Thailand: Can the Whimpering Tiger Spring Ahead?

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Generally speaking, a coup d’état is not good for business. Political upheaval usually scares away investors who become unsure of their footing under a new regime that has muscled its way into power.

Thailand’s coups have been an exception. In 18 other such takeovers since absolute monarchy ended in 1932, none have led to a financial crisis. Investors are betting that it will be the case again this time around, even if they cannot count on 87-year-old King Bhumibol Adulyadej, who is ailing, to intervene once again as a stabilizing force.

Since General Prayuth Chan-ocha and his troops took control of the Thai government in May 2014, ending civil strife over the populist policies of ousted former Prime Minister Yingluck Shinawatra, the benchmark stock market index Thai SET has been among the best performers in the region. It is up 7.15% year-to-date as of February 18 and gained 25.27% in one year. Compare that to Indonesia’s Jakarta Stock Exchange Composite Index, up 3.13% thus far in 2015 and 19.79% in one year; and Malaysia’s Kuala Lumpur Composite Index, up 2.93% year-to-date and 2.04% in a year.

The Thai baht has stayed resilient as well since the coup, hovering between 32 to 33 baht to the U.S. dollar in the past 52 weeks. In fact, the currency is a bit too strong for the country’s main business group, the Thailand Chamber of Commerce, because it hurts exports at a time when overseas shipments have been falling, according to a February 11 story in The Wall Street Journal. The group has called on the central bank to clamp down on the baht. Meanwhile, private equity firms continue to invest in Thailand despite the political uncertainty, according to the December 2014 issue of Private Equity Analyst, a Dow Jones publication.

“Thailand has a relatively robust investment environment,” says Philip Nichols, Wharton professor of legal studies and business ethics, whose research interests include international trade and emerging economies. “Thailand is regarded pretty well among business people for its low regulatory burden, and with a low regulatory burden usually comes less corruption.”

Indeed, it is Thailand’s weakening economic outlook that has so far overshadowed its political problems and risks. Like other markets, the country is being hurt by a slowing economy worldwide, especially in China, its largest export market. On January 13, the World Bank cut its global GDP outlook for 2015 to 3% from 3.4%, and to 3.3% from 3.5% for 2016, according to its semiannual Global Economic Prospects report. The International Monetary Fund has followed suit.

“Thailand is regarded pretty well among business people for its low regulatory burden, and with a low regulatory burden usually comes less corruption.” –Philip Nichols

Thailand’s National Economic and Social Development Board said the economy, the second largest in the region after Indonesia, grew by 0.7% in 2014. It slashed its growth outlook several times last year down to 1%, according to a November 2014 story in Reuters. Weaker exports, a drop in tourism and lower private consumption were the main culprits. Exports make up around 70% of the economy. While the country’s central bank, Bank of Thailand, kept interest rates steady when its Monetary Policy Committee met on January 28, it nevertheless said that going forward “monetary policy should stay accommodative to provide continued support for the economy.” Indonesia has already lowered rates, while Singapore eased its monetary policy by taking measures to tamp down even more on the appreciation of its currency.

Geopolitics is also playing a role in political uncertainty. China has been cozying up to Thailand, supporting the new military government, while the U.S. has wagged its finger and called for elections to return the country to democracy soon. While it is unclear when, or even if, Prayuth will end martial law, hold snap elections and step down as prime minister, the bigger question confronting Thailand is less the political drama unfolding and more its longer-term economic position.

Wharton management professor Mauro Guillen says that Thailand, along with its smaller Southeast Asian neighbors, has mainly stayed put economically as China, India and even Vietnam are charging by. “They have stayed more or less where they were in the last 10 years or so,” he notes. “The problem they are facing is they haven’t made much progress. At the same time, there are other countries coming up from below that are catching up. That can be highly problematic.”

Once a ‘Tiger’

According to Guillen, the Southeast Asian nations of Thailand, Indonesia and Malaysia have more mature economies than China or India, even though they are not making as many headlines. In the 1970s and 1980s, Thailand and Malaysia became important producers of textiles, electronics parts and components. Thailand was also the largest rice exporter in the world until recently, and a major producer of hard drives. “These countries set up manufacturing operations earlier than China,” he says. “When Thailand was already manufacturing electronics and textiles for the global market, China was still a closed country…. It didn’t open up until the 1980s.” Back then, Thailand, Malaysia and South Korea were among the “tiger” economies, Guillen notes.

But China and India are the heavyweights today because of the sheer size of their population. In 10 to 15 years, the Chinese and Indian consumer markets will be bigger than the U.S. and the European Union, Guillen predicts. Then there are the economies of Thailand, Malaysia, Indonesia and others in the region. “It’s very clear these are going to be the largest markets in the world, and that has important consequences for companies like Coca-Cola,” Guillen notes. “Right now, they make most of their money in the U.S. and Europe. That’s no longer going to be the case.”

This year, the 10 countries making up the Association of Southeast Asian Nations (ASEAN) are banding together to create what would become the world’s largest emerging market with a $2.4 trillion economy. The region is home to 620 million people, or nearly a tenth of the world’s population. The participating nations are planning to lower tariffs, increase investments across borders and ease trade flows. The ASEAN countries include Burma, Brunei, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

Stephen Kobrin, Wharton emeritus management professor, says that there are hurdles to overcome before the ASEAN countries can become an effective single market. “Lack of infrastructure is a major issue,” he points out. “If you want to be a single market, you have to be able to move goods around and you have to be able to communicate.” That means adequate ports and roads must be built, which can be a challenge for some countries that comprise thousands of islands. They also must get around the problem of massive traffic jams tying up transport of goods within their cities, he notes.

