PROBLEMS AND PROSPECTS INTHAKSIN’S THAILAND

An Interim Assessment

Darryl S. L. Jarvis

Recent elections in Thailand brought to office a newgovernment headed by the charismatic businessman and multimillionaire,Thaksin Shinawatra. The election victory was substantial, backed by a largecross section of Thai society and supported fully by the business community.The Thaksin administration was quick to announce new policy directions,signaling a more engaged economic agenda and promising to move Thailandbeyond the financial and economic malaise of the years following the onsetof the regional economic crisis. Restoring business confidence, bolsteringdomestic demand, and providing government fiscal stimulus to the economyare at the heart of the government’s economic planning.

Aware of the need for domestic financial reform and restructuring, the newadministration announced the introduction of a new Thai Asset ManagementCorporation (TAMC) to help the banking sector restructure nonperformingloans (NPLs) and kick start growth in new bank lending. The governmentfurther indicated its intentions to work toward a reduction of current interestrate spreads (the difference between the interest banks pay on deposits andinterest charged on loans), inject new government spending into rural devel-opment (cash grants of B 1 million to some 70,000 rural villages) and na-tional infrastructure projects, initiate a new national health system, as well asdevelop a US$2.19 billion education bond system, provide tax incentives forlocal business, and increase civil service pay rates.

Darryl S. L. Jarvis is Senior Lecturer and Director of the Centre forInternational Risk in Government and International Relations, School of Economics and PoliticalScience, University of Sydney, Australia.

Asian Survey, 42:2, pp. 297–319. ISSN: 0004–4687 2002 by The Regents of the University of California. All rights reserved.

Send Requests for Permission to Reprint to: Rights and Permissions, University of CaliforniaPress, Journals Division, 2000 Center St., Ste. 303, Berkeley, CA 94704–1223.

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The spate of proposed new government spending will obviously have dele-terious effects on the government’s fiscal position, particularly in view of thegrowing evidence of a general economic slowdown exacerbated by events ofSeptember 11, 2001; diminished export performance; increasing external debtand capital outflows; climbing inflation; and a falling Thai baht. Meetingpopular expectations amid contracting economic conditions will prove in-creasingly difficult for the new administration.

The Economic and Financial OutlookMost observers are skeptical about the administration’s commitment to, andcapacity to implement, the reform process. Thailand remains entrappedwithin a cumbersome bureaucratic system that, by and large, is unresponsiveto business and economic pressures. Government reforms to increase the bu-reaucracy’s responsiveness to business needs and reduce the constraints oncommercial startups and operational effectiveness will not be realized any-time soon. More obviously, many of the government’s newly announcedspending plans must also be viewed with suspicion, especially since the gov-ernment’s fiscal options will narrow as the slowdown in the global economytakes hold.

More alarming for international observers have been Prime Minister Thak-sin’s recent overtures of a likely return to protectionism. This will jeopardizefuture international investment and pose increased risk for international com-panies currently operating in the Thai economy. The sudden change in policydirection and growing willingness to protect local business from global com-petition appear to be modeled on Malaysia’s trend of initiating greater controlover foreign access and softening the reforms recommended by the Interna-tional Monetary Fund (IMF) in 1997. In the financial sector, for example, thedeputy governor of the Bank of Thailand (BOT), Pakorn Malakul NaAyudhay, has indicated that new measures to defend the baht will be intro-duced. This might indicate a movement away from the partial capital controlmeasures currently in place to more stringent measures, the nature of whichhas not yet been revealed but is sure to be more extensive than those cur-rently in place.

Protectionist sentiments, combined with growing levels of public debt, cur-rently standing at almost 60% of gross domestic product (GDP) and likely toblow out to 80% with proposed new government spending, would certainlysee currency traders short the baht and cause further devaluation. Asset andprofit redemption is thus at increasing risk if government policy goes protec-tionist and public debt rises radically. The bottom line for Thailand is thatinternational investor confidence will be jeopardized if current trends con-tinue, forcing investors—the lifeblood of the Thai economy—to view Thai-land with increased caution. All is not well in Thailand despite the optimism

DARRYL S. L. JARVIS 299

generated by a new, charismatic leader and hope for a final end to the eco-nomic doldrums of the post-financial crisis years. Much will depend on howthe government positions Thailand in the coming years, especially the direc-tion of economic policy and the growing challenge posed by increased re-gional competition.

Economic PerformanceThe Thai economy continues to record positive growth rates despite increas-ing external risks associated with the slowdown in the U.S. economy, theevents of September 11, and continued malaise in the Japanese economy.However, the revised GDP estimate for 2001 of 3.5%1 indicates a sharp con-traction on the previous growth performance of 5.7% recorded for the firsttwo quarters of 2000. More generally, the flow-on effects that a slowdown inthe U.S. economy represents for Thailand’s major export partners (Japan,Singapore, and Hong Kong), will further compound external threats, con-tracting the Thai export sector for the next 12 to 18 months, with negativeimplications for net foreign receipts, employment levels, tax revenues, andthe fiscal position of the newly elected administration.2

Domestic consumption has also been slowing with private consumptiondown more than 5% for the first two quarters of 2001 (year-on-year). Acontracting labor market, declines in farm income, and a dramatic reductionin public construction investment has seen total fixed investment fall from23% for the first half of 2000 to a mere 0.6% in the third quarter of 2000.Forward indications also show a dramatic slowdown in the rate of new banklending despite low interest rates and ample bank liquidity.3

The years 2001 and 2002 are likely to see an overall contraction in themanufacturing, retail, textile, and intermediate goods sector, albeit within apositive growth environment. Housing and office construction will remaindepressed and national infrastructure construction suffer from increasing fis-cal constraints and the declining fortunes of the baht. Retail and the con-sumer durables sector will generally see a softening in margins and volumes,reflecting a contraction in domestic demand. Tourism, auto assembly, andthe pharmaceutical sectors will continue to outperform the rest of the econ-omy.

