Challenges face Thailand’s military junta

The May 22 coup followed six months of protest and confrontation in Bangkok. Markets appear to have responded well, with the SET (Stock Exchange of Thailand) Index rising 8.12 per cent, suggesting that investors are expecting the junta to enforce calm and unblock spending previously obstructed by the tumultuous political environment.

This view has been encouraged by the news that Thai rice farmers have been paid Baht 92bn (£1.5bn) of overdue debt by the junta and that key economic policies are being continued, such as the extension of VAT and corporate tax reductions.

While the junta has seemed to provide political stability, it is unclear how long this will last. The National Council for Peace and Order has laid out a three-phase plan to reconcile Thailand’s political conflicts: first, a short interim period with a military government in place; then the installation of a civilian government with an interim prime minister and cabinet chosen by the military, due to be in place by the end of the year; and finally, the restoration of a democratic government within 15 months.

There remain a number of near-term challenges, however. Ongoing are reforms to the energy markets, propped up and distorted by the government and increasingly burdensome on account of rising oil prices from geopolitical tensions across the Middle East, in particular Iraq. Considering oil’s percentage relative to the whole CPI/PPI basket, household spending will hurt on account of likely inflationary headwinds.

The other point of note is the enormous shadow economy: illicit economic activity that exists alongside a country’s official economy, and 54 per cent of GDP by some estimates. A crack-down on illegal immigration could affect small and medium-sized enterprises in industries such as construction and household services, and clamping down on corruption may affect discretionary spend in areas such as luxury goods.

Looking further ahead, the overarching view is more positive. Structural changes should reduce the regulatory burden, particularly in areas of immigrant labour, transportation and the state lottery. This in turn should lead to lower transactions costs, improve productivity and simplify the tax structure; bolstering private investment, improving income for the masses and moving away from a base where corruption and labour market freedom were worsening.

The medium to long-term prospects for Thailand remain attractive. The country is the destination of choice for most tourists visiting Asia, while the manufacturing sector has carved a niche in sectors such as auto and technology, making it a significant player on the global stage. It is also fairly self-sufficient in most hard and soft commodities and is one of the largest exporters of rice and shrimp globally.

Mike Kerley is manager of the Henderson Far East Income trust and director of pan-Asian equities at Henderson Global Investors