It's not as if foreign investors in Thailand's stock market didn't already have reason to be skittish. As 2006 drew to a close they were still queasy from the roller coaster performance put on by the Stock Exchange of Thailand on Dec. 19 when the country's central bank triggered a market crash by suddenly slapping on foreign exchange controls, only to rescind them a day later (see BusinessWeek.com, 12/19/06, "Emerging Markets Turmoil").
So when a series of bombs exploded in the Thai capital of Bangkok on New Year's Eve, killing three and injuring dozens more, it gave people even more cause for the jitters. "It will make people think twice about investing in Thailand," says Michael Spencer, chief Asia economist at Deutsche Bank in Hong Kong.
And the fact that no one has claimed responsibility for the attacks makes matters even worse. The most common theory about the blasts is that they were masterminded by a group backing former Prime Minister Thaksin Shinawatra, who was ousted in a bloodless coup by the military in September. Several members of his Cabinet lost their jobs along with him (see BusinessWeek.com, 9/20/06, "Markets React to Thai Coup").
Waiting for the Fallout
General Surayud Chulanont, the Thai prime minister who runs the current military government, discounted the second possibility: that Malay Muslim insurgents from the violence-ridden southern provinces might have set off the blasts. However in light of the violence, it's likely the government could extend the martial law it imposed after the coup indefinitely. That has led some conspiracy theorists to speculate that the military itself caused the explosions to create a situation of crisis, thereby legitimizing its hold on power.
Just how big a fallout results from the blasts won't be known until Jan. 3 when the Stock Exchange of Thailand reopens after the holiday break, though it's likely prices will be heading south. "There is going to be a negative interpretation, obviously," says Sriyan Pietersz, head of research at JP Morgan in Bangkok. "There will be some pullback in the market, but given there has been some time to digest [the news] and there was some expectation [of possible violence], it will be modest."
He believes that markets have been discounting the possibility that Thaksin supporters would eventually make some attempt to create instability under the new regime. But coming on the heels of the central bank policy flip-flop, the bombs, and the possibility that more could go off, has foreign investors realizing that "stability and an orderly transition back to democracy," aren't just around the corner, says Deutsche Bank's Spencer.
Tourism May Take a Hit
Indeed, the prognosis doesn't look good on other fronts either. Tourism, which accounts for more than 5% of the Thai economy, is likely to get hit, especially as the bombs occurred at the height of the holiday season. In fact, tourism is one of the few bright spots in the Thai economy, which has failed to deliver the kind of growth that makes markets shine. Economic performance in 2006 is expected to have been anemic: In the first three quarters consumption grew only 3.4% year on year and gross capital formation 4.6%, though exports remained strong. Economists have forecast 2006 growth between 4.6 and 5%.
The bottom line for investors? "The risk premium on Thai assets has gone up on the back of disappointing economic numbers in the past," says Spencer. Not much New Year's cheer in that.