Export PerformanceWhile export growth has been the main vehicle propelling Thailand’s post-crisis economic recovery, the fragility of the sector has been revealed with

1. Asian Development Bank (ADB), Asian Recovery Report 2001 (Manila: ADB, March2001).

2. Ibid. (update) (Manila: ADB, September 2001), p. 4.3. Ibid.

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January 2001 trade data that show a 400-million baht deficit (a 12% reduc-tion on figures for January 2000 and the first trade deficit since August1997), with similar figures repeated for February, March, and April 2000.4

This is important since exports account for 65% of Thailand’s GDP, with justtwo countries, the U.S. and Japan, absorbing 40% of Thai exports. Thailandis thus highly sensitive to changes in external demand and particularly vul-nerable to the fortunes of the U.S. and Japanese economies.5

Most at risk have been electronic and computer part exports, which ac-count for 30% of Thailand’s total export profile.6 Thailand, like Singapore,Malaysia, and the Philippines, has been one of Asia’s chief beneficiaries ofthe recent information technology boom. However, the downturn in demand,principally from the U.S., is ominous. The price of the industry’s standard-64 megabyte random access memory chip, for example, is down 60% tolevels that are now barely above break-even point.7 Industry overcapacityand continued reductions in U.S. and Japanese demand for electronic andcomputer equipment will thus have prolonged implications for Thai exportperformance and foreign exchange earnings.

There are also growing indications that the Thai textile industry—tradi-tionally one of the largest employers of non-skilled labor—is undergoing alonger-term structural contraction associated with increased competition fromnew, low-cost market entrants, specifically Vietnam, Bangladesh, Pakistan,and China. Similarly, homewares such as ceramics, pottery, cutlery, andhome display items previously heavily sourced by U.S. and European chainstores and export-import consortiums are now increasingly sourced from suchlower-cost countries as the Philippines, Vietnam, and China. Sustainedlonger-term contraction in both these sectors will have severe employmentimplications unless movement toward higher value-added processing or ser-vice industries can be developed. This, however, is not likely for the foresee-able future because of Thailand’s poor education and knowledge infrastruc-ture and the non-development of secondary financial markets able to offeradvanced financial services to Asian economies.

Rapid downsizing in these sectors has been temporarily mitigated by thedepreciation of the Thai baht (see below), which was trading at levels againstthe U.S. dollar (47.48 baht = US$1) not seen since the Asian financial crisis

4. Wichit Sirithaveeporn, “January Trade Deficit First in 30 Months,” Bangkok Post,Feburary 17, 2001.

5. Shawn W. Crispin, “Thailand: Fading Euphoria,” Far Eastern Economic Review (FEER),May 24, 2001, p. 58.

6. BOT, National Accounts, Forward Estimates, 2001 (Bangkok: BOT, 2001).

7. “Oversupply Reduces DRAM Stocks,” Taipei Times, December 15, 2000, <http://www.taipeitimes.com/news/2000/12/15/story/0000065656>.

DARRYL S. L. JARVIS 301

of October 1997.8 A medium- to longer-term improvement in the baht, or atleast a return to less-depressed levels, will see a resumption of accelerateddecline in these sectors and a loss of international competitiveness.

Currency MovementsOf more immediate concern for the Thaksin administration has been the dete-rioration in the value of the baht, already down 15% since the beginning of2000 (and still trading some 33% down on its pre-crisis average). Continuedlow real interest rates, slower economic growth, increasing central govern-ment debt, and high levels of capital outflows have all conspired to maintaina depressed baht (projected ratios between US$1 = 40.00 to 48.00 baht), atrend that looks likely for some time to come.

Also having an impact on the fortunes of the baht are regional currencytrends, particularly that of the Japanese yen. Those currencies, too, are suf-fering relative depreciation as a consequence of investor flight to lower riskquality equities and bonds in the U.S. This has meant overall lower demandfor Asian currencies, a trend not likely to be reversed in the short to mediumterm.

Recent concerns about Thailand’s political stability, especially the indict-ment and then acquittal of Prime Minister Thaksin on allegations allegingconcealment of asset holdings also depressed confidence in the baht, tendingto spook capital and currency markets. Similarly, the series of Muslim sepa-ratist bombings (probably attributable either to Pattani United Liberation Or-ganization [PULO] and/or Barisan Revolusi Nasional [BRN])9 in January andFebruary 2001 on civilian targets in the southern provinces of Songkhla andYala, along with ongoing tensions and increasingly frequent firefights withMyanmar rebels on the Thai-Myanmar border, will only add to internationalinvestor fears about Thailand’s stability as an investment destination.

The baht is also likely to suffer from international jitters should the currentadministration stray from the IMF-initiated reform process. Recent state-ments by Prime Minister Thaksin, for example, blaming commitments to cer-tain international standards for Thailand’s financial woes, as well as recentremarks in an opening address to the Economic Commission for Asia and thePacific about “looking inward,”10 signal a softening commitment to continuewith financial sector reform, banking sector rationalization, greater financialtransparency and disclosure laws, and Chapter 11-type bankruptcy proce-

8. Federal Reserve Bank of New York Currency Exchange Rates, December 14, 2001, <http://www.x-rates.com>.

9. Police officials, personal interviews, February 21, 2001, Bangkok.

10. “Intelligence: Ex-Journalist behind Thaksin Speech,” FEER, May 10, 2001.

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dures.11 Should the economic or political predicament of the governmentdeteriorate significantly, then increasing pressures to pursue more inward,self-reliant policy directions would have severe implications for internationalconfidence in the baht.

Perhaps the greatest, longer-term structural predicament the Thai bahtfaces is the continued interest in China, especially with the trading opportuni-ties that will arise from China’s entry into the World Trade Organization.China already accounts for 50% of all foreign direct investment (FDI) intoAsia; a figure that will likely increase in the near future. Demand for thebaht, along with other regional currencies, will likely remain depressed forthe short- to medium-term and result in lower valuations. Much like Viet-nam, Thailand is in danger of being overshadowed as international investorslook toward emergent investment opportunities and lower cost structures inChina.

Financial MarketsThailand’s financial markets are still suffering from the fallout of the finan-cial crisis as well as the trepidation associated with the attacks on the U.S.Unfortunately, despite repeated governmental announcements concerning“restructuring,” there is little discernible evidence of substantial progress. In-deed, the poor state of Thailand’s financial system is threatening governmentattempts to pump-prime the economy through a combination of fiscal stimu-lus, tax concessions, and new government spending programs in education,health, and rural development. However, no amount of fiscal stimulus willbe able to compensate adequately for poor credit growth and the ongoingmalaise in new bank lending. Liquidity in private banks, for example, stillexceeds 16% of total assets indicating poor loan demand.1 2

At the root of the problem is the level of NPLs. These are slowly fallingfrom a high of 47.7% in 1999 to just 32% or about 22% of Thailand’s GDP(including those moved to various asset management companies) in 2001.13

However, a more accurate picture of the health of Thailand’s banking systemis probably gained by looking at total nonperforming assets (NPAs), whichadd NPLs to restructured loans and foreclosed properties. NPAs stand atalmost 50% of total bank loans plus foreclosed properties.14 In other words,

11. Chapter 11 bankruptcy procedures refer to the legally defined set of procedures for theadministration of commercial enterprises for purposes of securing creditors’ entitlements becauseof insolvency.

