Wednesday, 4 June 2008

Time Out for Thailand

You would think that as tanks roll into a capital in support a military coup that a country’s stock market would tank as well. In Thailand it seems to be taken as business as usual and this is not exactly a compliment. The Thai stock market took no hit at all and is up 9.6% so far this year. The past year follows a scripted political pattern all too familiar to Asian hands.

Some cynics may make the case that an authoritarian government taking charge is good for investors. For short-term traders, this may be the case. But for serious long-term investors and for Thailand’s economy and people, the cycle of new constitution, election, political paralysis, coup, and military takeover needs to be broken.

There have been 18 coups since the Kingdom of Thailand was established as a constitutional monarchy in 1932. The last coup was in 1991 and many hoped that the country had moved beyond its reliance on the military to sort out messy political patches.

After all, the now Prime Minister in exile Thaksin’s party had won two elections decisively. Critics charge that he manipulated the system to consolidate power and when his family sold its controlling stake in a company in a way that led to no taxes on the proceeds, the seeds of rebellion were stoked.

It seems that holding an election is the easiest part of building a democratic form of government and that establishing an independent judiciary and protecting due process is the hardest and maybe the most important part.

The reason military coups happen so frequently in countries like Thailand is that the military is the strongest and most respected institution. Over the weekend, former Army Chief General Surayud Chulanont was formerly appointed interim prime minister. Thailand’s military leaders also announced an interim constitution which sets out a nine-month timeline for drafting a new permanent constitution followed by new parliamentary elections. Who will be the drafters of the new constitution is not clear.

Instead of starting this cycle all over again, why not get to the bottom of the Thaksin controversy and bring closure to this unfortunate chapter? The current constitution may be just fine.

We also need to clear up what role the symbolic but powerful King of Thailand, Bhumibol Aduljadej who has reigned since 1946, played in the coup. In the past when the political temperature reached boiling point, a curt nod from the King was enough to send even the most imperious Prime Minister packing. This safety valve obviously did not work and the King may have pointed his next nod to trusted military leaders.

Meanwhile, this political instability has cost Thailand dearly in terms of foreign investment and economic growth. With a land area more than twice the size of Wyoming, Thailand is a youthful solid middle-income country with a consumer-oriented middle class. Its economy is well diversified, is rich in natural resources, and has a vibrant manufacturing sector and strong exports.

The Thai stock market is one of the cheapest markets in the world trading at just seven times earnings. Even so and my strong belief in the country’s potential, I am taking a time out before looking at the closed-end Thai Fund (TF) managed by Daiwa Securities. History shows that that the Thai market is both resilient and explosive. Thailand’s benchmark SET index rose 115% in 2003.

Foreign investors may be jumping in but Thai citizen’s patience with the cycle of instability may be wearing thin.

Carl T. Delfeld President & Publisher Chartwell Partners

Carl has over twenty years of experience in the global investment business with a strong background in Asia.

• Author of global investor primer "The New Global Investor"

• President of the global investment advisory firm Chartwell Partners

• Publisher of the Chartwell Advisor ETF Report and Asia-Pacific Growth

• Columnist on global investing with Forbes Asia: "Global Gambits"

• Former U.S. Representative to the Executive Board of Asian Development Bank

• Chairman of the global economic strategy think tank ChartwellAmerica

• Asian specialist with the U.S. Joint Economic Committee and the U.S. Treasury

• Former member of the U.S. Asia Pacific Economic Cooperation Committee

• Former investment executive with Robert Baird & Company and UBS

• Graduate of the Fletcher School of Law & Diplomacy with economics scholarship from U.S.-Japan Friendship Commission

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