For the beleaguered government of Banharn Silpa-archa, it may be one big scandal too many. In just one year of office, Thailand's Prime Minister has been plagued by a $3 billion banking debacle, accused of letting his party accept huge kickbacks for defense contracts, and charged with handing out pork barrel projects galore to cronies. Then in early August came the accusation by Banharn's own Justice Minister that his government had accepted $90 million in bribes in exchange for licenses to operate banks. That prompted key coalition partner Thaksin Shinawatra to quit the already fragile government.
For decades, Thais have endured the collapse or overthrow of one inept, corrupt administration after another. Through it all, the economy always managed to chug along. This time, however, a deep anxiety is gripping the Southeast Asian dynamo. As Banharn scrambles to cut political deals before a September censure vote in Parliament, investors are casting a vote of no confidence. The stock market, which has been sliding since Banharn took power, plunged an additional 13% in the last two months. Currency speculators are circling the Thai baht, sensing that the country's slumping exports and yawning current-account deficit--expected to reach $15 billion this year--mean that macroeconomic management is slipping. And foreign manufacturers, frustrated at the government's failure to solve infrastructure bottlenecks and labor shortages, warn that Thailand is losing its competitiveness.
PLUM CONTRACTS. Even more demoralizing is the perception that much of the progress by previous administrations toward cleaning up government since the bloody May, 1992, showdown between the military and prodemocracy forces has been undone. By stacking his government with politicians associated with the disgraced government of Chatichai Choonhavan, which was toppled in a 1991 coup, Banharn has reinstated the old-style practice of doling out big-ticket contracts in return for patronage. The parties backed by business interests buy votes in the countryside in order to win enough parliamentary seats to demand control of a ministry in return for joining a coalition. Then they use their posts to steer plum contracts--like highways and airport services--to supporters.
To businessmen like Bob Kevorkian, managing director of Philipp Holzmann in Thailand, that means a return to the bad old days when projects had to be renegotiated with each new government. "The Thai people are getting fed up with unstable governments and constant change," says Kevorkian. The German construction giant is furious because its $670 million bid to build a subway line was rejected in July with little explanation, even though it was far lower than the three finalists. It had spent four years and $7 million preparing the documents.
Of course, not all of these problems can be pinned on Banharn and his cronies. And despite the scandals, Thailand's economy is forecast to grow by 8% this year. But there's little doubt that backroom dealings are sapping confidence. Thai investors knew Banharn was bad news the day after he took office following a July, 1995, election marred by vote-buying. The stock market plunged when Banharn, as a reward to political groups that supported his coalition, appointed ministers who had been part of Chatichai's "buffet Cabinet," so called because of its insatiable greed. Scandals quickly ensued. Then Banharn got a rare public scolding from the revered king, Bhumibol Adulyadej, for his government's mishandling of much needed transportation projects. Banharn has even been accused of plagiarizing his law thesis. To top it off, Banharn walked onto national television, interrupted his daughter's critique of his governance, and dragged her off the set in front of millions of viewers. The Prime Minister has refused requests for interviews.
The biggest shock to the business community was Banharn's appointments to the Finance Ministry, a body that even under corrupt regimes has usually been entrusted to technocrats who guaranteed the country's basic finances remained solid. Surakiart Sathirathai, a Banharn loyalist with no financial experience, became minister. Surakiart fired the corruption-fighting chief of the Securities & Exchange Commission and failed to blow the whistle on an embezzlement scandal at the Bangkok Bank of Commerce, which has $3 billion in bad loans. Rather than try to solve the current-account deficit, the ministry issued overly rosy projections and urged consumers to shun foreign items. By May, Surakiart was shuffled out of the Cabinet, but the damage had been done.
Government mismanagement, however, doesn't completely explain the loss of confidence in what had been one of Asia's hottest stock markets. The most spectacular flop has been Bangkok Land Co., a $1 billion development empire on Bangkok's outskirts. Four years after work began, half of the 30,000 condominiums remain empty and the company's stock has plunged to about $1, a ninth of its 1992 high. Another surprise is the dismal performance of TelecomAsia Corp., which sold $450 million in the stock by grossly overestimating line demand and revenue and is expected to finish the year in the red.
DEFICIT DRAG. Blue-chip companies in telecom, steel, and other industries are also posting shockingly dismal results this year as they struggle to diversify. Sahaviriya Steel Industry, which went public before it even built its first mill, lost $45 million in the first half after a $12 million profit a year earlier. "They enjoy little comparative advantage and never should have been allowed to list before establishing a track record," says George Morgan, Thailand country manager for HG Asia Investment Research Ltd.
At least on some fronts, Thailand's bureaucracy appears to be regaining control over the economy. Banks have been forced to slow new property lending and inflation is expected to drop to 5.4% from 7% by yearend. Thailand is also still enjoying a net inflow of direct investment--much of it capital goods--allowing foreign reserves to rise by 7% this year, to $40 billion. That could change, however, if the government fails to lower the current-account deficit, now a hefty 8% of gross domestic product. If it doesn't improve, warns Deutsche Morgan Grenfell's Arporn Chewakrengkai, "capital will start flowing out." That could trigger a run on the baht.
Even if Thailand can dodge that bullet, solving the more fundamental problems in the economy will be hard without major reforms. "Thailand has tremendous potential, but it has to find a way to depoliticize projects of national importance," says Philipp Holzmann's Kevorkian. With the system of patronage as entrenched as ever, it may be a long time before that happens. For the short term, investors can only hope that the leadership can get its act together enough to keep investor doubts from turning into a full-flown crisis of confidence.