By Eric Vandenbroeck and co-workers

The Situation in Thailand

Thailand's Electoral Commission decided on March 4 to allow the caretaker government to reallocate 20 billion baht ($618 million) from the central budget to make overdue payments to disgruntled farmers for rice acquired under the government's controversial rice buying program. The commission had earlier approved a smaller sum, but it has now cleared the disbursement of about one-sixth of the total funds due to farmers -- the government is struggling to find other means to cover the roughly 100 billion baht that will remain unpaid.

The Electoral Commission had little to gain from withholding funds from the farmers, which would have been an unpopular decision. The commission has given the government until the end of May to make up for budget reallocations. This will be difficult, considering the government has had little success in raising funds due to its caretaker status and remains focused on the unfinished elections and a range of judicial cases against it. Still, the decision gives the government a respite. It may prevent certain farmer groups, mostly in central Thailand -- and in particular, those that had threatened to disrupt Bangkok's Suvarnabhumi International Airport -- from holding additional protests.

While the government's rural base has not withdrawn broad support, the Pheu Thai party's pro-rural image is tarnished, and it has lost at least some farmers affiliated with a coalition partner. The commission's decision does not rescue the caretaker government from the other threats to its hold on office, but for now it should help the Yingluck administration manage problems in the rural sector.

Meanwhile, the Constitutional Court is due to decide in March how to deal with the incomplete Feb. 2 elections. Deliberate interference marred the polls in certain areas, disrupting voting in 28 constituencies across eight provinces, mostly in Thailand's southern opposition strongholds. Some constituencies held elections on March 2 -- these were marked by low voter turnout -- but in others, voting remains incomplete. In order to form a government, elections need to produce enough representatives to meet a quorum. The Pheu Thai party wants the court to allow the Electoral Commission to carry out the vote under the existing royal decree for elections. Opponents hope that the court will demand a new royal decree, which would in effect nullify the Feb. 2 elections and require a new vote. In order for Pheu Thai to stay in power, it needs to finish the elections and engage in political horse trading to convene parliament. Even if Pheu Thai manages to finish elections and form a government, it will be hobbled by the pending court cases.

Some of the legal cases could result in the ejection of Pheu Thai party members from public office. The party could even be forced to disband. Past court decisions have unseated previous parties affiliated with the Shinawatra movement, notably in 2008. Pheu Thai is therefore planning for a fall from power and is threatening to hold massive rallies in Bangkok, on the scale of protests seen in 2009 and 2010. The United Front for Democracy Against Dictatorship -- the official name of the group known as the Red Shirts -- has begun mustering forces, holding rallies and practicing rapid deployment so that its members are ready to descend on Bangkok this spring if necessary. They also claim to be gathering recruits to build a 600,000-strong movement to enable the northeast to make a bid for regional autonomy or secession in the event of exclusion from power in Bangkok. This threat bears watching over the long run.

Since November, the Red Shirts have avoided amassing in Bangkok, a decision meant to prevent direct confrontation with royalist protesters. Typically Thailand's two factions alternate holding mass protests, just as they alternate controlling government -- simultaneous rallies could quickly raise the level of violence. The army has indicated that if large numbers of Red Shirts enter Bangkok, escalating civil strife could necessitate more forceful military action or even a coup in the name of preserving public order.

The military has continued to favor the opposition while avoiding decisive moves and maintaining the appearance of impartiality. Its position hardened somewhat, however, after a number of attacks on protest camps in late February -- in Bangkok and in the provinces -- resulted in the deaths of children and heightened public fears. Army chief Gen. Prayuth Chan-ocha recently reiterated the military's option to carry out a coup -- an admonition for restraint by all political forces, but especially the Red Shirts. The army repositioned its forces in Bangkok to protect protest camps and major institutions such as the Anti-Corruption Commission that are likely to come under threat. It is also weighing the option of arming soldiers with firearms, since they so far have mostly used batons. These actions highlight the military leadership's broad sympathy with the opposition, though it continues to maintain its distance from all political players and retains the option of condoning a Pheu Thai government under certain circumstances, as it did from 2011 to 2013.

Thailand remains in limbo for now, but pressures are building across the political landscape toward some sort of compromise. Failure to achieve such a compromise could spark a new confrontation. While the government wishes to complete the election and form a new parliament, the opposition benefits from drawing out this period of uncertainty, preventing the government from exercising its powers in full -- especially from implementing the 2 trillion-baht stimulus package -- and sapping the administration of support. Indeed, the opposition has succeeded so far in trammeling the ruling party without overthrowing it, which would inevitably trigger a backlash. It can be expected to continue this strategy, which means that its sympathizers in the military and the judiciary may continue to refrain from decisive moves.

