Scenarios: Will Thailand’s government ride out the storm?

By Martin Petty

BANGKOK (BestGrowthStock) – Streams of Thai “red shirt” protesters converged on Monday on a military base housing Prime Minister Abhisit Vejjajiva to press him to call a new election, a demand he refused to meet.

While the protests by supporters of former premier Thaksin Shinawatra have had no significant impact on Thailand’s stock market so far, the size of the rally and simmering tensions highlight a deep political divide that could hurt growth, consumer confidence and the country’s long-term investment image.

Following are possible scenarios:

GOVERNMENT RIDES OUT PROTESTS; STOCK MARKET RISES

The ability of the “red shirts” to mobilize more than 150,000 rural people has delivered a strong message of public discontent but will probably fail to topple a government backed by the powerful military and establishment elite.

Failure to oust the government would prolong an uneasy status quo, but that has not affected financial markets much in recent weeks, with foreign investors continuing to pour money into relatively cheap Thailand and other regional markets.

However, the rally has illustrated the extent of the polarization, which has made investors think twice about expansion in Thailand over the longer term.

If another pro-Thaksin party eventually returns to power, it will probably face protests of its own, another intervention by the military or the kind of judicial intervention that put paid to pro-Thaksin governments in 2008.

While foreign investors are piling into Thailand’s stock market, foreign companies are less enthusiastic about capital investment and are forecast to cut investment pledges this year by 15 percent.

VIOLENCE ERUPTS BUT QUELLED; NEAR-TERM MARKET VOLATILITY

Violence breaks out, triggered either by “red shirts” or outside agitators keen to stir up trouble to discredit the movement.

This could cause near-term volatility in Thai stocks, with selling by small investors offset by buying by foreign investors focused on longer-term economic fundamentals in a region bouncing back from the financial crisis. Foreign investors helped to drive a 63 percent rise in Thai stocks last year despite violent riots in April. Bond yields could fall on expectations the Bank of Thailand would keep its benchmark rate at a record low of 1.25 percent longer than expected. Economists expect an increase around the middle of the year as the economy recovers.

The likely scenario would see security forces breaking up the rally, handing a public relations victory to the government and further denting the reputation of the “red shirts,” vilified after last year’s riots.

A measured response by the government could bring confidence to investors in the short term but, again, political divisions would continue to cloud the long-term investment outlook, with an election due to be called by the end of next year.

PROTEST CAUSES COALITION TO CRUMBLE; MARKETS TAKE HIT

The mild-tempered protest becomes more heated, piling pressure on the government, increasing tension in the capital and leading to the invoking of an emergency decree. This response could raise questions about the government’s stability and spark a flurry of behind-the-scenes negotiations among the political parties, with Thaksin sure to be involved.

Some of Abhisit’s already disgruntled coalition partners could break away, with money politics prevailing, leading to switches of allegiance to the pro-Thaksin opposition, the Puea Thai Party, which remains popular in the vote-rich countryside.

In this scenario, Puea Thai would table a no-confidence motion against Abhisit, which gets the backing of the house. Puea Thai would then lead a new coalition government.

Markets would fall on concerns about instability that could ensue, given the likelihood a Puea Thai-led government would anger the potent “yellow shirts” movement, increasing the risk of another pro-Thaksin government being toppled and a backlash by supporters of the new administration.

But this scenario remains unlikely due to the staunch backing Abhist enjoys from Thailand’s army, royal advisers and business elites. Coalition partners may not be entirely happy with Abhisit but the likely promise of bigger budgets for them to oversee will keep them onside.

PROTESTS TURN VIOLENT, PM DISSOLVES PARLIAMENT; MARKETS

FALL

Violence ensues, security forces are unable to control the crowd and a state of emergency is declared. Bangkok is paralyzed, government buildings are targeted. A crackdown by the military causes many casualties.

Abhisit is no longer able to govern and announces parliament has been dissolved. He serves as a caretaker until new elections.

This scenario, highly unlikely, could prompt mass selling by local and foreign investors fearful of heightened instability and the potential for more stalemate and unrest.

Faced with the possibility of a pro-Thaksin government winning the election, and the strong chance of another intervention by Thaksin’s powerful opponents, foreign investors would prefer other regional markets with recovering economies and shun Thailand.

Investment Research

(Editing by Alan Raybould and Jerry Norton)

Scenarios: Will Thailand’s government ride out the storm?