Thailand's political nightmare exposes her financial fragilities

Following an escalation of political violence, Thailand’s government declared a 60 day emergency rule yesterday

The New York Times reports

The embattled government of Prime Minister Yingluck Shinawatra declared the imposition of emergency rule in Bangkok and surrounding areas on Tuesday, suggesting a more aggressive posture toward protesters who have occupied parts of the city during the past two months and are seeking to overthrow the government.

But officials said they had no plans to crack down on protesters, who have escalated their campaign over the past week by blocking government offices, taking over major intersections and staging daily marches across Bangkok. The emergency decree enacted Tuesday gives the government the power to invoke curfews, censor the news media, disperse gatherings and use military force to “secure order.”…

Protesters have been attacked by unknown assailants in recent days. Three grenade attacks left one person dead and dozens injured. The government and the protesters have blamed each other for those attacks.

The emergency decree, which is valid for 60 days, was passed under the same law that a different government used in 2010 to start a military crackdown that left dozens of people dead. Underlining the seesaw power struggle that has gripped Thailand for the better part of the past eight years, the man responsible for the crackdown four years ago, Suthep Thaugsuban, a former deputy prime minister, is now leading the antigovernment protests.

A video of the man who threw a grenade that wounded 28 protesters captured here

Yet it’s rather odd, if not contradictory, for the Thai government to impose an emergency rule but claim “they had no plans to crack down on protesters”.  So what’s the emergency rule for?

Anyway, the aggravation of political violence headed towards election day in February 2, has led to increasing anxiety in Thai’s credit markets.  Default probability from Thailand’s 5 year CDS spread surged to September highs.

But the angst over Thailand’s politics has had mixed responses on her financial markets so far. Such has been partly due to the recent rally in US Treasuries, expectations for the Bank of Thailand to cut rates and the People’s Bank of China’s recent liquidity injections.

As a side note: to the surprise of the consensus, the Bank of Thailand kept rates on hold. It is bizarre, if not absurd, for pundits to expect that manipulation of interest rates to function like a magic wand that would solve real world economic problems. The economy is a micro dynamic. For instance, we shouldn’t expect interest rates to solve Thai’s political impasse that affects investor sentiment. Investors will be concerned about the sanctity of property rights that may be affected political turmoil, rather than by low interest rates. The Bank of Thailand surprisingly cut interest rates last November, yet the political nightmare and slowing economic growth continues. [note: the last sentence is an add on]

Thailand’s stocks (via the SETI) have recovered most of the New Year’s day crash but the rally appears to be faltering again.

Yields of Thailand’s 10 year local currency bonds have likewise recovered but like the stock market, pressures appear to have re-emerged.

Importantly, the US dollar-Thai baht is at a 3 year in spite of the recent decline.

Foreign investors were reported to have pulled $4 billion from stocks and bonds since October 2013

It would be easy to dismiss the effect of politics on the financial markets, but as I have been pointing out, Thailand has a credit bubble

Loans to the private sector ballooned by more than 20% over the last 2 years that has fueled a property bubble.

The credit bubble has been manifested in her monetary aggregate M3 which has swelled over the same period.

Thailand’s external debt which inflated by about 75% from 2010 will likewise be under pressure as the baht continues to weaken.

This will further impact Thailand’s once vaunted foreign exchange reserve cover which appears to be rapidly dwindling.

As you can see, political instability will only magnify Thailand’s fragile financial and economic conditions.

As I pointed at the start of the year, there are many potential flashpoints for a Black Swan event to occur. ASEAN may be one of them or if not would be vulnerable to a contagion.

Things are turning out to be very interesting.