“When Thailand was already manufacturing electronics and textiles for the global market, China was still a closed country.” –Mauro Guillen

Wharton management professor Peter Cappelli adds that the region’s economies can be quite volatile. “Although the region is huge in its economic activity, the individual countries are reasonably small, and typically their economies are not so diverse,” he notes. “That increases the volatility: When a sector like tourism is down, the entire economy is down.” As such, businesses in the region have to learn to deal with that volatility. Hiring and laying off people as business changes might be too slow to be effective. Therefore, companies have to think through other arrangements, including joint ventures, leased employees and contract work, Cappelli says. However, “all these practices come with risk.”

Kobrin notes that ASEAN nations do offer several benefits: low cost manufacturing; a young, trainable labor force; abundant resources and technological innovation. Moreover, Singapore is a well-developed financial center, he says. Vietnam is an up and coming market where wages are even lower than China’s, Guillen adds. “If you want to bet on a growing economy that’s going to be very attractive for a long time, go to Vietnam,” he says. “Vietnam is a truly emerging economy.”

Therein lies Thailand’s dilemma. It is more expensive than Vietnam, lacks the scale of China and is not as developed as Japan and South Korea. “Thailand, Malaysia, Indonesia — these countries are somewhere in between,” Guillen says. “They cannot compete with the low wages in Vietnam and Bangladesh, but they are not as sophisticated as South Korea. So they are somewhere in the middle. It’s OK to be somewhere in the middle for a while, but it cannot be forever.”

Guillen notes that South Korea started out in the same state as Thailand. It was a low-wage country that produced products of inferior quality. “Today, [Korean] cars are really good, and Samsung is the largest electronics company in the world.” Singapore has made the same transition, and its citizens are among the wealthiest in the world. For Thailand, Indonesia and Malaysia to make the same jump, they must invest in education and infrastructure to boost productivity, and continue to develop their local markets instead of being overly reliant on exports, he says.

Moreover, they have to provide other advantages besides being cheaper. “You cannot be a rich country if you always compete on the basis of low wages and low costs,” Guillen points out. “It’s hard enough to compete on low wages — there’s a lot of competition. Many countries have low wages. But it’s even harder to make the transition from being a low-cost producer to being a producer of higher value” products and services.

At least Southeast Asian countries are learning from previous crises. For example, the 1997 Asian financial crisis that started in Thailand and then swept up Malaysia, South Korea, Indonesia and others in the region led to the development of stronger financial systems. “That is something that they learned in the last 15 years,” Guillen notes. “They accumulated currency reserves to avoid being in the situation where they could be at the mercy of the markets…. Their central banks have gotten better. This is really important.”

Finally, these countries have been rebalancing their economies. They used to overinvest in manufacturing and remain heavily dependent on exports, but the domestic market is rising in importance. “You start creating a middle class, people with higher wages, so they will consume more,” Guillen says. “That is very healthy.” But Thailand has a long way to go before it can become another South Korea. “This is not an easy transition to make,” he adds, noting that it is particularly tough for the country now because of the political sideshow.

“When a sector like tourism is down, the entire economy is down.” –Peter Cappelli

Red Shirts vs. Yellow Shirts

Thailand is an anomaly compared to its neighbors. “Thailand is the only place in the whole region that was never occupied,” Nichols says. “It’s got a really strong sense of national identity, cultural identity and of course they revere the monarchy. But at the same time, the people are exuberant in their voting and politicking, and then you’ve got a very interesting intervention by the military over and over and over again.” The country also enjoys a free press, he adds.

There are two main political parties in Thailand’s parliamentary-style government: The populist Pheu Thai party supported by urban poor and rural citizens, and the Democrats, which is backed by the Bangkok elite and royalists. The populists wear red shirts to show their support of the party; the elites wear yellow, which is the color of the monarchy. Ousted Prime Minister Yingluck led the Pheu Thai party; her brother Thaksin Shinawatra, a former prime minister and telecommunications tycoon, is in self-imposed exile in Dubai after facing corruption charges.

Nichols said Yingluck was swept out of power due to the confluence of several factors. Massive flooding hit the country right after she was elected, coming during a time of recession. She proposed legislation that would extend amnesty to anyone who was arrested for politicking in the aftermath of the 2006 coup, which included protesters occupying a Bangkok airport, but it was taken the wrong way. Her supporters felt betrayed because they thought police officers who mistreated them would get a pass. Meanwhile, the opposition assumed that Yingluck was clearing a way for her brother to return to Thailand without jail time. Thaksin was ousted in the 2006 coup.

“The legislation never said that but it kind of morphed into that in the popular mind,” Nichols notes. “The streets erupted. This time, there was no support from the poor and rural folks. They also didn’t like the legislation, and that’s what sent everything into a spiral.” That was when Thailand’s Constitutional Court stepped in and removed Yingluck, not for the proposed legislation, but for abuse of power after unlawfully transferring a senior security official. The court said the removal paved the way for the appointment of her relative to the job. In the power vacuum that followed, the military stepped in.

Yingluck would later be impeached for her administration’s handling of a rice subsidy program that backfired. To fulfill a campaign pledge to help rural farmers, her party had a plan to buy rice at above-market rates, stockpile the inventory to drive up global rice prices and then sell. The plan failed after India, Vietnam and other countries stepped up their exports to take up the slack, leaving Thailand with billions of dollars in losses. She faces up to 10 years in prison if corruption and negligence charges stick, according to a January 23 story published in The New York Times.

Yingluck has refuted the charges. “Democracy is dead, along with the rule of law,” she wrote on her Facebook page. “I will fight to the end to prove my innocence.”

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