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Thai coup adds to challenges for already struggling economy

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BANGKOK - Thailand's economy was already struggling before the country's military seized power in a bloodless coup Thursday, saying it needed to restore order after six months of protests aimed at ousting the elected government. The military takeover, the second since 2006, could ensure stability in the short term. But analysts fear the army's intervention will result in Thailand's political divide becoming even sharper, holding back the economy and living standards in the longer run.


Among developing countries, Thailand is in the top tier for incomes and standard of living, a position that puts developed status within reach if growth isn't stymied by political upheaval. It is the sixth largest economy in Asia with GDP of about $366 billion and is significant to the world as a food exporter, tourism destination, and manufacturer of cars and computer hard drives.

Weighed down by political uncertainty, the economy contracted 2.1 per cent in the first quarter from the previous quarter. Moody's Analytics was forecasting the economy to grow 0.2 per cent this year but says it may now suffer a recession, which would be a woeful performance compared with 6.5 per cent growth in 2012.


Tourism employs millions and directly contributes about 6 per cent of GDP. For January to March, foreign tourists dropped 6 per cent to 6.6 million as headlines overseas about protests and violence in Bangkok muddied the welcome mat. In 2010, violent street battles and an army crackdown killed dozens.

"We are now offering discount prices to attract customers that may have a little worry about the situation there," says Chen Jiying, saleswoman at Beijing Youth Tourist Service. Still, the strong appeal of Thailand's pristine beaches, world famous food and vibrant culture along with savvy marketing has consistently lured visitors back in record numbers.


Much of heavy industry and manufacturing, particularly that with foreign involvement, is concentrated on the country's eastern seaboard in factory parks linked to Bangkok by good roads and other world class infrastructure. Foreign manufacturers have never been a target of protesters and usually take the unrest in their stride. South Korea's Posco said its plans to start construction of a steel sheet factory in Thailand next month were unchanged.

The coup is bringing some minor disruption. Toyota said it had cancelled night shifts at its Thai car plant because of the curfew imposed by the army. Overall, however, the prolonged political instability has helped to make other countries in Southeast Asia such as Vietnam more attractive for new foreign investment. Consultants Frost & Sullivan says automakers may reconsider some big ticket factory expansion plans in the pipeline.


The currency wobbled and the stock market dropped a couple of per cent. Foreign investors, remembering the shock of the 2006 coup and unnerved by the months of street protests, have already substantially cut their holdings of Thai stocks. Net selling of stocks by foreigners is about $640 million so far this year, according to stock exchange data. Average daily turnover on the market is about $1 billion.


There's a question mark over whether generals will be effective managers of the economy. A hallmark of the 2006 coup was the inept 15-month rule of a civilian administration appointed by the junta. Its economic policies were unpopular abroad and with local businesses. Backflips on some of its decisions added to an aura of ineptitude.


Thai politics is deeply polarized between the supporters and opponents of Thaksin Shinawatra, the telecommunications billionaire ousted as premier in the 2006 coup. He swept to power in 2001 elections with populist policies that appealed to the rural poor. Every election since then has been won by Thaksin or his allies. Some analysts say Thaksin's supporters are unlikely to accept the coup. In a worst case scenario an insurgency could develop in the north and northeast of the country where the ousted government's support is strongest. Others say there is a risk of attacks on businesses in Bangkok regarded as affiliated with opponents of Thaksin.

"It's now hard to see just how Thailand can successfully re-establish a democracy encompassing the voices of the rural majority," says Rabobank's Michael Every. "We expect that backdrop of potential instability and violence to weigh" on the economy and the Thai baht.

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