12. ADB, Asian Economic Monitor: Thailand (Manila: ADB, December 2001), p. 100.13. This figure represents about 17% of all outstanding commercial bank loans. These figures

compiled from the ADB, Asia Recovery Report 2001 (September update), p. 12. See also “Anal-ysis: Trade, Debts Slow Thai Economy,” United Press International, February 28, 2001.

14. Tom Holland, “Asia’s Economic Outlook: Overview,” FEER, January 10, 2002.

DARRYL S. L. JARVIS 303

half of all bank assets are nonperforming and will eventually require write-down. Also of concern is poor banking compliance enforcement and laxBOT monitoring protocols that have seen most bank loans not “restructured”at all but simply “rescheduled” (term extension with little net present valuereduction). Thus, any downturn in the economy will likely see a large por-tion of these rescheduled loans reenter bank ledgers in the NPL category asbank grace periods expire and business cash flows contract.

Unfortunately for the Thai economy, the endemic problem of NPAs has adirect bearing on growth in new bank lending and credit creation. Interestrate spreads, for example, have remained stubbornly high despite BOT prod-ding for a reduction on lending margins. Deposit rates, for instance, havedropped to 1.75%–2%, while medium- and long-term loan rates run at 7.5%.Banks are using these spreads to help fund NPLs and maintain liquiditylevels. The effect, however, is to dampen new bank lending because of therelatively high cost of borrowing money and to depress net foreign capitalinflow because of low deposit rates and poor bank profits.1 5 Governmentstimulus measures have thus been thwarted and will remain so until a resolu-tion to the NPL problem is achieved.

Few commentators are expecting this to happen anytime soon. Of theNPLs’ total value, 70% (some US$50 billion) is concentrated in the corporatesector, representing some of Thailand’s largest and most significant corpora-tions who dominate in manufacturing, real estate, and wholesale and retailbusinesses.1 6 Restructuring is thus politically sensitive and will involve sig-nificant corporate reengineering, employment downsizing, and write-downs,each with far reaching implications for the performance of the Thai economy.The health of the financial sector is thus tied intimately to the corporate sec-tor; poorly managed NPL restructuring (orchestrated through the TAMC)could well serve to act like a strong wind on a fragile house of cards.

On the upside, the dearth of new bank lending has forced the developmentof small secondary financial markets, especially for debt. Reluctant to lendbecause of high NPL ratios, banks have tended to place growing portions oftheir liquidity in government and corporate bonds. Likewise, the dearth ofdomestic capital sources and trepidation to source foreign capital have seenan exponential growth in bond issues by the corporate and governmental sec-tors. In 1997, for example, government bond issues amounted to some 300billion baht but had grown to 1 trillion baht in 2000. Similarly, corporate

15. World Bank, Country Dialogue Monitor: Thailand (CDM:T) (Bangkok: World Bank,September 2000), pp. 33–37.

16. Ibid., p. 38.

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bond issues have risen from 200 billion baht to over 600 billion baht in thelast four years.17

But the debt market is fragile and its health rests on how NPL restructuringproceeds relative to growth in new bank lending. If the newly formed TAMCmoves too quickly and rapidly absorbs commercial bank NPLs, this couldcause a collapse in the bond markets as banks redeem paper debt and moveliquidity back into new bank lending.1 8 Either way, the financial sector isdoomed to a prolonged period of painful restructuring and uncertainty—acondition that will only deprive Thailand of much-needed foreign capital.

Despite net losses for the commercial banking sector that, in 2001, willhover around 86 billion baht, prudential regulation remains weak and reformis slow in coming. All this does not bode well for international investor con-fidence.1 9 As a destination for foreign capital investment, the Thai financialsector has little appeal with bank balance sheets telling only half the story.Accounting procedures remain arcane, with meaningful restructuring onlyhalf begun, and the small secondary financial markets that exist are fragileand could easily collapse if NPL problems are not handled carefully.

As a recent World Bank study noted, before foreign private capital willagain be attracted to invest in Thai banks, a compelling story will have to bewritten. Among other things, this will have to include “full loss recognitionon bank balance sheets such that investors can understand what they are buy-ing.”2 0 As it stands at present, investing in financial institutions and mostfinancial markets in Thailand means investing blind.

If the quality of financial markets in Thailand are the biggest deterrent tointernational investment, Thailand’s prudential regulatory measures have alsosent less-than-attractive signals to the international financial community.Newly announced measures by the BOT, for example, appear to be creatinggreater administrative and bureaucratic hurdles, suggesting that domesticsourcing of startup and venture capital by foreign enterprises will face grow-ing uphill battles and increasing compliance measures despite excess bankliquidity. Foreign borrowings greater that 50 million baht (about US$1.04million), for example, are required to show proof of underlying commercialtransactions and require BOT approval. Inter-bank transactions and settle-ments are slow and open to abuse. In December 2000, for instance, the BOT

17. Pisit Leeahtam, deputy finance minister, Thailand, speaking at the High-Level RegionalConsultative Meeting on Financing for Development, Jakarta, August 2000.

18. Restructuring Monitor (monthly publication compiled by Deloitte Touche Tohmatsu,Thailand) (June 2001).

19. BOT, Outlook: Economic Performance in 2000 and Outlook for 2001, August 2, 2001,<http://www.bot.or.th/BOTHomepage/DataBank/Econcond/econreport/outlook/8-2-2001-Eng-i/outlook_eng.pdf>.

20. World Bank, CDM:T, p. 36.

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was forced to bring Thailand’s entire payment system to a halt for a daywhen it was discovered a rogue trader was making false baht-denominatedtransactions.2 1 The bottom line is that financing and borrowing transactionsfor foreign corporations in Thailand are increasingly cumbersome. If the pro-tectionist tide grows stronger—which looks increasingly likely—then an in-creasing number of cumbersome measures can be expected in the near future.

