Avoiding Themptation

Thai poll gives jittery investors a short-term fix

Resolving Thailand's political deadlock is making investors cautiously optimistic. But any expectation that fresh polls will provide a lasting solution to the country's leadership crisis is premature.

Yingluck Shinawatra dissolved parliament on December 9, following month-long protests against her government and the threat of mass resignation of lawmakers from the opposition Democrat Party. Elections might give a new mandate to the besieged prime minister, who is accused by detractors of running a puppet administration on behalf of her brother Thaksin, who was ousted as prime minister in a 2006 coup.

The latest confrontation began when the government introduced a bill that would have paved the way for Thaksin's return from exile. The Democrats want him to serve a jail term for his 2008 conviction for corruption - or not return. Yet, the urban "Bangkok elite" that the party represents can't banish Thaksin from politics as long as poor farmers in Thailand's northeast see him as their messiah. An election won't resolve these differences: there are twice as many people in the northeast as in the capital.

Thailand's period of relative stability since 2011 has made foreign investors complacent. The baht rose by 11 per cent against the dollar between June 2012 and April 2013, drawing in funds. However, the economy has been losing competitiveness because of an overvalued real exchange rate and growth is now slowing under a pile of household debt. The central bank recently cut its interest rate to 2.25 per cent. It may not be able to stimulate the economy much more without stoking concerns about financial stability. Those concerns are real. Foreign banks' exposure to Thailand has more than doubled since the start of the US Federal Reserve's quantitative easing programme.

Overseas investors own 18 per cent of the country's government bonds, up from 11.5 per cent at the end of 2012. As the Fed starts to end the glut of cheap dollars, investors must be wary of Thailand's dimming appeal. One day perhaps the farmers and the city dwellers will be able to bury the political hatchet. They won't be doing it at the ballot box - at least, not this time.