Thailand is dealing with a combination of farmer protests, controversial government attempts to get financial support from state-owned banks, a spike in political violence against royalist protesters, military redeployments in Bangkok, a Red Shirt buildup in the provinces and pending court cases against the government. The circumstances indicate that Thailand's two main factions are raising the stakes even as they sit down to negotiate.

A compromise that allows Pheu Thai to stay in power is possible. It would probably need to include guarantees that the party will not bring former Prime Minister Thaksin Shinawatra back from exile or alter the constitution to entrench its power. But a continued push by anti-government forces to oust this government seems more likely. This would open a new chapter of unrest, since the Red Shirts seem prepared to respond. The opposition may at least be able to draw out the current impasse beyond the springtime, during which rural farmers could join rallies in Bangkok.

 

The Root of the Protests

The foundation for the ongoing protests was laid after the Pheu Thai party’s repeated attempts to push forward several constitutional amendments, including the recent one that would make the Senate a fully elected body in order to push forward Pheu Thai’s political agenda and a controversial amnesty bill. A key component of the government’s proposal for what it claimed to be a national reconciliation, the amnesty bill is widely said to be an effort to bring Thaksin back into the country from exile and to strengthen Pheu Thai’s hold on power. Thousands of protesters took to the streets when the bill passed the lower house in late October, leading the ruling party to withdraw the bill. Meanwhile, the Constitutional Court rejected the constitutional amendment in mid-November.

Instead of quelling what were relatively limited protests, the opposition decided to capitalize on the reaction against the government and fomented massive demonstrations. The focus of the protests shifted from blocking the bills to ending “Thaksin’s regime.”

Although the protests have momentum, the opposition’s immediate goal of bringing down the government will face two major challenges in the next couple of days. First, it is important for the opposition to bring the military on board if it is to oust the sitting government. Protests and violence have been a centerpiece of the country’s political dynamic since the 2006 coup against the Thaksin-led government, and the judiciary, military and monarchy have repeatedly intervened. An open military intervention would be the last resort if violence reaches an extreme, particularly considering the ruling party’s widespread popularity and moderate progress in a rapprochement with the royalist-allied military. Despite its past interventions, the military may be more willing to tolerate a range of political reversals without directly jeopardizing its own power and prestige.

In the meantime, the opposition’s second challenge will be trying to keep the protests strong. The king’s birthday weekend from Dec. 5 to Dec. 8 – traditionally a time for celebration and a time when political moves are seen as disrespectful – is expected to dampen the enthusiasm for protests. 

Even before the current crisis, Thai politics have been deeply polarized. The geographic, social and economic problems that have repeatedly brought the country to an impasse have not gone away, and the issue of royal succession always simmers beneath the surface.

What formed the backbone of Thailand’s contemporary political history – the antagonistic regional divisions between Bangkok and the northern regions – was manifested by the rise of the populist Thaksin in the late 1990s. Thaksin’s massive popularity among the rural poor – especially those in the north and northeast, which together make up more than half the country’s population – and his attempts to manipulate political institutions in his favor were seen as a direct threat to the traditional political establishment in Bangkok, whose power rests on the military, civil bureaucracy and the royal families.

Thai politics since the 2006 coup have repeatedly been consumed by the struggles between Thaksin’s proxy parties and anti-Thaksin forces. These struggles have directly led to several rounds of political crisis and the end of three successive governments. The popularity of Thaksin’s sister, Yingluck, and her campaign for national reconciliation had brought relative stability to the country for the past two years. However, facing the threat of lost influence, the traditional establishment has not wasted time in bringing pressure against Yingluck’s government.

Beneath the political roots, there has been a growing economic challenge during Yingluck’s two years in office. Thailand has made remarkable progress with sustained economic development, but economic growth and public services have been largely concentrated in the central region and Bangkok, while the vast majority of the population working in agriculture and informal sectors has little access to social welfare. Such inequality has exacerbated social tensions and increased the public demand for inefficient populist policies.

Moreover, with Thailand’s exports, which accounted for 60 percent of the country’s economy, faltering amid the global recession and China’s slower growth, the need to harness the rural population grew. Lower exports also were an opportunity for the opposition to point to Yingluck’s many inefficient populist policies and her controversial political agenda. Falling exports have strained the state budget, which was already beset by a failing rice subsidy and massive infrastructure investment. Now the country is facing a growing credit bubble and long-lasting economic slowdown, which will only worsen with the political crisis.

 

Struggling for Relevance

As an important security ally of the United States, Thailand was likely to play a major leadership role in the region at a time of renewed U.S. engagement in Asia. However, Bangkok's political uncertainties and concerns about the civilian-military balance appear to have hampered the U.S.-Thai relationship and have forced Washington to look for other partners, such as the Philippines, Indonesia and Singapore, and to develop better relations with less traditional partners such as Vietnam.