Private and Public DebtPublic sector debt is emerging as one of the key crisis indicators for theThaksin administration, which is acutely aware that international capital mar-kets are increasingly sensitive to Thailand’s climbing debt levels.2 2 Since1996, public debt has risen sharply from just under 20% to around 60% ofGDP or 2.9 trillion baht as of June 2001. In the past four years alone, gov-ernment debt has more than doubled, with forward estimates suggesting thisfigure is likely to peak around 80% of GDP as the economy slows and gov-ernment spending increases.23 Debt paydown is also looking unlikely, withPrime Minister Thaksin forced to acknowledge in a recent statement that“debt servicing will be for interest payments” with substantially less devotedto “principal repayment.”2 4

Capital markets will obviously be tested in the coming months for theirrisk tolerance as the government stimulus package attempts to pump-primethe economy and spur growth through public sector debt. The risk, however,is that should the stimulus package fail to push GDP growth to 5.5% then thelevel of public debt will be fiscally unsustainable. ADB growth estimates forThailand in 2001, however, have already been revised down to 3.5%.25 This,combined with the fact that real interest rates are now exceeding the econ-omy’s underlying growth rate, means that the fiscal options of the centralgovernment will be severely restricted.

Also of concern are the ongoing problems being experienced by the Finan-cial Institutions Development Fund, established in the wake of the financialcrisis to help ensure commercial bank solvency. Initially costed at some 500

21. Margo Towie, “Treasury and Risk Management: White Collar Crime Is on the Rise inAsia,” CFO Asia: Magazine for Financial Directors and Treasurers, May 2000 <http://www.cfoasia.com/archives/200005-81.htm>.

22. Public or government sector debt is defined as the stock of recognized, direct liabilities ofgovernment to the rest of the economy and the world.

23. ADB, Country Performance Assessment, December 2000, <http://www.adb.org/Docu-ments/CAPs>.

24. “Thaksin Retreats Open Market Policy: Speech Dispels Fears of Procedure U-Turn,”Bangkok Post, May 10, 2001.

25. Merrill Lynch has gone further, revising the ADB figure down to 2.5% for 2001. Growthin government spending is projected by the Ninth Economic and Social Development Plan to be7.7% for 2002.

306 ASIAN SURVEY, VOL. XLII, NO. 2, MARCH/APRIL 2002

billion baht, the fund is now indebted to the tune of 1.6 trillion baht. Thefiscal burden on the Thai taxpayer will be enormous, with Prime MinisterThaksin forced to publicly flag the situation in his recent address to the na-tion.2 6

If no action is taken to reverse these underlying problems, Thailand islikely to be hit with a series of ratings downgrades that will add a furtherburden to international debt servicing. But on the upside, total external debthas declined, reflecting an improvement in private external debt because ofimproved economic conditions in the aftermath of the financial crisis. Short-term private debt, in particular, has tended to be paid down. As of December2000, total external debt stood at US$80.2 billion, down from US$95.6 bil-lion in 1999.2 7

Labor Market TrendsThe Thai labor market is beset by a number of structural problems that do notposition Thailand well in terms of its immediate regional competition andaspirations for a more knowledge-intensive economy. In particular, there isan acute skills shortage in Thailand. Poor educational infrastructure and lowresearch productivity have not served the country’s economy well. Secon-dary school participation rates are particularly low, creating knock-on effectsfor the tertiary sector. Research innovation has been sparse and casual con-versations with business executives in Thailand suggest that the quality oflocally educated Ph.Ds is questionable. Technical sector growth faces similarconstraints, with national shortages of suitably qualified personnel in engi-neering, applied sciences, management sciences, human resources, and tech-nical consulting.

This story is not true for the Thai employment market generally however.The overall labor market remains soft, with official unemployment levelsrunning at around 4%–4.5%, down from 6.1% in 1998 and 5.9% in 1999.28

Despite the downward trend, official unemployment figures do not reveal theextent of labor force under-utilization, principally from low reportage andhigh underemployment. Low productivity and low wages for non-skilled la-bor conspire to make for low labor productivity and partial labor utilization,problems that will only be overcome with intensive labor training and skillsupgrading.

Most of Thailand’s labor force comprises unskilled labor, with rural-urbanmigration providing the bulk of this. Unskilled labor has traditionally beenabsorbed in labor intensive, low value-adding export industries that boomed

26. “Thaksin Retreats Open Market Policy.”27. ADB, Asian Recovery Report.28. BOT, Economic Performance in 2001; and ADB, Asia Economic Monitor: Thailand.

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prior to the financial crisis: textiles, footwear, intermediate goods production,homewares, handicrafts, assembly, and so on. Strong post-crisis export per-formance served to absorb much of this labor, but with a general economicslowdown in 2001 and projected to last well into 2002 a softening in thelabor market is already apparent.

The Thaksin administration will thus have to juggle rising unemploymentamid worsening economic conditions and the possibility of debt blowout. Aworsening labor market is likely to be the first sign of trouble ahead for theThai economy as the global economy begins to contract and move into acyclical recession.

Consumer and Business ConfidenceConsumer and business confidence still suffers from the trauma of the finan-cial crisis and is now haunted by the twin concerns of a slowing global econ-omy and the uncertainties in the wake of the September 2001 attacks. Hiringand bank lending practices as well as business expansion plans have all beennegatively affected by poor confidence levels and low business expectations.The robust export market of 1999 went some way to restoring consumer andbusiness confidence, at least in terms of growing expectations about eco-nomic turnaround (see Figure 1). Again, however, the U.S. slowdown hasquashed this, with September 11 subsequently cementing sluggish economicexpectations and killing off the economic optimism of 1999.

Many of the structural conditions surrounding NPLs also suggest that busi-ness confidence will be sometime in healing—and may yet face a seriousdownturn. Many mid- to large-scale corporate businesses still have to dealwith their own restructuring and cash management problems. Bank re-scheduling has only delayed long-term liquidity problems, and issues sur-rounding corporate downsizing and management efficiencies have still notbeen dealt with.

A recent Thai Chamber of Commerce survey of senior business executiveson macroeconomic conditions reported a medium score of 51.61 (100 signi-fying normal economic conditions, 200 signifying a boom economy). Thisrepresents a gloomy outlook for 2002, with respondents pointing out ongoinghindrances to business activity as the major culprits: corruption, governmentred tape, tough competition, falling prices for agriculture goods, and a pooreducation system providing poorly qualified employees.2 9

While consumer confidence has recovered from the depths of the post-crisis years, it remains tenuous. Big ticket items like housing are still suffer-ing from dramatic oversupply and low consumer demand. Automobile

29. Woranuj Maneerungsee, “Survey Reveals Slight Boost in Confidence: Respondents Big-gest Problem Is Inability to Obtain Financing,” Bangkok Post, February 8, 2001, p. 1.

