Recession threat

Thailand's biggest investor Japan expressed on Tuesday, May 20, "grave concerns" after the army imposed martial law, while the United States said it must only be "temporary" as multinational firms monitored events nervously. After months of deadly anti-government protests, the Thai army deployed armed troops in central Bangkok and censored the media, but insisted the move was "not a coup." The country has been plunged in a political crisis over the past seven months, pitting the Bangkok-based middle-class and establishment, as well as staunchly royalist south against the north and northeastern rural support base of the Shinawatra clan.

While the new caretaker government is still in office, there are already indications that Southeast Asia's second-biggest economy is hurtling towards recession given the prolonged political crisis, says Rajiv Biswas, the chief Asia economist of the analytics firm IHS, in a DW interview.

DW: Given the protracted conflict and the recent declaration of martial law, is Thailand at risk of sliding into a recession later this year?

Rajiv Biswas: The Thai economy has already recorded a significant contraction in GDP during the first quarter of 2014, with domestic demand likely to remain weak during the second quarter due to slumping consumer confidence and weak investment. With the declaration of martial law, the military may be able to temporarily maintain stability, but does not create any path to political compromise between the deep political rifts in Thai society. Both consumer sentiment and business confidence are likely to remain weak in coming months, creating risks that the economy could experience two successive quarters of negative growth and slide into a technical recession.

How much damage has the prolonged unrest inflicted on the Thai economy?

The country's Gross Domestic Product (GDP) contracted by 0.6 percent year-on-year and 2.1 percent the first quarter of 2014. Tourism, which is a key sector of the Thai economy, has been hit by a significant decline in international arrivals during the first three months of 2014, due to the violent political protests that disrupted Bangkok.

Although tourism arrivals have since stabilized, there is a high risk that the political situation could deteriorate again if an unelected government is appointed to rule Thailand. While the military may be able to temporarily prevent public protests, there is a significant risk that there will eventually be a backlash with renewed political protests and potential threat of escalating violence. With no sign of any political compromise in sight, the country remains in a protracted political crisis with no agreement on how the next Thai government can be elected democratically.

Thailand is also a base for electronics manufacturers and several global automakers. How is the crisis affecting foreign investment?

There are growing signs that international investors are losing confidence in the Thai economic outlook. Toyota, which has significant auto production in Thailand, has already signaled that it is reconsidering its plans for a 600 million USD investment in new manufacturing facilities in Thailand due to the political turmoil. Many other multinationals are likely to sit on the sidelines and postpone investment decisions until they are convinced that the political situation has stabilized.

What impact is the crisis having on Thailand's standing within the Association of Southeast Asian Nations (ASEAN)?

While Thailand is one of ASEAN's largest economies and has become one of the groups leading manufacturing hubs, the Thai domestic political crisis has substantially eroded the country's ability to play a leadership role in ASEAN. With martial law, Thailand will not be able to contribute effectively to ASEAN under an unelected administration that may struggle to make essential foreign policy or long-term economic decisions.

Is Thailand potentially at risk of losing its attractiveness as a manufacturing base to neighboring countries?

Thailand has been regarded as one of East Asia's leading manufacturing hubs, due to its skilled, low cost workforce as well as high standard of infrastructure. However, the protracted political unrest is having a negative impact on the nation's reputation as a leading location for multinationals to establish their manufacturing plants. Unless some form of lasting political compromise is found, Thailand's standing as an attractive investment location could be rapidly eroded.

Given the latest developments, how is Southeast Asia's second largest economy expected to perform by the end of the year?

IHS forecasts that the Thai economy will grow at just 1.9 percent in 2014, far below its potential growth rate of 4 percent to 5 percent. In real terms, this means that around eight billion USD to 10 billion USD of economic growth potential has already been lost in 2014.

There is also a significant downside risk that GDP growth could be negative in the second quarter of 2014, pushing Thailand into recession. The Thai economy is expected to show the worst performance of all ten ASEAN nations in terms of GDP growth in 2014. The growth outlook for 2015 is also at risk of being downgraded due to the ongoing political crisis.

Rajiv Biswas is senior director and chief Asia economist at IHS, a global information and analytics firm. He is responsible for coordination of economic analyses and forecasts for the Asia-Pacific region.

The interview was conducted by Gabriel Domínguez.