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Escalating Thai Violence Threatens Economic Growth

Thai demonstrators use slingshots
Thai demonstrators use slingshots to launch stones against security forces during clashes in Bangkok, on Sunday. Photographer: Pedro Ugarte/AFP/Getty Images

The escalation in violence stemming from a political stand-off in Thailand threatens to undermine investor confidence and see the nation’s economy slip behind neighbors that are helping Asia lead the global recovery.

At least 36 people have been killed since the Thai military moved to seal off a business district as large as New York’s Central Park four days ago, as the government seeks to end an occupation of the area by political demonstrators.

Deteriorating consumer demand may impair spending and has prompted the central bank to keep interest rates at a five-year low. The violence may not be “containable” if the government fails to restore order and convince protesters to resume talks, according to Moody’s Investors Service, which said domestic confidence will be crucial in determining the Thai debt rating.

“What matters is the man in Toledo or Paris or Sydney or Tokyo watching his TV and seeing piles of tires burning in the middle of Rama IV road,” said Alastair Henderson, a partner in Bangkok at the London-based law firm Herbert Smith LLP. “Is that going to affect investor confidence? Of course it is.”

Signs have already emerged of investor unease. Foreign funds were net sellers of 14.7 billion baht ($453 million) of Thai equities last week, the most since 2007. The cost of insuring Thai government debt from default jumped 23 basis points to 170 basis points as of 12:32 p.m. in Hong Kong, according to BNP Paribas SA. That’s the biggest increase since March 2, 2009, according to CMA DataVision in New York.

Fitch, S&P

Fitch Ratings may review Thailand’s debt rating if the political situation worsens, associate director Vincent Ho said in a telephone interview today. The company is maintaining its negative outlook on Thailand’s credit rating, Ho said.

Fitch cut its outlook on Thailand’s local-currency debt to negative from stable last month, citing “an escalation in political uncertainty.”

Thailand’s investment may weaken as prolonged political turmoil hurts sentiment, Kim Eng Tan, a credit analyst at Standard & Poor’s, said in a separate interview.

“Investment would be slow, and I think consumer sentiment will be affected, and tourism has already suffered,” he said. S&P is maintaining its BBB+ grade on the country’s debt, with a negative outlook, as the political tension is “confined to small areas within the capital, so the immediate economic and fiscal damage would not be very severe,” Tan said.

Stocks, Baht

Moody’s is monitoring Thailand’s political developments “very closely,” Senior Vice President Tom Byrne said in an e-mail to Bloomberg News today. While Thailand’s “political storm” hasn’t had much of an adverse effect on the country’s credit fundamentals, “confidence can shift suddenly,” he said. “It is domestic confidence that we think will be crucial.”

The benchmark SET share index closed little changed last week at 768.79 and remained 15 percent higher than the low reached in November. The baht retreated for a third day against the dollar as of 4:28 p.m. in Bangkok, paring the advance for the year so far to 2.6 percent.

The limited impact so far is due to the conflict being contained in the nation’s capital, Bangkok. At the same time, the situation threatens to slip out of control unless all parties exercise restraint and resume dialogue, Singapore’s Ministry of Foreign Affairs said in a statement on its website May 15.

“If this happens the consequences for Thailand and for Asean will be extremely grave,” the Singapore ministry said. Thailand is the second-biggest economy in the 10-member Association of Southeast Asian Nations.

Tourism Impact

Thai Finance Minister Korn Chatikavanij said on May 14 growth has already been shaved by as much as 0.5 percentage point, and warned in an interview with Bloomberg Television that the disturbances will “significantly” reduce tourism in the coming months.

TUI AG, the German owner of Europe’s largest travel company, said May 14 that it stopped travel and accommodation for guests going to Bangkok until the end of the month after Germany’s Federal Foreign Office advised against traveling there. Passengers can still fly to Bangkok airport, Anja Braun, a spokeswoman for TUI, said by phone yesterday.

“We don’t expect clients being put off from going to the south of Thailand,” where more than 90 percent of TUI’s Thailand travelers go, Braun said. “Bangkok is usually just a stop-off for travelers where they can spend a few days before going to the bathing regions.”

Business Zones

Richard Han, chief executive officer of Hana Microelectronics Pcl, Thailand’s biggest semiconductor packager, said that he’s seen little evidence so far of damage to his business, while expressing concern at the longer-term dangers.

“As long as the airports are not shut down, our power is not cut off, we’ll be able to continue,” Han said, noting the company’s operations are “far away in business zones” outside the area of conflict. “In the longer term, who knows what customers will think about the situation and their dependence on companies such as ourselves,” said Han, whose firm makes parts for computers and phones including Apple Inc.’s iPhone.

Prime Minister Abhisit Vejjajiva’s government has already seen consumer confidence drop to a nine-month low, leaving economic growth reliant on exports. The central bank forecasts that Southeast Asia’s largest economy after Indonesia may grow as much as 5.8 percent this year on overseas demand.

Australian Warning

The Bank of Thailand last month kept the benchmark one-day bond repurchase rate unchanged at 1.25 percent, the lowest level since July 2004, and warned about the potential impact on tourism. Neighboring Malaysia has by contrast raised borrowing costs twice this year as its economy’s expansion accelerated.

Australia warned its nationals to reconsider the need to travel to Thailand because of the deterioration in security. The government was “very worried” by the violence in Bangkok and the high risk of further unrest, according to a Department of Foreign Affairs and Trade statement e-mailed to Bloomberg.

The Japanese Embassy in Bangkok was relocated on a temporary basis because of the clashes, according to the Kyodo News website.

“We are deeply concerned about the present situation, and we hope the relevant parties show restraint and work toward restoring social stability,” Ma Chaoxu, a spokesman at China’s Ministry of Foreign Affairs, said in a May 15 statement.

Bangkok hotels are less than 30 percent full, about half the usual rate for this time of year, as the deadly protests deter tourists, the Thai Hotels Association said today. Occupancy in hotels on Sathorn Road, near some of the worst violence, has dropped to as low as 10 percent, Prakit Shinamornpong, the group’s president, said by telephone from Bangkok.

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