With the United States now placing less emphasis on its relationship with Thailand, the country is accelerating its pursuit of more vibrant ties with China, which perceives Bangkok as a strategic pillar in its expanded outreach in Southeast Asia and as a potential corridor as it builds up its maritime sphere. Under Yingluck's government, China has discussed building a high-speed rail line from Bangkok to Nong Khai as well as various investment pacts. But the latest disruption also reminded Beijing that its strategy could again be threatened if the current government cannot retain power.

While all this is going on, Thailand is faced with the strategic opening of Myanmar, Thailand's historical rival to the west, and growing competition with Cambodia in the east. With the rest of the region prepared to capture the benefits of its newfound significance, Thailand may find itself being left behind.

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Earlier article about Thailand

Political and Economic Volatility in other Important Markets

Turkey

Turkey's ruling Justice and Development Party (abbreviated in Turkish as AKP) came into power on the heels of a major banking crisis in 2001, ushering in more than a decade of relatively stable economic growth. With the AKP's rise also came the sidelining of the republic's wealthy secular elite, as Turkish Prime Minister Recep Tayyip Erdogan seized the opportunity to raise a new crop of corporate loyalists. But Turkey was also benefiting from cheap but mobile portfolio capital inflows during this period. With a population of more than 70 million and a steadily growing economy, Turkey became heavily reliant on outside investment to finance a hefty energy import bill, leading to chronic current account deficits.

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Turkey's key vulnerability is that most of the foreign investment it attracted was made into debt, and to a lesser extent equities, instead of foreign direct investment into companies that both provide jobs and are more difficult to liquidate in times of crisis. Total portfolio investment into Turkey in the year ending in November 2013 equaled $26 billion, while foreign direct investment was only $11 billion. Therefore, market skittishness has a much higher potential to severely undermine Turkey's finances than in other countries where foreign direct investment is the primary type of financial inflows.

With Turkey's economic record tightly linked to the AKP's political track record, it is little wonder that deeper political forces are now realigning to challenge the AKP's clout and fracture Erdogan's patronage network in this highly volatile election season. Turkey's venomous political struggle will intensify in the coming months, blunting efforts by the Turkish central bank to assuage investor fears.

 

Indonesia

Indonesia’s economic situation has changed rapidly in recent years. Cheap capital inflows primarily into public sector debt facilitated a significant boost in Indonesia’s imports. Rising demand for foreign goods coupled with a fall in prices in commodity markets pushed Indonesia’s current account balance into negative territory for the first time in 2012, and it has worsened since then. (A recent decision to ban exports of some unprocessed minerals will not help.) The currency fell by 20 percent in relation to the dollar since the United States first began discussing withdrawing monetary stimulus in mid-2013. The Indonesian central bank has responded by gradually raising interest rates, but rates remain below inflation, which is at the highest since the credit bubble in 2008, creating a situation of real negative interest rates.

The government’s response is complicated by upcoming legislative elections in April and presidential elections in July that will likely give Indonesia a new ruling party for the first time in a decade. Indonesian voters have already had to endure a fuel price hike in 2013 as the government sought to trim its subsidy bill. A rapid increase in interest rates would have the effect of slowing spending domestically and could hurt the country’s growth prospects. With the prospects of a meaningful shift in the leadership ahead for Indonesia, there is persistent concern over whether the country will be able to convert economic uncertainty and a slowdown in growth into an opportunity for reform.

 

India

India is gearing up for general elections expected in May. Current polling shows the Bharatiya Janata Party, India's main opposition party, leading ahead of the incumbent Indian National Congress. Domestic and foreign observers expect a Bharatiya Janata-led government to have a more investor-friendly, pro-business policy agenda. However, the challenges facing India's new government will be extensive, including strong institutional barriers for New Delhi to rapidly assert control over India's disparate states.

The election comes as India anticipates growth to slip below 5 percent in the coming year. India's current account is in chronic deficit. Marginal gains were made in 2013, when the current account deficit was estimated to be $78 billion. However, this slight improvement was driven in large part by restrictions on gold imports that merely shifted the gold trade into the black market, meaning that foreign currency continues to drain from the country at an even more rapid rate than official statistics indicate. India has also seen a downturn in portfolio investment from abroad, and the currency has depreciated 14 percent since the first whispers of a taper began -- something that could worsen inflation on imported goods but that has already helped Indian textiles to be more competitive on global markets.

However, India's real challenges are longer term. The country remains very energy poor and burdened with serving a population of 800 million people living in poverty. New Delhi is caught between having to develop policies that not only facilitate the growth needs of a vibrant metropolitan marketplace with deep ties to international markets but also address the needs of an enormous, poor rural population requiring consistent subsidization. The indelible contradiction and competition for resources between the two economies of India will only exacerbate divisions between local and national authorities, restricting New Delhi's options no matter who is in power.

 

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