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What could have happened if Thailand’s economy wasn’t plagued by its political instabilities?

Authors: By: Yutika Agarwal and Ivan Chin Cheng Xin

Research Head: Shawn Tenh

Editor: Praharsh Mehrotra


Abstract


In the past 20 years, Thailand benefited greatly from the rapid growth of manufacturing exports with an average growth of about 20% up till 2007 with exception of the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008 which they rebounded quickly afterwards. In recent years, Thailand has been experiencing relatively slower growth which may result from many factors such as diminishing advantage as compared to Vietnaminlow cost production and many more. We are going to focus on Thailand’s political instability and 2 major coups in 2006 and 2014, followed by analysing its impact on the economy and its growth potential.Political instabilities can negatively affect the business environment in many ways and one good example is the recent Thailand elections in 2019 where “US$20 billions of spending on transport and logistics projects had been delayed due to a 3-month political impasse”, (The Business Times, 2019). Such an environment forces potential investors and businesses to halt and wait for the dust to settle down which makes them more hesitant on investing in Thailand.Another example will be the suspension of EU Free Trade Agreement in 2014 where the Junta overthrew the elected party. The absence of the FTA signalled EU companies toredirect resources out of Thailand which contributed to the drop in FDI from 2014 to 2011



Political instabilities can negatively affect the business environment in many ways and one good example is the recent Thailand elections in 2019 where “US$20 billions of spending on transport and logistics projects had been delayed due to a 3-month political impasse”, (The Business Times, 2019). Such an environment forces potential investors and businesses to halt and wait for the dust to settle down which makes them more hesitant on investing in Thailand.Another example will be the suspension of EU Free Trade Agreement in 2014 where the Junta overthrew the elected party. The absence of the FTA signalled EU companies to redirect resources out of Thailand which contributed to the drop in FDI from 2014 to 2018.


According to IMF’s report on Thailand’s net FDI flows throughout the years, we can observe that the data corresponds to the time of events such as the dips in FDI in 1997 (Asian Financial Crisis where the value of the Baht plummeted and many investors lostconfidence in Thailand which greatly affected FDI in those year). In 2006 Thailand’s FDI hit a new low at about -8 Billion USD which at that point the country was facing a political coup and the prime minister then Thaksin, was taken over and left in exile. We can observe another dip from the recovery 2011 to 2015 which coincides with the coup that happened in 2014 and bounced to an all-timehigh right after when the dust settles. We can also observe the business confidence index of Thailand from Euromonitor where it went negative from 2005-2009 which can be effects of both the coup and the financial crisis. We can then observe another period in 2014-2016 where it went negative and 0 which relatively matches the series of events whereby confidence and FDIdecrease whenever there was a crisis or political instability.The economy grew by only 0.98% in 2014 as compared to 2.68% in 2013 and 7.24% in 2012 (EUROMONITOR, 2020) which might be due to the political turmoil then which dampened the domestic demand and the exports had also fallen due to the lower demand from Southeast Asia and China. The Thai consumer and business confidence indexes gives us a better picture of the impact that political instability has had on the economy. Observed data revealed that both indexes decreased in tandem during 2006 and 2014 which was when the coup was taking place and up till 2019, the business confidence index especially has been lingering near the 0 bound (EuroMonitor).


The automobile industry in Thailand had been greatly affected by the political instability. In 2014, Honda had reduced their production to 60% of their capacity and had delayed investments into the country (Jittapong, 2014). There was a decline in consumer confidence which greatly impacted the sales of the Japanese automobile industry.


During the period between 2006 to 2015 the cumulative growth was around 35%. When we compare this to other Southeast Asian countries that have similar economies,we see that there was a higher growth rate. Vietnam during this period grew at the rate of 70% (Samphantharak,2019). The political instability caused Thailand to lose about a decade of growth.


In 2019 the elections were held for the first time after the two coups. The new coalition government announced a policy framework consisting of fiscal stimulus policies to boost short term growth as well as structural reforms to help in long term growth.


To become a high-incomecountry by 2037 Thailand will have to sustain long run growth rates of more than 5%. In order to achieve this doubling of the public and private investment is required (World Bank, 2020). Since2014, FDI inflows have been slowing down and have been volatile. Political stability in the future will be the key to gaining back the investor confidence. Tourism can be a major driver for growth and the Visa on arrival policy can help further. Thailand is moving towards Thailand 4.0. This economy can be described as having advanced infrastructure and social systems.


A key component of the future of Thailand is the Eastern EconomicCorridor(EEC) with an area of more than 13,000 square kms across 3 provinces Rayong, Chachoengsaoand Chonburi southeast of Bangkok. The government hassetaside US $45 billion to build infrastructure and smart cities. TheBelt and Road initiative will further boost connectivity and improve logistics (Forbes,2018)



References


EURO MONITOR PASSPORT. (n.d.). Retrieved February 13, 2020, from https://www-portal-euromonitor-com.libproxy.smu.edu.sg/portal/statisticsevolution/indexJittapong, K. (2014, May 29). Coup won't drive car firms from Thailand, but rivals’beckon. Retrieved from https://www.reuters.com/article/us-thailand-politics-autos/coup-wont-drive-car-firms-from-thailand-but-rivals-beckon-idUSKBN0E90UN20140529The Business Times. (2019, June 13). Foreign investors wary of Thai economy. Retrieved from https://www.businesstimes.com.sg/government-economy/foreign-investors-wary-of-thai-economy


World Bank. (n.d.). Foreign direct investment, net (BoP, current US$) -Thailand. Retrieved February13, 2020, from https://data.worldbank.org/indicator/BN.KLT.DINV.CD?locations=TH

World Bank. 2020. Thailand Economic Monitor:Productivity for Prosperity (English).

Washington,D.C.:World Bank Group http://documents .worldbank .org/

curated/en/3945015797102381/Thailand-Economic-Monitor-Productivity-for-Prosperity


Forbes. (2018, October 31). Retrieved from Thailand: A Vision For The Future:https://www.forbes.com/custom/2018/10/30/thailand-a-vision-for-the-future/


Samphantharak, Krislert, The Thai Economy: A Lost Decade? (May 7, 2019). Available at SSRN: https://ssrn.com/abstract=3135033orhttp://dx.doi.org/10.2139/ssrn.3135033


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