International | Oct 26 2006
By Chris Shaw
While much of the focus on Thailand since last month has been on the political ramifications of the coup there has been a lack of detail as to its actual impact. With this in mind HSBC visited the country and met with a number of government and finance officials and analysts in an attempt to better clarify how the coup has changed things from both a political and investment perspective.
The bank came away with the view the political situation has now stabilised, with little prospect for unrest prior to the elections set for October next year. Given there is only an interim government in place the bank expects little in the way of significant policy announcements, suggesting the focus is likely to be on institutional reforms such as strengthening anti-corruption and regulatory agencies.
This also partly reflects the popularity of deposed former Prime Minister Thaksin, as the interim government is unlikely to act in a way that stirs up his supporters and causes further unrest, particularly in the northern area of the country which was his political homeland.
It sees the most likely outcome in terms of political power as a return to the pre-Thaksin days where no one party has an outright majority and any government is a coalition among smaller parties.
In the meantime the bank suggests a continuation of existing economic policy appears likely given recent appointments to key positions and comments by leaders of an objective of avoiding any economic excesses.
The bank suggests the focus will be on stimulating domestic demand, which has slowed this year, particularly as strength here would help offset any weakness resulting from the expected slowdown in global demand next year.
In terms of fiscal policy the bank expects many Thaksin-era policies such as rural support programs to remain, with the interim government targeting a deficit of 1.5% of GDP helped by some cuts to large infrastructure projects.
Monetary policy is expected to be strengthened through the introduction of new laws, in particular in relation to the Bank of Thailand (BoT). These are expected to include fixed terms for the governor and new board appointment procedures, leaving the bank better protected from political interference in the future.
Changes to the Currency Act are also expected to allow the bank to diversify its holdings of foreign exchange reserves, while greater powers to oversee non-banks are also likely.
The bank expects free trade agreements with both Japan and Peru to be signed in coming months, though the US has stated it will only pursue free trade negotiations with a democratically elected government, meaning discussions between the two countries are now on hold. This may be problematic as the bank notes the current Generalised System of Preference agreement with the US expires at the end of this year, an outcome which could impact on as much as US$3.5bn in exports annually.
The other expected change is in foreign investment laws, with the bank anticipating the new leadership will introduce laws designed to improve the clarity of regulations and tighten the current investment measures, a move that will potentially result in an increase in foreign direct investment in the coming year.
