Conflict raises Thai financial risk

The ruling was welcomed by Thai markets as a compromise that might reduce tensions — the court said US$900 million of frozen funds should be returned to Thaksin. But it is unclear if he will ever be able to access those funds, and some analysts question how long he can keep bankrolling his political battles.

The “red shirts” have evolved into a mass movement that stands for more than just returning Thaksin to power, however. Many expect them to remain a political force even if Thaksin abandons his ambitions. That means the red-yellow divide that has polarised Thailand for five years remains far from resolution.

Some analysts say this need not undermine economic success.

“Admittedly, the cloud of political event risk cannot be ignored, but it should not take away the several reasons to smile over the more attractive economic outlook for the Land of Smiles,” investment bank Macquarie said in a recent report.

Thai assets already price in a relatively high degree of political risk. Despite a robust recovery from the lows they hit during the global crisis, stocks trade at just 10.1 times estimated 2011 earnings, the cheapest in Asia after Pakistan.

Markets emerged relatively unruffled from two previous showdowns — the November 2008 siege of Bangkok's airports, and violent clashes in Bangkok and Pattaya last April.

Abhisit's coalition survived the April unrest and is expected to survive the upcoming rally. Crucially, it has the backing of the military brass. But its chances of stopping a victory by the pro-Thaksin Puea Thai party at the next elections seem remote.

“By election time, Abhisit is likely to end up where he was in the December 2007 polls, still unable to capture hearts and minds of the vast majority of the electorate in the north and northeast,” said Thai political scientist Thitinan Pongsudhirak.

For this reason, longer-term and direct investors remain wary, despite the recovery in southeast Asia's second largest economy and confidence in the government's fiscal policy.

The Board of Investment says foreign investment pledges this year could be 15 percent down on last year at 300 billion baht.

“A lot of the stock market and currency movements are being driven by a short-term outlook,” the EIU's Owen said.

“We'll see more of an impact on longer-term direct investment, which certainly will suffer from instability and concern over the political outlook ... Some of the other Southeast Asian countries are doing reasonably well, like Indonesia, and investors are no longer considering big expansion in Thailand.”

Goldman Sachs said in a research note this month that much-needed infrastructure investment would suffer.

“We believe the uncertainties in the political climate could weigh on the efficiency of government policy implementation, and the desire of the public sector to participate,” it said. “Looking ahead, we believe this could put Thailand in a more disadvantaged position compared to its regional peers.”

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