Any comfort investors in Thailand draw from what happened four years ago, when economic growth, the stock market and foreign investment all surged despite deadly unrest in Bangkok, may be sorely misplaced.
The latest bout of political strife will delay major government spending projects and damage a lucrative tourism industry. And, even if Thailand's politics calm down, its economy will remain handicapped by weak private investment and rising household debt.
“If you look at the channels through which politics impacts real economic activity, it's virtually every demand side component of GDP,” said Euben Paracuelles, senior economist at Nomura. “But, where I have a bigger worry is on private consumption and private investment.”
Data released on Monday showed the economy slowed sharply in the fourth quarter of 2013, when street protests aimed at bringing down Prime Minister Yingluck Shinawatra's Pheu Thai Party government first began.
The national planning agency slashed its growth forecast to 3-4 percent for 2014, from the 4-5 percent it was predicting in November, when the protests began building a head of steam. Some private sector economists think that is still over-optimistic.
“The longer the power vacuum lasts, the worse it will be for the Thai economy,” said Krystal Tan, Asia economist at Capital Economists, who doubts growth will top three percent this year.
“Spending restrictions on the caretaker government leave it with limited ammunition to boost the economy,” she added in a note.
As well as the big-ticket infrastructure items now facing delays, the government will also be unable to pursue the populist policies that brought Yingluck to power in 2011.
A controversial rice subsidy that has run into funding problems cannot be renewed when it expires this month, which will hit rural demand.
“Another major downside risk to growth from government spending is the inability to pay the rice farmers under the pledging scheme when many of them are already facing a liquidity problem,” said Santitarn Sathirathai, an economist at Credit Suisse in Singapore. “Even the cautious economists in the market, including ourselves, have not fully factored this issue in.”
This time it’s different
While 12 people have been killed in sporadic clashes between protesters, security forces and government supporters, the unrest has so far been less violent than during the country's last major spasm of street protests four years ago.
More than 90 people were killed in April and May 2010, but that year saw foreign direct investment jump 88 percent, the stock market surged 41 percent and the economy bounded ahead by 7.8 percent, its best performance in 15 years.
Back then China, the biggest market for the exports that make up 60 percent of the Thai economy, was roaring back from the global financial crisis at a stimulus-fuelled, double-digit clip, while domestic private investment was picking up.
Though it expanded 7.7 percent last year, China's growth narrowly missed a 14-year trough.
The chill for Thailand is even more evident in private investment, which fell 13.1 percent in the fourth quarter of 2013 from a year earlier. The National Economic and Social Development Board sees it rising just 3.8 percent this year.
In 2010, private investment rose nearly 14 percent.
Tourism, whose share of Thailand's economy has been grown in recent years to account for around 10 percent of GDP, has been suffering. Just last week, Starwood Hotels & Resorts Worldwide warned that political unrest had “significantly” hurt its business in January.
Of greater concern over the longer term is the rapid accumulation of debt by Thai consumers, who splurged on loans for house and car purchases in recent years.
Household debt is now equivalent to around 80 percent of GDP, up from 56 percent at end of 2008, and the Bank of Thailand warned this month it was likely to rise further as consumer loan growth may be faster than economic growth.
That is likely to depress consumer confidence, which dropped for a 10th straight month in January, even after the political crisis is resolved, and will limit the ability of the central bank to cut interest rates too far to prop up growth.
“When we get some kind of resolution, tourism tends to recover very quickly,” said Nomura's Paracuelles. “But what I would caution is that maybe the recovery is not going to be as quick from the private consumption side as previous episodes have suggested, because the difference now is we have very leveraged households, which are spending a lot of their disposable income just to service that level of debt.”