Saturday, October 17, 2009

Q+A-Would a Thai crisis destabilise regional markets?

Markets in Thailand have tumbled over the past few days on concerns about the health of King Bhumibol Adulyadej, who has been in hospital since Sept. 19. The turbulence suggests Thai stocks, bonds and the baht could be set for an even bigger shock when Bhumibol's reign comes to an end, because of uncertainty over what will come next in a country already riven by a destabilising political conflict.

However, analysts say the market shock may not be as bad as some fear, and the risk of contagion across neighbouring markets as seen in the 1997/98 crisis is low. Following are the key questions and answers about the likely impact of another potential crisis in Thailand:


Thailand's king is officially a constitutional monarch with no political power. Bhumibol's successor is almost certain to be his son, Crown Prince Maha Vajiralongkorn. And yet markets fear the succession could herald prolonged instability in Thailand. The reasons for this are rarely publicly discussed, because of strict lese majeste laws that prevent any perceived criticism of or speculation about the monarchy. Most Thais privately say they are very concerned about what will follow Bhumibol's reign.

Three key factors make the succession a major risk issue.

Firstly, despite the monarchy's lack of formal political powers, it is an institution with enormous influence. This is partly because of its reputation as a unifying force, and partly because during his six decades on the throne, Bhumibol built up widespread respect that enabled him to exert influence on politics, sometimes overtly, more often subtly. Nobody would dispute that the king is far more than just a figurehead.

Secondly, the political context is crucial. Thailand has been riven by a destabilising political conflict for more than 3 years. In broad terms, the conflict pits royalists, the military and urban elites against the mainly rural mass movement backing deposed former Prime Minister Thaksin Shinawatra. The palace has at times been drawn into the conflict, sparking muted debate about the appropriate role of the monarchy. But the king has also had a stabilising influence because the widespread reverence in which he is held has prevented the conflict escalating to a point where the monarchy was threatened.

Thirdly, the crown prince does not command the same level of popular support and trust as Bhumibol. The prince's reputation is a highly sensitive subject, but supporters of the prince concede that it will not be easy for him to match Bhumibol's popularity. So when Bhumibol's reign ends, one of the most important institutions in Thailand will pass to an untested monarch, at a time when competing factions are vying for power. The likely result is a period of even deeper instability and uncertainty.


The scale of the negative reaction this week to rumours about the king's health -- stocks fell 7.2 percent over two days and the baht slid -- suggests that the downside would be even larger if confirmation comes that Bhumibol's reign has ended. Yet this may be misleading. For a start, the sell-off in stocks looks much less serious when viewed in context -- Thailand's main stock index has soared 57 percent this year. Moreover, financial markets often struggle when it comes to pricing in political risk. It is not uncommon for rumours ahead of an event to cause more market weakness than the event itself. And markets almost always over-react to political shocks, diving in a knee-jerk sell-off then recovering within a few sessions.

Foreign capital flows are widely seen as the most vulnerable to political event risk. In Thailand's bourse, foreign flows as a percentage of market capitalisation are 1.1 percent according to Kim Eng Research -- more than twice the level of Indonesia and the Philippines, but not large enough to pose major risks. Also, Thailand's capital controls mean foreigners have to retain assets for a year after buying them, further limiting the likely size of any panicky sell-off by foreign investors.

Assessing the longer-term market impact requires analysis of the likely scenarios. In Thailand's case, many analysts say the worst-case scenario is that the succession heralds a period of intense political conflict and perhaps civil unrest. Yet severe instability would almost certainly be temporary, and if Thailand's conflict is settled in a bout of upheaval, however intense, the long-term impact would be market-positive.

A second scenario is Thailand stays mired in uncertainty, with the conflict dragging on unresolved, and a weakened monarchy unable to contain the instability. This would not be good for markets, but it would essentially be a continuation of the situation that Thailand already faces, limiting the downside.

And a third scenario is that the succession goes smoothly, unrest fails to materialise, and markets get a pleasant surprise. Overall, analysts say, markets will drop whenever they receive bad news about the king, but most of the losses will be temporary, depending on how events play out afterwards.


Memories are still fresh in the region of the 1997/98 Asian crisis, which began with the collapse of the baht, and generated catastrophic financial contagion across southeast Asia, with currencies plunging, asset prices tanking and debt spiralling. Could Thai political upheaval this time around have a similarly savage impact on other economies?

The answer is no.

Analysts say several factors contributed to the Asian crisis contagion. Many other regional economies had similar problems to Thailand, and had also benefited from similar uncritical market euphoria in the years leading up to the crash. So when markets were suddenly seized by concerns about Thailand, the same concerns applied to several other Asian economies. And there were no economic safety nets in place to help governments and central banks defend against the onslaught.

Now, things are very different.

Most central banks now have ample foreign exchange reserves to combat depreciating currencies. Also the fundamentals of financial systems and banking systems are much stronger now than they were back then. The institutional safeguards in the region have been tested several times -- notably when Indonesia's rupiah was tanking last year -- and there was no significant contagion. Also, upheaval in Thailand would be a purely national factor not relevant to the fundamentals of other economies.
Investors would think -- how does this event affect the rest of the region? And the reality is, the fundamental linkages are not really significant. So both from a systemic perspective and from a fundamental perspective, the contagion risk is very low." By Andrew Marshall, Asia Political Risk Correspondent (forwarded by Joyo News Service)

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