FIGURE 1 Thailand Consumer Confidence Index, 1996–2000

0

20

40

60

80

100

1996 1997 1998 1999 2000

Low

Hig

h

SOURCE: BOT, Business Sentiment Index, 2001, October 31, 2001, <http://www.bot.or.th/BOThomepage/DataBank/Econcond/econind/Business_Sentiment/10-31-2001-Eng-i/bsi_e_sep.htm>; and MasterCard, “Mastercard’s Masterindex of Consumer Confidence Shows Asia-WideConsumer Confidence Recovery,” February 25, 1999, <http://www.mastercard.com/au/about/press/990225a.html>.

FIGURE 2 Total Vehicle Sales in Thailand, 1990–2000 (vehicles/year)

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

SOURCE: Figures compiled from BOT, Quarterly Bulletin: Commercial Vehicle Sales,selected series from March 1999 onward, <http://www.bot.or.th/BOThomepage/databank/ArticlesAndPublications/quarter_report_e.htm>; and Thailand Automotive Institute, <http://www.thaiauto.or.th/index.html>.

DARRYL S. L. JARVIS 309

purchases have rebounded since 1998, but have not recovered to anywherenear their pre-crisis levels (see Figure 2). The same is true of white goods,with evidence of general household consumption being postponed because ofmiddling consumer confidence—now running at mid-range levels (see Figure1).

Short- to medium-term consumer confidence projections will be contingenton the extent of the economic slowdown and the prospects for charting a“V-,” “U-,” or “W”-shaped recovery in the U.S. Again, the events of Sep-tember 2001 have only served to introduce yet more pessimism into businessexpectations, confirming a generally gloomy business outlook with consum-ers steering clear of large consumption items and postponing consumptionexpenditure. All this bodes ill for the export-sensitive Thai economy. Simi-larly, employment and income security confidence remain at middling levelsand display fragility. Further economic shocks could cause a sharp downturnin confidence and consumer spending levels.

Stock MarketThe Stock Exchange of Thailand (SET) lost one-half of its value during 2000,but through 2001 improved by around 20%, hovering at levels of about 315on the set composite index for most of the year. In the wake of the Septem-ber attacks, though, it only recovered to levels of around 270. Apart frompost-September investor caution, it has been the underlying structuralproblems associated with the banking and corporate sector, which accountsfor 25% of the SET composite index, that have held back investor senti-ment.30 Fears about slow and inadequate NPL restructuring and the slowingpace of corporate reengineering have depressed the SET index.

There are also strong concerns about corporate transparency and govern-ance issues, many of which have yet to be addressed in the wake of thefinancial crisis. Most analysts predict that downstream corporate downsizingand restructuring will have a deleterious impact on the banking and corporatesectors bottomline, and that earnings downgrades will be inevitable. Much ofthe fallout from the financial crisis is still to be expressed, posing a longer-term risk for the SET.

The health of the SET will largely rest on the implementation and perform-ance of the TAMC and, in turn, on the realization of significant improve-ments in the banking and corporate sectors’ financial health. The prospectsfor this, however, do not look promising. A recent analysis by Standard &Poor’s, for example, concluded that the “[T]AMC concept is not assured” ofsuccess, the problem of corporate sector reform appeared endemic, and struc-tural problems associated with poor foreclosure, transparency, accounting,

30. Dan Biers and Tom Holland, “Asia Frets as America Slows,” FEER, December 21, 2000.

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and bankruptcy laws might derail any prospective benefits of the TAMC.3 1

Furthermore, while nominal improvement in the SET composite index is in-dicated, the medium- and longer-term performance of the SET will be tiedintimately to reform and governance issues, which, as yet, are not being ad-dressed. Nepotism, price rigging, and corruption issues have featured pre-dominately in the media and should send a sharp warning to any prospectiveinvestor.

There is also the problem of inadequate capitalization throughout the bank-ing and corporate sector, which poses serious and in some cases precariousliquidity issues for many institutions. Unfortunately, without sustained andmeaningful corporate restructuring, attempts at recapitalization will bethwarted by a dearth of investor confidence, principally though poor levels offoreign portfolio investment. Market capitalization might be set for a boost,however, with the newly announced government plan to inject 700 billionbaht into the equity market over the next three years. This would involveoffering share issues in 18 state-enterprises in the hope of fostering renewedinterest in Thai equities.3 2

The problem again, however, is the ongoing lack of corporate trans-parency, poor corporate accounting and reporting procedures, and lack ofcommitment to corporate restructuring, which will only continue to dampeninvestor confidence and keep investment away from the equity markets.

Residential and Commercial Property MarketsResidential and commercial property developments came to a virtual stand-still in the immediate aftermath of the crisis. In no other sector was thetrauma of the crisis so acutely felt, with pre-crisis speculation pushing prop-erty prices and new construction to unsustainable levels. Property prices sub-sequently tumbled and still remain well below their pre-crisis levels, withinvestors badly hurt and confidence in the sector shattered. Many of theNPLs derive from the crash in the property market and their continued under-performance have debilitated meaningful restructuring other than through as-set write-downs.

However, there are signs of a tentative recovery in the property market,spurred on by low interest rates and new government incentives. Year-on-year, the unsold supply of houses and condominiums has been reduced, cur-rently standing at 13,277 (detached houses and townhouses), and approxi-mately an unsold or vacancy rate for downtown Bangkok condominiums

31. Nancy Koh, “Thai National AMC Offers Few Benefits to Banks,” Standard & Poor’sFinancial Institutions Analysis, New York, March 2001.

32. Stock Exchange of Thailand, “Working Group Join Forces to Revive Thai Capital Mar-kets,” March 31, 2001, <http://203.194.162.10/regbod/th/set/press/p010331.htm>.

DARRYL S. L. JARVIS 311

having fallen from 50% in 1998 to 32% in1999 and 20% in 2000. As for theluxury condominium market, it has rebounded with occupancy rates for high-end quality developments reaching 90% in 2001 compared to 87% in the lastquarter of 2000.3 3 This trend can be expected to continue subject to eco-nomic conditions remaining relatively stable vis-a-vis the exigencies of thepost-September 11 environment.

