Scenarios: How will Thai crisis pan out after peace moves?

By Alan Raybould

BANGKOK (BestGrowthStock) – Thai Prime Minister Abhisit Vejjajiva has offered a five-step peace plan and a November election to end a two-month political crisis, but protesters are holding out, wanting a specific date for dissolving parliament.

Although the “red shirts” show no sign yet of leaving their camp in a posh Bangkok shopping area that has been all but closed since April 3, this may be the best chance of ending a crisis in which 27 people have been killed without further bloodshed.

Little movement is expected on Wednesday, with neither side wanting to be seen as disrespectful to Thailand’s revered monarch on Coronation Day, a holiday. Here are scenarios that may develop in coming days and possible financial market reaction:

GOVT AND “RED SHIRTS” NEGOTIATE DEAL ON DISSOLVING PARLIAMENT

The “red shirts” have reacted positively to elements of the peace plan but say only the Election Commission, not Abhisit, has the authority to set an election date. Instead, they want him to fix a date for dissolving parliament.

Under the most optimistic scenario, Abhisit would give a date for dissolution, perhaps after talks between red shirt leaders and government figures, and the protest would end. Calm would prevail until the election in November or a little sooner.

MARKET REACTION: External factors are bearish at the moment, but stocks could resume the rally that took the index up 15 percent on a $1.8 billion wave of foreign buying from February to April 9, the day before clashes in old Bangkok killed 25 people.

Pichai Lertsupongkij, head of sales at Thanachart Securities, said that on its most optimistic scenario, the index could hit 950 by the end of the year, against 796.86 after a 4.4 percent jump on Tuesday and its peak this year of 820.09 on April 7.

Markets were closed for Coronation Day on Wednesday.

Bond yields have already risen in anticipation of a deal and would probably rise further, as the central bank is keen to raise interest rates from a record low of 1.25 percent but wants to make sure political developments won’t further hamper growth.

Some economists are still looking for a rise of 25 basis points at the next policy meeting on June 2, but that is highly contingent on political developments.

“Reduced political noise is bearish for government bonds because it raises growth forecasts and brings forward forecasts of the timing of a first Bank of Thailand rate hike,” ING said in a note on Wednesday.

“The 40 basis point decline in the 10-year government bond yield in April to a low of 3.50 percent will be quickly retraced if the PM’s offer results in a breakthrough. Yesterday’s 15 bps rise to 3.70 percent was the start.” Currency trader Chatchawan Jumruswittayawong of Bank of Ayudhya forecast the baht could easily appreciate to 31.50 per dollar by the year end if an election is held in November. It was quoted around 32.36 on Wednesday, when Thai banks were closed.

“Fundamentally, the baht should have moved in tandem with bullish Asian peers this year, riding on the yuan speculation, but it has been tripped up by the political turmoil. Even with that, it has still appreciated about 3 percent this year.”

“RED SHIRTS” DEMAND CLARIFICATION, MARKETS WAIT AND SEE

Abhisit may stick to his conditions but offer talks with the “red shirt” leaders. These are unlikely to be protracted but may last some days, during which time the protesters will remain in their camp, the malls and luxury hotels will stay shut, and tourists will stay away while travel advisories remain in force.

Eventually a compromise date for parliamentary dissolution will be reached. Or talks break down and it’s back to square one.

MARKET REACTION: As long as hopes of a peace deal remain alive, the stock market could move tentatively higher, dropping back now and again in reaction to adverse developments. Bond yields would edge higher and the baht would probably tick up.

If the talks are successful, the first scenario above would prevail. If not, one the outcomes below may result.

PEACE DEAL COLLAPSES, MILITARY CRACKDOWN RESULTS

If the “red shirts” eventually reject the compromise of a November 14 election, the authorities, exasperated, may order a crackdown, and those in the military and police that have balked at the inevitable bloodshed will go along.

Protesters will be warned to leave their camp and the army will steadily build up it presence on the outskirts. It offers red shirts a way out. Once the army determines those remaining in the shopping district are the hard core, troops will move in.

Casualties are high as militants wage a fierce fight, which could spill into neighboring high-end residential districts.

The government retakes control of the area but the protest leaders regroup and new demonstrations start elsewhere, especially in the red shirts’ northern strongholds.

MARKET IMPACT: Heavy fighting with high casualties would trigger a knee-jerk plunge in stock prices that would also hurt the baht and send investors scurrying into the relative safety of government bonds, pushing yields back down and probably delaying the long-awaited interest rate rise to July or later.

Any indication the government is restoring order might be seen as an opportunity to buy on the belief the worst is over, but the recovery in stocks will be hesitant. The baht might fare better, but pushed up more by external factors such as possible moves to let the yuan appreciate.

PEACE DEAL COLLAPSES, THE PROTEST DRAGS ON

This seems unlikely: having held back for two months and then offered a compromise, the authorities will probably say enough is enough and break up the rally. Unless there is carnage, that will probably be acceptable to the public, in Bangkok at least.

There is, however, still a chance that the occupation of the shopping area will carry on for a while, leaving malls and hotels closed and sending small businesses under.

MARKET REACTION: Share prices will likely give up some of the gains scored in the wake of Abhisit’s proposal but, as in April, daily falls may not be large except in reaction to further violence. Hotel, retail and tourist-related stocks such as Airports of Thailand would remain under pressure.

Bond prices might pick up a little and yields would drop back as doubts grew over whether the central bank would raise interest rates in June.

The baht might suffer a little if inflows into stocks dried up, but it has broadly held a range between 32 and 32.50 per dollar since late March and that could prevail for some time.

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(Additional reporting by Jason Szep and Vithoon Amorn in Bangkok and Saikat Chatterjee in Hong Kong; Editing by Alex Richardson)

Scenarios: How will Thai crisis pan out after peace moves?