Thailand Military Coup


  • Appointment of unelected interim government
  • Economy battered by political turmoil
  • Market impact

Political uncertainty has always undergirded Thai politics, particularly in the last decade. This is because of the wide chasm between between the royalists yellow shirts (who are mainly urban middle class incensed at what they see as the massive government corruption) and red shirts (farmers from rural areas who were the main beneficiaries of the populist policies implemented by ousted, former Prime Minister Thaksin Shinawatra).

The recent coup, announced on May 22, gives the military full power over civilian matters and has effectively deposed the caretaker government of Yingluck Shinawatra. The constitution has been suspended and a night curfew has been imposed. Thai Army Commander Prayuth Chan-Ocha has received royal endorsement to lead the interim government. However, he has yet to appoint an unelected civil prime minister, but many speculate that he will assume the post himself. A new election date has not been announced.

The priority of the interim government is likely to be political reform, although they have taken steps to alleviate the economic slowdown by repaying farmers for the previous government’s rice pledging scheme.  The road ahead is expected to be bumpy and it is uncertain if the election can be held within a 1-year time frame.

Slowing Economic Growth

The difference between this crisis and the previous ones in 2006, 2010/2011 is that currently, the economy has already been slowing down significantly. The political crisis has exacerbated this. Thai consumers have become heavily indebted, partly due to the previous government’s populist policies including the first car ownership incentives. Thailand’s consumer debt to GDP exceeds 80%, one of the highest in the region.

Real gross domestic product (GDP) growth declined by 0.6% year-on-year (yoy) in the first quarter of 2014, from a growth of 0.6% in the fourth quarter of 2013. The contraction was attributed to a sharp drop in inventory levels, while consumer and business spending continued to decline on the back of heightened political uncertainties. Thailand’s economy is expected to fare poorly in 2014 due to the present political crisis.

Expensive Valuation

A coup-installed interim government will be able to carry out more effective political reform and economic management. Nevertheless, the risk of violence is always there especially if the red-shirts escalate their protests. The Thai stock market has remained remarkably resilient since the declaration of the coup, despite the weakening economy. This is because the Thai people view the present coup as a step forward towards resolving the political crisis. In fact, many Thai fund managers belong to the urban yellow shirts camp.

The current 14x FY14 PER (price earnings ratio) of the Thai market is not cheap in its historical context. However, downside could be limited as domestic liquidity remains strong and most foreign investors have exited the market. We have been selling down since the political crisis erupted six months ago, and currently our funds do not have exposure to the Thai market. We are monitoring developments closely.

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