Helping the residential market has been the hefty reduction in property feesand taxes under the previous government and the recently announced assis-tance packages under the Thaksin administration. Under this program, civilservants and those from lower income brackets can claim a tax allowance ofup to 100,000 baht (US$2,500) spent on buying housing over the next twoyears (2001–03). More recently, the Government Housing Bank has also in-troduced a new financing package providing 100% of the property’s collat-eral value to new borrowers.3 4

On the downside, an increase in housing prices by home builders of be-tween 5%–10% during 2001, will likely dampen demand despite lower inter-est rates. More importantly, bank reluctance to deepen its exposure in theproperty market means few financing options for prospective buyers and ashortage of liquidity. Growth in this sector has thus been positive but notrobust.35

Commercial and Hotel Property MarketsOffice and commercial developments also faired better in 2001 after havingbottomed out in 2000. The overall year-end vacancy rate for all grades ofoffices in Bangkok fell to 35%. This is expected to continue to drop into2002 with commensurate moderate increases in rental values. For 2001–02,premium office rental space is expected to increase from US$8 to US$10 persquare meter per month, while grade-A office space is projected to increasefrom US$7 to US$9 per square meter per month. Little large-scale officeconstruction is anticipated principally because of financing difficulties andbank reluctance to further property asset exposure.36

As for hotel real estate, it has faired relatively well in the wake of thefinancial crisis, with the fall in the baht making Thailand a cheap interna-tional tourist destination. Tourism has been one of the few growth areas inthe Thai economy and, as a result, hotel occupancy rates have been moderateto good, providing a valuable cash flow to investors in an otherwise crisis-prone economy.

33. “Performance Exceeds Expectations for Year,” Bangkok Post, December 18, 2001.34. Ibid.35. Nina Sucbsukchareon, “Prices Could Fall Further: Thai Property Prices,” Colliers Jardine,

May 14, 2000, <http//www.colliersjardine.co.th/frmarket.html>.36. “Debt Debate,” FEER, September 28, 2000.

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The spate of hotel fire sales anticipated in the wake of the crisis have,consequently, not materialized. A proactive Thai Tourism Authority and ag-gressive international marketing strategies have provided Thailand with agrowing supply of tourists, responsible for about 7% of GDP. However, de-spite an anticipated 7%–8% growth in tourist arrivals in 2002, the trend for2000–01 was growing tourist numbers but decreasing tourist revenues, down2%–3%. The revenue prospects for the hotel sector thus look mixed, withaverage tourist spending declining, suggesting increased price sensitivity tohotel accommodation rates.37

The black spot on all this, of course, is the severe drop off in tourist arriv-als after the events of September 11. Japanese tourist arrivals, for example,traditionally one of the larger markets for Thailand, dropped precipitously inSeptember, October, and November.3 8 Similar declines in tourist arrivalsfrom origin countries such as the U.S., Canada, Britain, and Germany, arealso evident. The effect on hotel occupancy rates and thus returns on hotelinvestments can be expected to decline in the immediate short term. On thebasis of previous international crisis and recovery cycles, this depressed stateof affairs can be expected to linger for upward of eight months, with antici-pated recovery to more normal tourist arrivals not expected until the first andsecond quarter of 2003.

While greater pressure will be exerted on the bottom line of the hotel sec-tor causing some softening in hotel property prices, these can be expected tostabilize in the intermediate to longer term. On the upside, Thailand has beenrecently ranked by hotel owners and investors as the fourth most preferredmarket in Asia (behind Singapore, Hong Kong, and Seoul),3 9 providing somelonger-term prospects for income growth in the sector.

Foreign Direct InvestmentFDI was one of the main vehicles propelling the Thai economy throughoutthe 1990s. Capital flows, however, were spotty, influenced strongly by wildgyrations in the domestic fortunes of the Thai economy and frequent jolts topolitical stability. International business confidence has thus been confrontedwith a less than stable environment requiring ongoing monitoring and reap-praisal as economic and political conditions change sporadically.

Business investment decisions informed by aggregate FDI data and used asan indicator of international investor confidence and growth trends should beviewed with suspicion. There are two reasons for this. First, official FDI

37. Tourism Authority of Thailand, Tourism Statistics, November 2, 2001, <http://www.tat.or.th/stat/index.html>.

38. Tourism Authority of Thailand, Preliminary Figures, ibid.39. Global Hospitality Resources, Market Focus: Asia Pacific Hotel Investment Sentiments,

October 25, 2001, <http://www.hotelsmag.com/bob_harp/bob_harp102501.htm>.

DARRYL S. L. JARVIS 313

figures tend to be inflated, used as a political tool to advance investor confi-dence and bolster capital inflows.40 Second, raw FDI data, as with the up-ward spike in FDI in 1998 (below), do not reveal longer-term trends.

The 1998 FDI spike thus can be seen as a result of the washout of thefinancial crisis, especially the dramatic fall in the value of the baht, whichmade for unusually favorable market conditions. International investors re-sponded to discounted asset acquisition costs and low production costs, al-most doubling the level of FDI in 1998 year-on-year (see Figure 3).

Short-term shocks aside, the current, longer-term trend in FDI has beendownward, and should serve as an ominous sign to Thai officials. Thailand isviewed, increasingly, as a less attractive destination for international invest-ment, with risks to capital flows stemming from four principal areas: (1) lackof corporate and financial sector reform; (2) movement toward protectionism;(3) infrastructure and production bottlenecks; and (4) increasing relativewage and production costs. Unfortunately, the current administration is ei-ther not able, or not willing, to speed the pace of meaningful corporate andfinancial sector reform, other than through the still-to-be-tested TAMC.Likewise, the political disposition of the current administration, and the polit-ical whim of voters, is disposed increasingly toward viewing internationalinvestors, globalization, and the internationalization of the Thai economy as anegative trend, harmful to economic development. Popular support for pro-tectionist measures is thus gaining momentum, with growing evidence of dis-crimination against foreign investment in areas where it affects domesticenterprise (retail, for example).

Apart from these concerns, the operational effectiveness of domesticallyoriented foreign investment is also tested by infrastructural and productionbottlenecks (for example, procurement delays, poor logistical managementsystems, and inefficient distribution systems)—problems otherwise effec-tively tackled in, for example, Singapore and Malaysia but ongoing in Thai-land. The lack of resolution to these problems reflects a less-than-responsivegovernment environment and an insular commercial acumen that, from sur-vey evidence,41 make commercial practices prone to extensive delays, ineffi-ciencies, and production failures. Some of these factors can be explained bycultural-business practices, others by inefficient-bureaucratic administrativeprocedures, and still others by systemic corruption. Whatever the case, allhave proven a hindrance to foreign investment and remain so.

40. Identity-protected sources at both the BOT and the Thai Development Research Institute,for example, informed the author that it was common practice to inflate FDI figures in order tobolster domestic political support for incumbent administrations and heighten international in-vestor confidence in Thailand. Interviews, January 21, 2001, Bangkok.

41. BOT, Business Sentiment Index, December 2001, <http://www.bot.or.th/BOTHomepage/DataBank/Econcond/econind/Business_Sentiment/index_eng_i.asp>.

