The Asian Financial Crisis 20 years on: part three

One man has cast a long shadow over Thailand since 1997. Where does the country stand now as it tries to re-engage its stalled democracy?

In any analysis of where Thailand has gone wrong over the past 20 years, it is hard to avoid mentioning one man; Thaksin Shinawatra.

His very name is an anathema to most educated and urbanised Thai citizens and therefore the contributors to FinanceAsia’s three part series on the origins and aftermath of the Asian Financial Crisis.

These contributors are: Korn Chatikavanij, former finance minister and leading Democrat party politician; Montree Sornpaisarn, CEO of Maybank Kim Eng’s Thai arm; Eric Ma, Morgan Stanley's long-standing Thai investment banking head and Stephen Taran, who runs Citi's sovereign rating advisory team in New York. 

In parts one and two, published earlier this week, we examined the immediate impact of Thailand’s decision to float the baht on July 2 1997, followed by the lessons the country and region learnt from it.

Here in part three, we discuss the challenges Thailand still faces as it tries to climb out of the middle-income trap and overcome Thaksin’s divisive legacy. At the heart of the issue is Thailand’s struggle to make democracy work, either in terms of its longevity, or ensuring income distribution penetrates beyond the greater Bangkok metropolitan area.

Some might say the nexus of politics and business, which created the Asian Financial Crisis, was never properly addressed by it. In fact, Thaksin’s ascendancy seemed to prove the very embodiment of Asian crony capitalism.

The former prime minister and current Dubai-based exile set up his own political party, Thai Rak Thai, July 1998 and initially attracted the support of many of Thailand’s top business tycoons.

But unlike most of his fellow tycoons, Thaksin did not spend the Asian Financial Crisis fighting for survival because the majority of his company’s dollar-denominated debts had been hedged before it broke out. In a subsequent parliamentary debate, there were allegations of collusion with the then finance minister, Thanon Bidaya, who went on to work for Thaksin when he stepped down from office.

Thaksin positioned himself as the champion of the rural poor, particularly those based in the North East. In his book, Asian Godfathers, author, Joe Studwell, said Thaksin’s real motivation for entering politics was because his wealth: “derived from telecommunications and broadcasting concessions, which were the most politically fought-over rents the state had to offer in the 1980s and 1990s.”

False prophets who pretend to be aligned with those holding genuine economic grievances are nothing new. As one Thai expert tells FinanceAsia: “When Donald Trump was elected to the US presidency, we all said he’s doing a Thaksin.”

Eric Ma

Five years after winning the 2001 general election, Thaksin was ousted through a military coup in September 2006. His sister, Yingluck Shinawatra, then took on the family mantle, winning the 2011 general election, before being forced to step down in 2014 following a constitutional ruling concerning abuse of power.

She is currently on trial for mismanaging a scheme, which purchased rice from farmers at above market prices, but made losses of Bt536 billion ($15.6 billion) – equivalent to about 3.8% of Thailand’s $407 billion 2016 GDP.

A judgement is expected in September. It could leave Yingluck in jail and consign her Pheu Thai party to political oblivion.

Thai observers believe it represents the current military junta’s latest efforts to cauterise the Shinawatra family, who still retain strong political support in the countryside. Key will be whether their red shirted supporters take to the streets if the judgement goes against her.

Maybank Kim Eng’s Montree Sornpaisarn speaks for many when he says, “Unfortunately we’ve had what I’d call a ‘commercial democracy’ in the past. It’s not been clean and it’s often been very volatile. But we are taking steps to fix it.”

The military junta has promised to hold elections next year. Last year, it held a referendum asking the population if they were happy with a new constitution, which would continue to give the military a voice beyond the election.

Some 61.45% said yes, although turnout at 55% was low. One observer believes the military’s continued presence could act as an important counterweight for the country’s competing political parties and enable a form of controlled democracy to find its feet.

Groundhog Day

For the past 40 or so years, Thailand has a experienced a kind of Groundhog Day politics whereby weak coalition governments work for a while until corruption becomes public and the military steps in to re-set the clock.

Observers hope the current prime minister, General Prayuth Chan-ocha, can help break the pattern, while following the lead of General Prem Tinsulanonda, who has long been the pivotal figure behind the scenes in his role as the late king’s most trusted advisor. “General Prayuth does seem like a person with integrity,” the observer says.

Citi’s Taran recalls that Thailand was enjoying a period of political stability when he awarded its debut rating while at Moody’s. This was based on the two key pillars: the king and the effectiveness of the country’s technocrat-minded civil service.

One of the reasons Thaksin started to face severe opposition during the mid-noughties was because he systemically replaced the civil service’s permanent secretaries with his own appointees.

Korn Chatikavanij

Former finance minister and Democrat politician Korn Chatikavanij also harks back to the country’s 1997 people’s charter: the first to be drafted by a popularly elected constitutional drafting assembly.

“The 1997 constitution was the most well meaning that Thailand’s ever had,” he says. “But it relied on good faith and it’s widely to considered to have been hijacked by politicians acting in bad faith.”

