surapong

April 2008

Eric Ellis, Bangkok

IT WAS a simple act but, for Asia, an unusual one. But if it catches on, it could mark a new era for how economic policy is executed in coup-plagued Thailand.

On March 8, in the surrounds on Bangkok’s mock-Venetian palazzo of a Government House, Thais witnessed a rare display of national unity when the country’s shadow finance minister called on his recently-elected opposite number in government, who graciously received him.

Under the scrutiny of TV cameras, Korn Chatikavanij, the Democrat Party’s charismatic deputy leader was warmly met in the palazzo’s grounds by aides of Thailand’s new Finance Minister Dr Surapong Suebwonglee. “I don’t think this has ever happened before,” Korn noted, as he was ushered in to meet his counterpart. Then the two men, flanked by suited advisors, spent 45 minutes politely debating policy. Euromoney sat in on the meeting as Korn proffered the Democrats’ alternative blueprint for the economy, explaining that the Democrats’ policies – notably stimulating a sclerotic economy with domestic spending - were broadly of a view with Surapong. The minister nodded approvingly, prompting Korn to quip that if the new government actually instituted the Democrats’ fine-tuning it thinks the government lacks, Surapong will be guaranteed office “for a long time.”

Such niceties are uncommon in Asian politics. In a region of immature democracies, political adversaries are mostly mortal enemies best avoided, ignored and, in some countries, sued into oblivion, jailed and sometimes even killed. But Surapong recognises that Oxford-educated Korn, JP Morgan Chase’s former country chief in Bangkok, has the experience to at least be listened to.

So, after sustained instability and uncertainty, might this at last be a new era that Thais, whose economy and democracy were strangled by the September 2006 military coup that ousted Surapong’s controversial ally, the billionaire Thaksin Shinawatra, so anxiously hanker after?

That’s a best case scenario but in Thailand’s opaque intersection of business and politics, things are not always as they seem.

As Surapong and Korn were amiably debating policy, a more telling shadow was busily networking in the grounds outside while monitoring events inside. Suparat Nakbunnam is, according to Thai media, ‘very close’ to Thaksin, an ‘intermediary,’ as one official described her. Immaculately groomed in Chanel, and coiffed to within an inch of her hairdresser, Suparat’s official title is ‘deputy government spokesperson,’ one of a kitchen cabinet lurking at the fringes of the new government. With her ear never far from her mobile, she wouldn’t talk to Euromoney, claiming she was too busy.

Korn and his youthful democrats may eventually get their turn in Thailand, but its Thaksin Shinawatra who again casts the biggest shadow over this new government formally led by warhorse politician Samak Sundaravej. One of Samak’s first acts was to allow Thaksin to return to Bangkok from exile. He still faces corruption charges brought by the previous military junta, but he is expected to beat them. Thaksin is not officially part of this administration that Thais elected last December 23, and is at pains to insist he’s not an advisor to it either, informal or otherwise.

Indeed, his office maintains his primary interest is stewarding his $200 million investment in Manchester City, the English Premier League club he bought last year whilst in exile. Says one foreign banker here; “if you believe that, you’ll also believe that City will win the Treble this year.”

Thais aren’t convinced either of Thaksin’s claim that he’s out of their lives. Indeed, they don’t seem to much mind that he isn’t, seeing the formal PM Samak as providing a balance to Thaksin’s authority. Samak’s ruling People Power Party is a near carbon copy of Thaksin’s Thai Rak Thai party outlawed by the generals soon after ousting it with all-important royal backing. Indeed, so tight are the links to Thaksin that its become common parlance in Bangkok to refer to the first Thaksin administration as ‘Thaksin-1’ and this new Samak government as ‘Thaksin-2’ even though Thaksin is, officially, nowhere near it. Key posts in the civil service are changing to Thaksin allies, which Thais see as revenge. The govt denies that, arguing that it requires good co-operation between ministers and trusted civil servants.