314 ASIAN SURVEY, VOL. XLII, NO. 2, MARCH/APRIL 2002

FIGURE 3 Net Foreign Direct Investment to Thailand, 1992–2001

–50

0

50

100

150

200

250

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001E

Bah

t Bill

ions

SOURCE: BOT, Thailand’s International Investment Position, October 1, 2001, <http://www.bot.or.th/bothomepage/databank/EconData/IIP/iip_e.htm>; and ADB, Key Indicators, September6, 2001, <http://www.adb.org/Documents/Books/Key_Indicators/2001/THA.pdf>.NOTE: E = Estimated.

The low level of market capitalization in the SET and the poor corporatetransparency have also been responsible for Thailand being largely bypassedby institutional investors. The SET’s poor composite index performance,corporate insolvency, and slow reform have only tarnished Thailand’s inter-national reputation, with competitor markets offering lower risks and higherreturns. Unfortunately, this story is not likely to be reversed in the near fu-ture, with SET performance expected to deteriorate or at best remain stagnantbecause of increasing external risks, continuing overcapacity in the electronicsector, the slowdown in the U.S. economy, and synchronized recessions inJapan and Western Europe.

Of particular concern to Thai officials should be the fact that, despite therecent downward trend of the baht and thus lower asset acquisition and pro-duction costs, FDI has not spiked as in 1998 but, in fact, shown a 40% reduc-tion in the past two years. The explanation for this is twofold. First, limiteddomestic opportunities reflecting sluggish demand and excess manufacturingand production capacity, subsequently depressing demand for new infrastruc-tural investments; secondly, increasing disincentives relative to competitormarkets, ranging from production and supply bottlenecks, operational issues

DARRYL S. L. JARVIS 315

and problems, and increasing relative costs have served to depress FDI in-flows.4 2

Despite the evidence, the current administration has shown no signs ofaddressing this problem despite the gravity of the situation. The Thai econ-omy has been built on the back of international investment and any decline incapital inflows will only deepen the country’s financial and economic woes.

Politics: Stability and Other ConcernsOf most concern to outside observers have been the political uncertaintiessurrounding the indictment, trial, and acquittal of Prime Minister Thaksinover allegations of asset concealment and the repercussions of this for policycontinuity. These fears were not realized, however, with the controversialacquittal of the prime minister by a slim 8-to-7 majority of the ConstitutionalCourt. Instead, what has been raised by the Court’s decision portends tomore fundamental concerns about the independence of the courts and politi-cal interference. Some Senate members have already called for an officialinquiry, emblematic of concerns that the outright power of Thaksin is creat-ing undue influence and impropriety in the institutional bodies responsiblefor transparent and impartial governance of the Thai economy.

Indeed, this is what should most concern international observers: the exten-sive and growing political influence of the current administration, and exten-sive popular support enjoyed by the prime minister’s Thai Rak Thai Party, istending to harm the independence of statutory bodies, creating a system ofentrenched patronage politics, political appointees, and “favorite friends,”with implications for the level and extent of soft corruption in political deci-sion making, awarding of government contracts, and business dealings.

The May 29, 2001, sacking of Chatu Mongkol Sonakul, governor of theBOT, signals the politicization of the bank. The new appointee, PridiyathornDevakula, was hand selected by Prime Minister Thaksin. BOT independencein determining monetary policy has thus been usurped, signaling a return toolder-style Thai politics and a step back from the spirit and intent of the IMF-reform recommendations for robust, independent monetary authorities free ofpolitical interference.

ProtectionismOf more concern is the outright predominance of Thai Rak Thai, which hasboth fueled and fed off nationalistic sentiment, creating increasingly inward-looking policy directions with detrimental effects for international businessand investment. The corollary with the nationalistic style of Malaysian Prime

42. BOT, Thailand’s International Investment Position, October 1, 2001, <http://www.bot.or.th/BOThomepage/DataBank/EconData/IIP/iip_e.htm>.

316 ASIAN SURVEY, VOL. XLII, NO. 2, MARCH/APRIL 2002

Minister Mahathir Mohamad is obvious, rebuking transparency and accounta-bility as Western values detrimental to national interests and showing littletolerance for dissent.

Thaksin, for example, when addressing the Federation of Thai Industries,noted Thailand would “cease being a slave to the world” and that his admin-istration would amend laws that “work against Thai interests.”43 This inwardturn has been reinforced by his “Buy Thai” policy directive for governmentfirms and agencies, who are now required to buy locally produced goods andservices in an effort to halt a sliding balance of payments. Similarly, an Aprilcentral policy directive to all ministries placed a freeze on the hiring of for-eign nationals and the issuing of consulting contracts to foreign firms. Toreinforce the point, the government also announced a ten-fold increase in thecost of work permits for foreign nationals.

Taxing Foreign BusinessMost alarming for operators of foreign commercial interests has been thechange in organizational responsibilities for foreign nongovernmental andnonprofit organizations from the Department of Technical and Economic Co-operation to the Ministry of Labor. The move has resulted in “unprecedentedtax pressure” being placed on such organizations, with a suggested six-foldincrease in tax levels under consideration.4 4 While no statements have beenissued, the revenue crisis in Thailand is likely to see increasing governmentalattempts to find revenues from non-Thai sources as a means of securing in-creased government expenditure. Increased operating costs are thus a distinctpossibility for foreign enterprises.

CorruptionCorruption in Thailand is endemic among governmental officials and thecivil services (police, military, statutory authorities, government agencies)because of low wages. A recent survey in Thailand, for example, estimatedthat at least 20% of the state budget (160 billion baht annually) ends up in thehands of corrupt officials.45 Similarly, the ADB estimates that up to 30% ofgovernment procurement expenditure and public investment in Thailand islost to graft.4 6

The reformist Constitution adopted at the height of the financial crisis in1997 has gone some way to tackling corruption, principally through the em-powerment of the National Commission to Counter Corruption (NCCC). The

43. Shawn W. Grispim, “Thaksin Turns Back Clock,” FEER, April 19, 2001, p. 47.44. “Buy Thai Policy Goes Overboard,” FEER, May 10, 2001, p. 10.45. “New Poll Says Graft Rife in Thailand, Bangkok Post, February 14, 2001, p. 11.46. ADB, Key Governance Issues in Cambodia, Lao, PDR, Thailand, and Viet Nam (Manila:

ADB, April 2001), pp. 37–45.

DARRYL S. L. JARVIS 317

NCCC has had an immediate impact, notably ending the political career ofMajor-General Sanan Kachornprasart (former interior minister and DemocratParty general secretary) for graft and corruption, as well as indicting the cur-rent prime minister on corruption and concealment charges.

