Can This Tiger Get A Thorn Out Of Its Paw?

Upcoming Thai elections give business hope for needed 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 the Sept. 27 surprise move by boosting the Stock Exchange of Thailand (SET) Index by 5% when 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 raised the possibility that there may yet be a way out of Thailand's crisis. Analysts hope the door could be open for a return of 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 put respected technocrats back in government to manage the economy.

But given the nature 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 administration could be the same cronies who kept Thai politics mired in scandal and gridlock for decades.

NO BASKET CASE. That could send the stock market and Thai baht, which has dropped 8%, reeling again. Despite posting one of the world's highest growth rates in the past decade, Thailand's economy is plagued by structural problems that the government has failed to address. They range from paralyzing traffic and a yawning current-account deficit to schools that aren't producing enough skilled workers.

Not that Thailand is close to becoming a basket case. It has $40 billion in foreign reserves, and foreign investment is expected to rise 33% this year, to $8 billion. General Motors Corp., for example, is pressing ahead with a $1 billion car manufacturing plant and intends to use Thailand as its Southeast Asian 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 foreign banks. Moody's Investors Service downgraded the country's short-term debt, saying the loans make the country vulnerable to financial shock. The corporate sector has performed miserably as well. 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 falling export growth and tight-money policies by the Bank of Thailand.

Until Banharn dissolved the government, prospects for change were grim. Despite calls for his resignation, Banharn insisted on fighting a no-confidence vote in Parliament. During a humiliating three-day grilling on live TV, opposition politicians accused the Premier of everything from corruption to being a Chinese national. His allies then endorsed rival Chavalit Yongchaiyudh, a former general and Defense Minister. Banharn made a last-ditch attempt to hand-pick his successor. Unable to negotiate a deal, Banharn dissolved the government.

SIGH OF RELIEF. The business community, which considers Chavalit to be 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.

In contrast, a Chuan win would boost confidence among investors. Among the initiatives in his first term were efforts to privatize state industries, establish transparent bidding procedures for big government contracts, and liberalize the country's financial system.

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 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. Political scientist Suchit Boonbongkarn predicts a "trend toward more responsible, transparent government." But in 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.

Before it's here, it's on the Bloomberg Terminal.