In the July 2011 general election the Pheu Thai Party [PTP] prevailed over the former government led by the Democrat Party [DP]. The PTP gained an absolute majority [265 out of 500 seats], but nevertheless formed a coalition with five smaller parties to broaden its majority and popular acceptance.
The restoration of democratic rule in December 2007, after more than a year of a military rule, has not brought the hoped-for political stability. Since then, there have been ongoing political tensions caused mainly by the sharp political, economic and cultural divide between the rural and urban poor who supported PTP, popularly known as red shirts, and both the Bangkok upper and middle class, represented by the DP and the Peoples Alliance for Democracy [PAD], popularly known as yellow shirts. This urban establishment enjoys the support of the army, the judiciary and no doubt the royal family. The years from 2008 to 2010 were characterised by growing political tensions between the two camps, with changing governments in 2008 and regular mass protests by either the yellow or red shirt movements since then. The situation deteriorated sharply in March 2010 when the red shirts organised mass protests in Bangkok. About 90 people were killed and 1,400 injured during the protests.
Relations with Cambodia deteriorated in 2008 because of a border dispute over the Preah Vihear Temple, leading to several border skirmishes. The relationship reached an all-time low in early November 2009 when the Cambodian government announced the appointment of former Thai premier charged with corruption by the Thai Supreme Court as a special economic advisor and refused requests for an extradition.
Economy will contract due to the flood disaster
The economy has been badly hit by the worst floods for 50 years, caused by heavy monsoon rain, killing more than 600 people and leading to serious disruptions: among others, in the electronics and textile industries. Many supply lines have been damaged or destroyed, and more than 1000 factories have been flooded and will probably not resume production before April or May 2012. Thailand serves as a production hub for Japanese car and electronics producers, whose supply chains were severely hit [Japanese automotive companies have lost production of about 100,000 cars, with shortages of parts affecting operations]. The total damage is estimated at US$ 17 billion [5% of GDP]. Industrial production decreased 35.8% in October 2011, and consumer confidence has deteriorated sharply.
Economic growth projections for 2011 have been adjusted from their previous 4.1% to 2.5%, and some analysts forecast growth to be even lower: at 1.5%. After 3.5% GDP growth in Q2 of 2011 Thailand is expected to record real GDP contraction in Q4 of 2011 [the government expects a 3.7% contraction] and probably also in Q1 of 2012, which would technically mean a recession.
At the end of November 2011, the Bank of Thailand cut the benchmark interest rate for the first time in more than two years - by 0.25% to 3.25% - to prop up the economy and support reconstruction. The government announced spending of 130 billion baht [US$ 4.2 billion] on reconstruction.
Beside public investments to speed up reconstruction after the flood disaster, the economic policy of the administration will be determined by Thaksonomics: the leading school of economic thought during the premiership of Thaksin. This implies populist measures such as a focus on alleviating poverty and investment in infrastructure. After the elections, the new government announced that it would raise the minimum wage, decrease corporate income tax from 30% to 20% and ensure a return to a guaranteed rice price. Together with the reconstruction efforts this is likely to affect the budget such that the budget deficits will increase in 2011 and 2012.
The economy is expected to recover in 2012, with GDP forecast to grow 3.8%, helped by reconstruction measures, which will spur domestic demand. At the end of November, the Bank of Thailand forecast that the economy could grow by as much as 4.8%. However, weaker than expected global growth could hamper a strong rebound, as Thailands economy is export driven [mainly electrical appliances, automotive parts, machinery] and very dependent on demand from its key trading partners: China, Japan and the US. The Bank of Thailand has announced additional interest rate cuts if needed [i.e. in the event of slower paced reconstruction and/or shrinking global demand] as it sees the inflation rate as controllable [forecast to be 4% in 2012].
The health of the banking sector has improved significantly. Non-performing loans are currently estimated to be just 5.7% of total loans.
Overall, Thailand shows very strong macroeconomic fundamentals, which significantly reduce the country risk. Thailands sovereign payment capacity is underpinned by low external debt ratios, a current account surplus and more than adequate foreign reserves.
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