However, despite some high-profile successes, there is little evidence ofcorruption curtailment in the vast majority of the Thai economy and polity.A recent survey of Thai businesses, for example, reported that 79% claimedthey had to resort to bribing officials to get results and that these bribes addedroughly 20% to startup and business operating costs.4 7

Corporate Fraud and TransparencyCorruption and lack of accountability extend to the corporate sector in Thai-land. Foreign enterprises are the preferred targets for phantom billing prac-tices, financial misappropriation, and white-collar fraud. Intellectual propertyfraud is also rampant and employment confidentiality clauses are near worth-less as a mechanism to control competitor risk and protect commercially sen-sitive information. Client lists, strategic plans, marketing strategies, andother commercially sensitive documentation, can be bought from corrupt em-ployees of blue chip companies for as little as US$100.4 8

Corporate transparency is also lacking, with well-documented cases offraudulent reporting practices, stock market manipulation, or restricted “freefloats” of shares by 99 of the 381 companies listed on the Thailand SET.Restricted free floats involve the SET granting special provision to selectedcompanies enabling them to release limited amounts of shares, often less than10% of their overall market capitalization, creating intense speculation anddriving up share prices.49 Prospective foreign portfolio investment into theSET should thus proceed with extreme caution.

The slow pace of corporate reform—combined with strong indications thatfallout from the financial crisis in terms of private debt restructuring has yetto occur—in the majority of Thai corporations suggests that the immediateshort-term future will see Thai businesses having to cope with a considerableeconomic downside.

SecurityThe events of September 11 have implications for Thailand as with mostother nation-states around the globe. However, they are less pressing than

47. “New Poll Says Graft Rife in Thailand.”

48. Russell Learner, managing director, Pinkertons (Thailand), personal interview, February12, 2001, Bangkok.

49. Asiawise, June 4, 2001, <http://www.asiawise.com>.

318 ASIAN SURVEY, VOL. XLII, NO. 2, MARCH/APRIL 2002

the traditional border problems that have dogged Thailand for the last severaldecades.

Border tensions, principally with Burma, remain front and center and re-sulted in a series of firefights during 2001. Frequent border incursions byBurmese forces pursuing rebel elements have soured Thai-Burma relationsand resulted in cancelled senior ministers’ meetings. While the Thaksin ad-ministration has tended to favor a policy of economic engagement, the fre-quency of border issues with Burma has stalled prospects for a more interac-tive relationship and an expansion of trade. This will likely remain the casefor the foreseeable future. Lesser issues also dog the relationship and poseinternal security problems for Thai military and paramilitary forces. Cross-border movement of narcotics, for example, along with refugees and illegallabor, have placed considerable pressure on northern border regions and cre-ated extensive illegal networks that undermine any hopes for effective juridi-cal rule in these areas.

Border issues with Laos have tended to be less tense and mainly concernedwith trade issues and incidences of goods restriction and confiscation. Theseare likely to be solved with Thaksin pursuing a series of negotiations to freeup movement of goods between Laos and Thailand.

Internal SecurityInternal security is mostly stable with only few exceptions. The bombings inSongkhla and Yala, while minor in terms of damage, underscored the contin-uation of Muslim-led separatist movements. These, of course, have becomeof greater concern with the war against terrorism, the U.S. bombings of Af-ghanistan, and Muslim resentment toward the U.S. and its allies. Impor-tantly, such activities have been confined mostly to rural areas and away fromfinancial and commercial centers with no direct implication for Bangkok, theepicenter of Thailand’s economy.

While the Muslim population comprises Thailand’s largest religious mi-nority, it tends to be concentrated in the southernmost provinces ofNarathiwat, Yala, and Satun, and constitutes only some 3.8% of the popula-tion. Obviously, Thailand, as with other nations, has been forced to reassessits internal security status, increasing surveillance and monitoring of high-risk provinces and certain ethnic/religious minorities. Even before the Sep-tember attacks, Thai authorities were keen to ensure that Islamic separatistmovements were stamped out and after the incidents in Songkhla and Yalaembarked upon improved intelligence gathering and a systematic crackdown.There is every reason to suppose this will be largely successful.

Perhaps the most worrying recent trend in Thailand has been the develop-ment of business assignation, most often again competitor Thai nationals butmore recently also against foreign nations in Thailand. The March 1999 kill-

DARRYL S. L. JARVIS 319

ing of an Australian auditor, Michael Wansley, for example, was a case inpoint, particularly because he was involved in the sensitive issues of corpo-rate restructuring. Death threats against foreign auditors and professionalsinvolved in corporate restructuring projects have become more frequent, withthe most recent involving Tony Norman, an auditor with the Sydney account-ing firm Ferrier Hodgson, engaged by creditor banks to restructure the ThaiPetrochemical Industry. Twenty-four hour bodyguard protection amid nu-merous death threats and large demonstrations underscore executive safetyissues for foreign nationals engaged in the painful process of corporate sectorrestructuring. All indications suggest these are likely to become more fre-quent with the bulk of corporate restructuring still to occur.50

Toward the Future: Outlooks andProspects

The outlook for Thailand is not as optimistic as the Thaksin administrationwould like to suggest. Thailand is at increasing risk of missing out on much-needed FDI, with its increasing protectionist measures when the rest of Asiais looking toward a more open economic trading system and a declining com-petitive position relative to other regional neighbors. The general health ofthe economy is also stalling, the result of a combination of factors includingpoor and stalled levels of financial and corporate sector reform, underdevel-oped financial markets, poor prudential regulation, a cumbersome bureau-cracy, and an inefficient government sector.

Politically, the Thaksin administration is ill-equipped to deal with theseproblems, in part reflecting poor state-capacity to effect meaningful reformand ensure that Thailand is well placed to meet the challenges of the future.More alarming, however, is the apparent deafness of the administration tomany of these problems and its willingness to exploit populist anti-globaliza-tion sentiment regardless of the economic harm this may cause Thailand.

On the economic front, things are set to deteriorate with the economy tend-ing downward, albeit with GDP growth expected at around 3.5%, well belowwhat is needed to make meaningful inroads into developing appropriate tech-nology and education infrastructure that would better place Thailand for thedecade ahead. Public debt is also set to increase along with governmentspending, causing growing concerns among international markets about Thai-land’s debt-servicing abilities and fiscal position. The immediate implica-tions for Thailand under Thaksin are thus not optimistic, with the events ofSeptember 11 only adding to what will be troubled times for the country inthe coming years.

50. Mark Baker, “Tony the Target,” Sydney Morning Herald, May 26, 2001.