Thailand’s economy has survived many coups in recent decades, but Thursday’s military takeover may be different, experts say, noting that the country's extremely polarized political leadership plus the tenuous state of its fiscal affairs make a quick rebound unlikely.
“There’s a pernicious long-term effect in that the economy could be better but all of this infighting is undermining it,” said Josh Kurlantzick, senior fellow for Southeast Asia at the Council on Foreign Relations.
Though markets dipped slightly when the military announced martial law on Tuesday, they soon recovered. In fact, in the short term the relative stability arising from a military coup could be a stem the volatility that has plagued the country for months. After a 2006 coup, the benchmark SET (Stock Exchange of Thailand) Index followed a similar pattern. It closed a modest 1.4 percent lower on the first day following the event, but after two months was up 4.5 percent from its pre-coup level. The Thai baht also quickly recovered from an initial knee-jerk reaction.
“Admittedly, coups have been a regular feature of Thailand’s history in recent decades and its economy grew rapidly through much of that period nonetheless. But as countries become richer, the quality of institutions plays an increasingly important role in promoting rapid growth,” Mark Williams, chief Asia economist for Capital Economics, said in a note published Thursday.
But recent political problems, starting in November of last year, have put a strain on the nation's markets and economy.
“Unlike in 2006, investors have been on the back foot for months,” Williams wrote. Back then "foreign capital had been flowing into Thailand’s equity market. By contrast, in the past 12 months foreign investment has been pulling out.”
Last October economists expected to see Thailand's gross domestic product grow between 4 percent and 5 percent. But earlier this week, Thailand’s National Economic and Social Development Board announced that first-quarter GDP contracted by 0.6 percent from a year earlier. Consumption dropped 2.1 percent, investment fell 9.8 percent, manufacturing declined 2.7 percent and construction plummeted 12.4 percent.
By contrast, neighboring Malaysia and Singapore experienced economic growth of at least 5 percent annually during the same period.
“Consumers have become increasingly pessimistic,” said Rajiv Biswas, Asia-Pacific chief economist at IHS, a U.S. based economic advisory firm. “They’ve seen that economic growth is slowing and there’s no outlook for the economy, there’s no government in place.”
Thailand’s $73.8 billion tourism sector, which accounts for roughly a fifth of GDP and generated 2.5 million jobs last year, is also in decline. The Tourism Council of Thailand estimates that cancellations will cut earnings by $2.5 billion (83 billion baht) in the first half of 2014, and lowered their target for foreign tourist arrivals to 26.3 million, the lowest in five years. Domestic demand and business investment have been slowing amid this malaise.
It’s unfortunate, considering Thailand's potential.
Even after devastating floods in 2011 and 2012, the economy suffered initially but quickly recovered, recording 6.5 percent GDP growth in 2012. The country generally is an attractive destination for foreign direct investment, with liberal finance laws and strong tourism, agriculture, auto and electronic production sectors.
“Historically, Thailand has grown 4 or 5 percent when you don’t have political chaos,” said Biswas.
“They have got quite a good economy, but you need a government,” Biswas said, explaining that many economists aren’t confident in the next caretaker government -- a similar situation to what happened after an earlier coup that didn’t end well.
Coming out of the Asian financial crisis in 1998, Thailand’s economy grew at an average rate of 5 percent every year between 1999 and 2006. But in September of that year, Prime Minister Thaksin Shinawatra was ousted by the military after accusations of corruption. In the following years, pro-Thaksin leaders were elected and later ousted by Thai courts as tensions continued.
Thaksin’s youngest sister, Yingluck Shinawatra, became prime minister in 2011, but dissolved the House of Representatives in December to defuse political tension. But she was removed from office earlier this month amid a corruption scandal, and the the military declared martial law on Monday, just days before announcing an official takeover and pronouncing the constitution invalid on Thursday.
“With no real government running the country since the parliament was dissolved last December, spending on government projects have been deferred or slowed down,” said Krislert Samphantharak, an associate professor of economics specializing in Southeast Asia at the University of California, San Diego.
“The Thai economy has been insulated from the unstable Thai politics for decades. This is no longer the case,” Samphantharak said. “Economic development strategies of the country are now initiated by politicians."