This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Aninda Mitra, senior sovereign analyst at Standish gives their outlook for Thailand.
The military coup in Thailand on 23 May was a bit of a surprise to everyone. The provisional administration was widely expected to hammer out a way forward to ensure government continuity following the dismissal of the Yingluck administration earlier this month.
Financial markets have remained fairly sanguine despite the news - the SET index lost 2% of its value as of noon the following day, the baht barely budged, and Thai government bond spreads widened by just 5-10 basis points. In fact, some even see the coup as a precursor to a fresh era of stability. However, we remain sceptical.
Indeed, the historical record of the last two decades does not raise much cause for alarm. This coup is Thailand's 12th since 1932, and may mark an attempt to re-start the political process. In the last two coups, in 1991 and 2006, a restoration of a democratic political process has taken around 450 and 570 days respectively. In the interim, there has been no collapse of domestic activity or a financial crisis. The 1997 Thai baht crisis, which morphed into the Asian financial crisis came much later after the 1991 coup and the resumption of a democratic process. Moreover, the 2006 coup was also followed by the restoration of democracy which navigated the Thai economy quite ably through the global financial crisis.
Analysis of the political facts leaves little room for complacency. Thai military coups have become fewer since the 1970s. But the 2014 coup follows fairly closely after the last coup in 2006 and is a direct result of the lack of political resolution since the last time the military tried to clean the slate. Back in 2006, Thaksin Shinawatra was unconstitutionally dismissed but his followers (Red Shirts) managed to remain resilient and bounced back to power repeatedly following several efforts to pull down or keep them out of power.
The 'Thai Deep State' remains fundamentally opposed to a democratic process that does not suit its interests. Meanwhile, the Red Shirts - who have remained patient, and relatively non-violent, so far -are unlikely to become any less determined. This raises the prospect of widespread disturbances across the country. It is impossible to tell what form or shape such events might take but our conclusion is the coup represents a suppression of a popular mandate and the institutionalisation of a regime with far less accountability. This may restore some normality to financial markets, though, it is difficult to see how it resolves underlying deadlocks or supports long-term investor confidence.
Over the near term, we will monitor two things to assess how long this perceived stability will last. First, whether an interim government - assuming one is formed under the aegis of the Thai military - will be acceptable to both sides - given the Red Shirts' demand for an elected government. Second, the timeline for when the next election will be held and if this will placate the Red Shirts.
What's more, the King of Thailand is aging and in fragile health. In the event of his passing, stability may prove even more difficult, as he remains a unifying force - though his influence appears to be ebbing steadily.
Thai assets have held up firmly, but falling activity poses a growing risk amid the absence of any form of political resolution. External accounts have strengthened as import demand has collapsed and the current account surplus has ballooned. FX reserves remain ample and exceed the entire stock of marketable foreign debt. And government bonds are well bid locally by a well-established contractual savings system. Nonetheless, falling activity will ultimately weigh on banks and should raise credit risks, which look underpriced per J.P. Morgan Asia Credit index spreads. Thai banks do have ample capital buffers and have taken precautionary measures amid the continuing political slide. But a broader or more sustained collapse of activity would prove far more stressful.
From major Thai banks’ first quarter results, we think Thai banks can still manage to deliver reasonable results in the second quarter. However, the cracks seen in the first quarter results (ie, lower loan growth, lower deposit growth, higher new Non-Performing Loans formation from the Small and Medium Enterprise segment, lower fee income, and lower loan yields etc) should be much more pronounced in the second half of the year, making the current long-lasting rich valuation susceptible to longer-than-expected unwinding.
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