Global Insight Perspective

Significance

The bloodless military coup was swift and looks to have been effective, with deposed Prime Minister Thaksin Shinawatra still believed to be in the United States, where he had been attending the UN General Assembly meeting.

Implications

Sonthi has said that months of political unrest and the prospect of another Thaksin government made the coup necessary, and that it is now the military's role to unite the country and return power to the people.

Outlook

Reaction to the coup, domestically and internationally, has been mixed. Thaksin is a controversial figure and his removal has inevitably created a stir. Two crucial factors in the coming days are the degree of support which the reform programme receives and how the much-revered monarchy responds to the situation.

Military Actions

The military surrounded and took control of Government House in the capital, Bangkok, last night before moving to secure the whole city. Today, soldiers wearing yellow sashes—a mark of respect to the monarchy—are patrolling the streets to ensure that order is retained. Reports however, suggest that the capital is quiet following the events. The military has announced that today is a public holiday and that therefore capital markets, businesses, shops and schools are all closed. To date, significant military actions have included:

Political shutdown. The Constitution, Senate (upper house), House of Representatives (lower house), cabinet and constitutional court have all been "terminated".

A media ban. The military has said that it does not want "misinformation" disseminated, and as such all news outlets, including international providers, have been banned from broadcasting.

The arrest of Thaksin's close colleagues. Key among these is Deputy Prime Minister Chidchai Vanasathidya, who was reportedly "invited to spend the night at army headquarters" last night.

Martial law has been imposed across the country. In addition, regional army commanders have been tasked with exerting military authority across the country, ensuring that the coup is extended nationwide.

Sealing the borders. The country's northern border with Laos and Myanmar has been sealed, reportedly to prevent elements from slipping into the country.

Domestic and International Response

Response to the events has been mixed. Domestically, there are those who considered some sort of military intervention inevitable, given the months of political unrest and Thailand's legacy of military coups—this is the eighteenth coup in six decades. That said, there are others who feel that Thailand had moved beyond this period of its history, and that this sort of activity can only damage the country's democratic fundamentals. Internationally, the response has been more negative than positive. A number of countries, including Australia, have condemned the coup, calling for a swift return to democracy, while a number of regional neighbours, including China and Singapore, have simply described the situation as an "internal matter".

New Policy and Reform Framework

Attention will now turn to the policy framework that Sonthi and his supporters are seeking to impose on Thai politics. It has been announced that Sonthi will stand as acting prime minister, although a new premier is expected to be elected within two weeks. Elections will reportedly be held shortly, although no timeframe has been given. In place of the standard political institutions, the military has said that a Council of Administrative Reform will be created and tasked with restoring "normality", but again no indication has been given on how it will achieve this. Sonthi has been keen to stress that he was forced to act to help restore stability and democracy. In a statement quoted by the Financial Times, the army chief said that: "We agreed that the caretaker prime minister has caused an unprecedented rift in society, widespread corruption, nepotism, and interfered in independent agencies, crippling them so they cannot function.”

Why Now?

In some respects the timing is curious, as political stability looked to be returning and the country was preparing for fresh elections in November. Indeed, these polls were expected to restore stability in full. That said, Thaksin’s absence clearly provided the opportunity to stage the coup, while the prime minister's long-running prevarication over his future role in politics was causing consternation in some quarters. It would appear that Sonthi and his supporters feared that the November elections would return another victory for Thaksin’s Thai Rak Thai (TRT) party and, with it, perhaps another term in office for Thaksin. Since Thaksin appears to be the central issue in this coup drama, those opposed to his rule could not let the November polls take place.

A Setback for Democracy?

Military coups inevitably look bad for democracy, and this one looks particularly bad given how well democracy has appeared to entrench itself in Thailand since 1992. In many respects, however, the political problems witnessed this year have their roots in the February 2005 polls, which gave a landslide majority to Thaksin and his TRT. The victory was so large that it overrode the normal parliamentary checks and balances on the ruling party's power, prompting some observers to argue that Thailand was heading for a one-party state model.

With this in mind, it is interesting that this year's political developments have seen calls for political reform. Following April's snap general elections—the results of which were later annulled—Thaksin offered to consider a package of constitutional reforms called for by the opposition, with further elections thereafter. This issue was not resolved and is clearly key to the coup. There are significant problems with Thai politics, and if this period causes genuine political reform then the coup may in fact ultimately strengthen democracy. The issues expected to be addressed include implementing more genuine multi-party government, introducing greater transparency into political affairs and decoupling politics from the business world.

The Impact on the Economy and Investor Sentiment

In the near-term, uncertainty over the ramifications of the coup and the reformulation of government will undermine investor sentiment. Contingent on a smooth transfer of power, the long-term impact on confidence and overall growth should be positive. The indeterminate political climate has undermined investor confidence, and was a key factor in the sluggish 4.8% growth recorded in the second quarter. Sentiment has also been undermined by the avian ‘flu outbreak and the continuing insurgency in the south of the country; issues that the Thaksin government has been accused of handling ineptly. The positive effect of swift elections and the installation of a strong administration will coincide with the expected conclusion of the central Bank of Thailand’s monetary tightening cycle. Domestic demand could subsequently receive a significant boost in the second half. That scenario would be reversed, however, if there is a counter-challenge by forces loyal to Thaksin or prolonged political uncertainty. Based on an assumption of strengthening domestic demand in the second half of the year, Global Insight currently forecasts growth of 5.0% in 2006. Yesterday’s coup has amplified to an extent both the downside and upside risks to that forecast.

Outlook and Implications

Events continue to unfold, but key issues that GI will be monitoring closely in the coming days include:

The response of the king. The king is key to whether the coup and its political reform agenda is accepted, due to the widespread reverence held towards him. Sonthi and other military officials reportedly held two hours of talks with the monarch today, but left the palace without making any comment. Much has been made of the coup leaders' loyalty to the king, but there is still nothing to suggest that the monarchy has lent its support. Sonthi is believed to have a good relationship with the king, but it is unclear whether this extends to royal support for him overthrowing the government.

The countryside versus urban Thailand. The protests witnessed earlier this year marked a distinct split, whereby anti-Thaksin feeling was strong in urban centres like Bangkok but failed to penetrate into rural parts of the country. It is here in the countryside—particularly in the north and east—that Thaksin has his core support base, and it will presumably be here where opposition to the coup attempt would be most visible.

Thaksin and the military factions. Thaksin is believed to have remained in the United States, with the Associated Press quoting his spokesman as saying "we are not coming back soon". The coup leaders are likely to want Thaksin to remain out of the country, because this will make it harder for him to pursue any counter-move against the coup. Thaksin secured some element of loyalty within the army through some of the promotions he made. This group reportedly continues to support Thaksin, potentially creating problems for the coup leaders.

Contact: Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9411
raul.dary@globalinsight.com
www.globalinsight.com