Thai opposition win is good for growth

July 4, 2011

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own

The Thaksins’ surprise win in the Thailand elections already has investors’ vote. As the opposition party of Yingluck Shinawatra — sister of exiled former premier Thaksin Shinawatra — took a surprise majority in elections on July 3, the baht strengthened, and the cost of insuring Thailand’s debt against default fell some 20 percent. The local stock market benchmark index rose 4.1 percent. In truth, there is some way to go before Thailand attains enough stability to regain favour with global investors — but it’s a good start.

Thailand doesn’t need a political about-turn. The deposed Democrat Party shepherded the Thai economy prudently. Even a bout of bloody violence between the red shirts, who back Thaksin, and the yellow shirts who favour the royal establishment and Democrats, failed to knock the country off its course towards 8 percent GDP growth in 2010. That’s largely because both sides respected the importance of strong banks, moderate leverage and fiscal prudence, and ensured that a downturn did not turn into an economic crisis. A dependence on exports, equivalent to around three-quarters of GDP, has helped separate growth from politics too.

But instability has brought a cost. Investors haven’t piled into Thailand in the way they have neighbours like Indonesia and Malaysia. For Morgan Stanley, the country is its biggest “underweight” among emerging markets, partly because of an elevated sense of political risk. Around $1 billion of investment drained away in the month before the elections. Ongoing concerns that the victorious Puer Thai party might create discord by calling for an amnesty for Thaksin over corruption allegations — or vengeance on those who supressed red shirt protests in 2010 — could linger for months.

Still, an unambiguous electoral result sets the country on the right path. Net foreign investment has been trending downwards for five years, helping to exacerbate an overall shortage of fixed investment, which runs at just a quarter of GDP. Infrastructure is needed to push Thailand out of middle-income mediocrity, and nudge GDP growth past the IMF’s current forecast for 2011 of 4 percent. Thaksin’s previous tenure saw corruption and discord, but also 6 percent growth, free-market policies and a focus on rural prosperity. If cool heads prevail, Thaksin redux will be no bad thing.

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