In 2007, a new constitution was pronounced that laid the process for the caretaker government to return power to the people by calling a general election. Howerver, it turned out that the People Power Power (PPP), the party that replaced Thai Rak Thai, won a majority of the seats in the parliament. Samak Sundaravej, a close ally of Thaskin, became the Prime Minister. Samak tried to get Thaksin out of trouble by attempting to change the constitution to provide him with amnesty or nullifying the corruption charges and this again provoked a second anti-government movement. PAD escalated issues by seizing the government compound in order to force the Prime Minister Samak to resign and call a new general election. Samak was later forced to resign as he was found guilty for earning significant income in a commercial activity as the presenter of a TV cooking show. Consequently, Somchai Wongsawat, a brother-in-law of Thaksin, was installed by the coalition as prime minister.

Meanwhile, Thaksin was found guilty by the Thai Supreme Court of conflict of interest over a government land purchase scandal. Thaksin, together with his wife, got the Court’s permission to visit the Olympic Games, and took that opportunity to jump bail. He used his connections through a firm of international lobbyists to present himself in the international mass media as a statesman being forced to live in exile abroad by the military. However, he was not able to live in his luxurious home in the UK, as the British government revoked the entry visa on his Thai diplomatic passport.

In Thailand, anti-government demonstrations finally peaked in October as the government tried to crack down on protesters with teargas and bombs, resulting in deaths and many injuries. Angered by the government’s retaliation, the PAD decided to escalate by seizing the two international airports in Bangkok. As the political situation grew from bad to worse, inflicting severe losses to the economy, the Constitutional Court found PPP and its coalition partners guilty of electoral fraud. Prime Minister Somchai was barred from the office.
A major breakthrough occurred when a faction of the PPP party, led by Newin Chidchob, decided to defect from the Thaksin led coalition to join with the Democratic Party. Abhisit Vejjajiva, aged 44 and Eton and Oxford educated as well as the leader of the Democratic Party, was voted into the Prime Ministership on 15 December.

Thailand’s economy was already burdened by the internal political turmoil of the last 3 years, as foreign investment and government programs were disrupted. On top of this, it was hit with rising inflation from oil and food prices in the middle of 2008, just like many other economies. The inflation rate hit 9 per cent, although the country kept growing at a decent rate of 4-5 per cent in the first half of the year. Thailand was not directly affected by the subprime problem in the US and the fall of Lehman Brothers. Thai banks have little investment in Collateralized Debt Obligation (CDO). The stakes which Lehman Brothers held in Thai firms were also not substantial. And, importantly, there was no bubble in the stock market, as in other booming economies.

Unlike the crisis in 1997, Thai households, corporations, banks and the government are not leveraged and have been cautious of financial risks. There has been no real estate bubble in Thailand in 2008 and the Thai public and private sectors tried to stay away from seeking external funding.

Thailand currently has US$100 billion in foreign exchange reserves with moderate current account surpluses and a sustainable level of public debt to GDP of 36 per cent. Despite these good fortunes, the Thai economy is not immune from external shocks, as foreign investors repatriate investments. The Stock Exchange of Thailand (SET) index has fallen approximately 30 per cent from the beginning of 2008. Thai firms are believed to be blessed with strong fundamentals, cash flow, and positive earnings. Thai stocks are under-valued at a price-earnings ratio of 7 and book value less than one but foreign investors are discouraged from investing in the Thai markets, mainly because of political problems. Thailand began to feel the real economic impact when the two international airports were closed down in December. It was estimated that the closure of the airports resulted in losses of US$ 100 million from tourism, logistic, and transportation related businesses. Many Thai hotel operators had their occupancy rates down from 80 per cent to 50 per cent during peak season. It will be difficult to bring back not only investors’ confidence but also tourists’ confidence in Thailand going forward.
The major challenge for Thailand in 2009 is political stabilisation. It is not certain whether the new government can cope with the pressure from former PM Thaksin and his supporters while they seek to resolve growing political and economic problems. It is a high mountain for a relatively young leader like Abhisit to climb, to restore political stability and ensure the continuity of his government while he weathers the storm of internal conflicts, the global economic crisis, social political problems, and the separatist movement in the South. The positive side of the current government is that it has backing from the army, bureaucracy, and the business community. The veteran politicians in the party are also fully behind the new Prime Minister despite internal rifts stemming from the displeasure on the allocation of cabinet seats.
The GDP growth rate for 2009 is projected to be 2 per cent. The closures of the airports in 2008 will definitely affect the sentiment of foreign investors and outsiders adversely. The government has realized the problem and will use monetary and fiscal means to revive the economy. The government will most likely rely on spending on mega projects and infrastructure to boost the economy in medium term. The global economic slowdown will decrease demand for Thai goods in the US, UK, and Japan. But exports from Thailand are mostly necessary goods such as foods and daily used items that could still be in demand. Despite the fact that 70 per cent of the Thai GDP comes from exports, Thailand has a diversified export base so that it will not be heavily affected from the lower export orders from the main industrial country markets. A positive factor is that inflation rate will be lower due to declining oil prices, which will also bring down product costs and living expenses.

Though it is difficult to be totally confident, there is some light at the end of the tunnel of the political troubles in Thailand, and that is bound to help the economy.

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Dr Pisit Leeatham is Dean of the Faculty of Economics at Chiang Mai University in Thailand, Head of the Macroeconomics and Finance Working Group of the Thai National Economic and Social Advisory Council and was formerly Deputy Minister of Finance in Thailand.

This is part of the special feature: Reflections on developments in Asia in 2008 and the year ahead