Wounded Tiger

Will new Thai elections spark reform?

It took 14 months, but Thai Prime Minister Banharn Silpa-archa finally found a way to instill confidence in his country's floundering economy: He resigned and called new elections.

After driving stocks down more than 30% since Banharn took office last year, investors greeted Banharn's Sept. 27 surprise move by boosting the Stock Exchange of Thailand (SET) Index by 5% when the markets opened afterward. "There is hope for a better government after the election," says Arpon Chewakrengkai, chief economist at Deutsche Morgan Grenfell Securities (Thailand).

For Thais as well as foreign investors, the Nov. 17 elections will be a critical test of whether the optimism is justified. By unexpectedly dissolving Parliament, rather than brokering a backroom deal to choose a successor, Banharn reopened the possibility that there may yet be a way out of Thailand's crisis of confidence. Analysts now believe the door could be open for a return of the Democratic Party led by Chuan Leekpai, who was considered ineffective as Premier from 1992 to 1995 but at least was committed to reform. If he gets a second chance, Chuan vows, he would bring respected technocrats back into the government to manage the economy.

CRONYISM. Given the fragmented structure of Thai politics--in which forming a government is a business deal among special interests more than a contest of ideas--a darker prospect is equally possible. The next ruling coalition could be run by the same cast of cronies that kept Thai politics mired in scandal and gridlock for decades.

That could send the stock market and the Thai baht, which has fallen 8% since January, reeling once again. After posting one of the world's highest growth rates in the past decade, Thailand's economy has been plagued by structural problems that need urgent attention. They range from paralyzing traffic and a yawning current-account deficit to an educational system that isn't producing enough skilled workers--problems Banharn failed to address. "The Thai markets want to see new blood," says Callum Henderson, a Hong Kong-based currency analyst for MMS International.

Not that Thailand is close to becoming a basket case. With $40 billion in foreign reserves, the central bank has enough to pay for seven months of imports and defend the baht from raiders. What's more, foreign investment is expected to rise 33% this year, to $8 billion. General Motors Corp., for example, says it is pressing ahead with a $1 billion plant that will produce up to 150,000 cars, and it intends to use Thailand as a manufacturing base. "Governments have come and gone on a regular basis for decades, and the economic growth has not been affected," says GM Thailand President Ronald D. Frizzell.

But for an Asian Tiger, Thailand sits in a precarious financial state. In the past five years, it has increasingly relied on short-term loans from overseas banks, accounting for two-thirds of Thailand's $68 billion in foreign debt. Saying that this makes Thailand vulnerable to financial shock, Moody's Investors Service downgraded the country's short-term debt in early September. If worries about the economy should cause those funds to dry up, a number of Thai finance companies, which have bad debts estimated at 20%, could well be pushed into default.

The miserable performance of Thailand's corporate sector raises concerns that a slowdown could have wide fallout. Excluding commercial banks, listed Thai companies posted puny profit growth of 1% in the past two years. Expansion is expected to cool to 7% this year and 6% in 1997, because of plunging export growth and tight-money policies by the Bank of Thailand. "The problems can be solved," says Board of Trade Chairman Photipong Lamsam. "But some people are going to get hurt in the process."

Until Banharn dissolved the government, prospects for change were grim. Despite widespread calls for his resignation by the Bangkok media and business groups such as the Federation of Thai Industries, Banharn insisted on fighting a no-confidence vote in the Thai Parliament. Despite a humiliating three-day grilling, in which opposition politicians went on live television to accuse the Premier of everything from corruption to being a Chinese national, Banharn managed to survive the vote.

SIGH OF RELIEF. But he paid a steep price. To secure the support of his own coalition, Banharn promised to resign in seven days. His allies then endorsed Chavalit Yongchaiyudh, a former general and Defense Minister. Banharn made a last-ditch attempt at negotiations to handpick his successor. As the bickering went on, the public outcry got so loud that a group of businesspeople formed a motorcade of Mercedes-Benzes outside the Government House to demand the election of a new government with a new mandate to restore order. Unable to negotiate a deal, Banharn did disband Parliament.

The business community, which considers Chavalit in the pocket of special interests, breathed a sigh of relief. However, the former general remains a top contender for the job. He has strong backing from the military Establishment, which is an economic force in its own right. Chavalit is courting the business community by promising to put a "dream team" of technocrats in key economic ministries.

In contrast, a Chuan win would boost confidence among investors. Among the major initiatives in his first term were efforts to privatize state industries, establish transparent bidding procedures for big government contracts, and devise a master plan to liberalize the country's financial system. He also appointed well-respected business figures to top economic posts, and they are expected to return if Chuan wins.

With public disgust over money politics at an all-time high, there is even hope that Chuan could win by a big enough margin to push through sweeping political reform. That would make it possible to reduce the large number of political parties and curb the practice of vote-buying, features that keep the Thai government in perpetual chaos. Predicts political scientist Suchit Boonbongkarn: "There will be a trend toward more responsible, transparent government." But given the political culture of Thailand, where no government has served a full four-year term since the parliamentary system was introduced in 1932, that's likely to be a long process.

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