alliance that had existed between Thailand's rural poor and the country's elites by favouring policies that benefitted farmers and the working class.
The supporters of these policies for the 'working man' grouped together in the 'red shirt' movement while the 'yellow shirt' movement consisted of royalists, ultra-nationalists, the military, and the middle class.
Yingluck's victory gave legitimacy to the red shirt movement, but ultimately, she and her Pheu Thai party proved unable to unite the country. In a continuation of her brother's populist policies, Yingluck passed tax rebates, maintained unsustainable fuel subsidies and increased the minimum wage. Yet it was Yingluck's controversial rice pledging scheme that would lead to her downfall.
First implemented in 2011, the scheme was designed to buy rice from local farmers at 50 percent above market prices, then to capitalise on Thailand's position as the world's leading rice exporter by stockpiling to push up global prices, before selling the stockpile for increased revenue. The populist scheme had disastrous consequences when the government ran low on funds to support the subsidy and India's rice output stepped up to fill the shortfall. Thailand fell from being the world's number one rice exporter, to the number three position, losing $9.2 billion in revenue as a result.
Weaker European demand for Thai exports, which make up 60 percent of GDP, combined with the beginnings of a slowdown in Chinese economic growth, and the impact of major flooding in 2011, also took their toll. The economic outlook had worsened by early 2014 following months of violent anti-government protests that disrupted Bangkok and threatened business interests. A total of $2.2 billion had exited Thailand's equity markets in November 2013 alone as the protests intensified. This was the bleak economic scenario confronting the military in May 2014.
A window of opportunity?
For a country relying on its agricultural and manufacturing exports and grappling with a fuel subsidy programme that had cost the Yingluck government around $15.6 billion, the collapse of global oil prices has given the junta a short window of opportunity for meaningful economic reform.
In addition to boosting output and lowering import costs (around 85 percent of Thailand's crude oil use is imported), the low oil price can allow subsidy restructures, which in turn can free up funds for vital infrastructure projects. GDP growth, if the junta commits to reform, could rebound to 4-5 percent.
Energy policy reform is already underway, with the junta announcing in July 2014 that it plans to boost the State Oil Fund and restructure domestic fuel prices. The existing model, where state-owned monopoly PTT pcl, imports liquefied petroleum gas (LPG) at market price, to resell at a sharp discount domestically, has long been unsustainable, as the State Oil Fund is required to levy taxes to compensate PTT.
Prices of LPG for diesel and household use, and also NGV (natural gas for vehicles) have been lifted by the junta to close the gap between global and local prices, thereby reducing the burden on PTT's finances.
The junta has already moved to shut down the rice subsidy scheme, with the intention of boosting exports. In June 2014 the junta sanctioned a one-off payment of $2.7 billion from state-owned farmers' banks to compensate the 800,000 farmers that had been left unpaid for their rice supplies. Lower oil prices will assist in increasing output, while the rice stockpile of 18 million tonnes will be repurposed. Around 2 million tonnes will be absorbed by global demand, while around 12.6 million tonnes of deteriorating rice may be processed into ethanol as an alternative fuel supply.
There is also growing momentum to boost the country's reputation as an alternative low-cost manufacturing base to China. As China's workforce begins to press for higher wages, and as the government seeks to boost GDP by switching to manufacturing higher-value items, there are opportunities for Thailand to take market share.
Thailand currently boasts the region's largest automotive manufacturing market and is looking to bolster its textile manufacturing. While Thailand's low unemployment rate (on average 1 percent) puts an upward pressure on wages in the medium term, the junta's plans for education reform should ensure an increase in the skilled labour pool that can be utilised in the higher-value manufacturing sphere.
With the restructuring of the subsidies regime, the ending of the rice scheme and diversification into manufacturing, opportunities abound for foreign investors – particularly in the infrastructure sector. Key infrastructure projects in Thailand that had been slated since 2006 had repeatedly been delayed as a result of flare-ups in violence, widening the infrastructure deficit. The junta is now keen to press ahead with core infrastructure spending.
In July 2014, the military-installed cabinet approved a 2015-2022 infrastructure development programme worth $75 billion. Focusing primarily on cross-country high-speed rail and mass transit lines, the programme will also seek to modernise roads, and expand sea and airports.
Early indicators have shown significant investor interest and there are further opportunities as the junta leans toward public-private partnerships (PPPs) rather than raising government borrowing levels to fund the projects. It is estimated that GDP growth will be boosted as a result, and that the upgrades will help attract new foreign investors.
Managing the risks
While there significant opportunities in Thailand for foreign investors, political risks must also be considered. Infrastructure in particular tends to be a politicised sector given social, economic and associated political interest in the cost of basic services such as power and water, and the ability to move freely and at reasonable cost from one location to another.
The junta's examination of the Foreign Business Act at the end of 2014 has worried investors as there are proposals to prevent foreign directors from controlling joint venture firms that are majority-owned by Thai shareholders. Such changes could have repercussions for infrastructure investors.
While volatility remains, a risk management strategy that incorporates the nuances of country risk can ensure that commercial opportunity is secured. Political Risks Insurance (PRI) can offer a final barrier of protection against political violence and risks of contract frustration, forced divestiture, currency risks and expropriation. The insurance market has remained open for Thai risks throughout the duration of the crisis, and non-cancellable insurance policies can guarantee protection even in the event that the risk environment deteriorates.
Amy Gibbs is a senior consultant at JLT Specialty's Credit, Political & Security (CPS) risk division in London