And what does he think Thailand requires now? “We need more checks and balances, greater transparency and for the voice of the people to be heard,” he replies. “How’s that for starters?”

Korn says the next general election will be an important one and believes it marks a step in the right direction. But he also warns that: “The military won’t be able to hold onto power even if they want to. If they do, it will be bad for the country over the short-term, but a lot worse for them over the longer-term.”

There have been suggestions that Thailand’s competing political parties should form a cross-party consensus to ensure the military does hand over power and that any new government can proceed without facing the prospect of street protests.

“I don’t believe we need to create a national political consensus,” Korn responds. “Disagreement is normal in politics and I believe competition is good for everyone. The most important thing is to debate and uphold the law.”

Korn is currently head of the Democrat Party’s policy unit and is very clear on the issues he feels Thailand has not addressed since 1997.

“Korea did a far better job at viewing the Asian Financial Crisis as an opportunity to force through substantial supply side reforms, which have served that country very well since then,” he argues.

Thailand's reforms did not go far enough. “We enacted some supply side reforms such as stronger bankruptcy laws and the establishment of institutions like the National Credit Bureau and Deposit Guarantee Fund," he outlines.

One of the Thailand’s major issues is its lower-end, manufacturing-based economy. In 2016, exports accounted for 52.4% of GDP and are generally not of the value-adding kind.

“Thailand faces a lot more competition today than it did in the decade running up to the Asian Financial Crisis,” Taran notes. “Back then, China was just awakening and Latin American countries like Chile only really got going in the 1990s too.”

Morgan Stanley’s Eric Ma agrees. “Innovation has always seemed integral to some North Asian nations’ DNA, whereas large section of Thai industry are still part of the processing economy,” he says. “But there are exceptions though, where the likes of Thai Union and CP Group really stands out.”

A second major issue is Thailand skills shortage. And it is increasingly a problem of quantity as well as quality.

The former is likely to get worse once the population starts ageing from 2018 onwards. The latter was recently exemplified by Thailand’s underperformance relative to neighbouring Vietnam and Malaysia in OECD tests.

“Is Thailand’s education system keeping pace with what’s needed to succeed in the 21st century?” Taran posits.

Korn says it is not. “We need to improve the quality of our workforce,” he comments. “In a nutshell, our people need to become a lot smarter.

“Our educational system is far too centrally controlled and needs to become more accountable to the local communities it serves,” he concludes.

Reasons to be cheerful

Maybank’s Montree still has faith in some of Thailand’s inherent advantages.  At the top of his list is a: “great geographical location and gateway to Indochina.”

Korn concurs, while acknowledging that: “We were very slow off the mark in Vietnam." But he adds: “That served us well because the early movers didn’t come out of the mid-noughties bubble in great shape.”

In recent years, Thai companies have been increasingly active in Vietnam and Korn believes the latter’s high growth rates will rub off onto Thailand through them.

Ma also point out that Thailand is actively positioned within the heart of the Association of Southeast Asian Nations (Asean) and takes issue with the country’s reputation for insularity.

“I don’t agree with that argument,” he counters. “Thailand has one of the most open and liquid capital markets in Asean. Average daily volumes on the Stock Exchange of Thailand are the highest in Asean.”

Montree also notes that: “Thailand’s investor base is very well diversified. We have a high level of retail participation here: about 50% to 60% compared to 30% to 40% in other markets.

“But I do worry about changes enabling high frequency traders to come here,” he continues. “I think we need to be more cautious about some types of technology.”

He also concludes with a parting shot concerning the rising influence of robots and artificial intelligence on the global economy. “Many people worry about this,” he says.  “But a number of our key industries such as agriculture and food will not be affected by this and cannot be relocated to other countries either.”

Ma also flags how consumption has become an important growth driver for Thailand. “We’re not the biggest country in Asean, but our urbanisation levels are relatively high and income per capita is above average for the region so consumption can be scaled up quickly,” he suggests.

But as Taran concludes, consumption needs to fan out across the country.

“Distribution of the benefits from growth between the Bangkok metropolitan area and the countryside, particularly the North East, has been a perennial challenge for successive governments,” he explains. “There have been efforts to address the problem under various governments, including the one led by Abhisit Vejjajiva, but his time in office was fairly limited.”

But he also has grounds for optimism. “Advanced economies are locked in sluggish growth, so it will be the Asian region that pushes Thailand to a higher level,” he remarks.

Korn served as finance minister in the government of his Oxford University college contemporary, Abhisit, who hopes to lead the Democrat Party to victory next year.

He believes Thailand can draw a line under the turmoil, which has besieged it for the past 20 years. But he is not keen to predict where the country may be 20 more years from now.

“I’m not keen on 20-year national plans. That’s what our military wants,” he sighs referring to the government’s 20-year 4.0 development plan.

“Even five years ago it would have been hard to envisage some of the technological changes, which have happened since then,” he concludes. “I think it’s far better to make a list of things that need to get done over the next few years (education, healthcare, civil service and judicial reform) and start addressing those first."

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