Thaksin, who wouldn’t be interviewed, became one of Asia’s richest men after a business career in telecoms and media and earning him the moniker of ‘Asia’s Berlusconi’ when he became PM in 2001, a nod to the controversial Italian tycoon-politician Silvio Berlusconi. But Thaksin’s dealmaking led to his undoing; selling his telecom Shin Corp tax-free to the Singapore government-owned Temasek Holdings in early 2006 sent Thais to the streets in protest, and the military from its barracks to topple him. Two years on, Thais now nod to Russia for foreign comparisons, dubbing Thaksin “Asia’s Putin” – a man who heads the government without formally occupying the office to do so.

Thais are skilled at euphemisms, which are also evident in banking and the economy in Bangkok these days, where its become impolite to describe as a ‘crisis’ the mid-90s financial meltdown that began in Thailand’s mismanagement of the economy and raged around Asia. That dark period - from which Thailand has yet to fully recover - is now regarded as a period of ‘credit deterioration.’ And when Thais refer to the recent ‘slowdown,’ it’s shorthand for the sclerotic two year rule of the military junta, when economic growth was wound back to around 4% after Thaksin’s bouyant years of 6-7% GDP growth. Little wonder then that investment bankers are thin on the ground in Bangkok. With richer pickings in China, Thailand’s deals tend to be served by so-called ‘briefcase bankers’ jetting in from full-service regional headquarters in Hong Kong. Foreign focus has tended to be on retail banking; GE Capital’s purchase of Bank of Ayudhya and ING’s partnering with the struggling TMB, the rump of the old Thai Military Bank. Canada’s Scotiabank recently took a stake in Thanachart, which is strong in consumer financing, particularly car loans, while the Singapore government-controlled DBS Bank has bedded down Thai Danu Bank.

But that focus may change. Boosting the economy is front and centre of the Samak government, which has dusted off the old ‘Thaksinomics’ manuals to repeat his populist economic growth measures. Suddenly another catch-phrase is again being bandied about Bangkok - mega-projects; massive public works drenched in state funds to kick-start growth. JP Morgan’s country head Vorapak Tanyawong estimates the government initial mega-project spend to be around $3 billion, mostly in energy, transportation and health care, as well as $2 billion in private-sector projects ready to begin.

“There will be a massive funding requirement from both government and private sector as they come onstream,” he says.

“There was a lot of appetite for deals but since the military coup, everything was put on hold,” Vorapak says. “It’s not just in banking but all the major investments of our clients have been deferred.

“But now there is a mandate after the December election,” Vorapak says, a view somewhat qualified mindful of the six-party coalition to achieve it. “We expect it to be substantially more active in addressing the economy. The distinct difference this year is the momentum that’s now out there, the wait and see period is over.

Vorapak says that “although the new cabinet posts are not as ideal as everyone expected” (a point even admitted by PM Samak himself) the overall perception is “that at least we have a government who wants to push this country forward.”

“The good part is that they are friendly to capital markets, they welcome investment and they are focussed on boosting the economy.

The appointment of 50 year-old Surapong as Finance Minister is a ‘surprise’, says Vorapak. Thai cabinets of the past have tended to match portfolios with career backgrounds; economists get finance, soldiers get defence and doctors go to health. As Finance Minister, Surapong breaks the mould. Surapong is a medical doctor cum professional politician with, as Morgan’s Vorapak puts it, “with no background related to finance or economics at all.” But Surapong may owe his job less to ability as to connections. As information, communication and technology minister during the first Thaksin administration, Surapong is purportedly very close to the Thai strongman and, as deputy prime minister, a powerful foil to Prime Minister Samak should he significantly break with Thaksin. Says Vorapak, “Surapong came to the post with good timing. Thailand’s fiscal position is strong, our debt position is very low, debt to GDP is around 30%, so he has a lot of capacity to do many things.”

So far Surapong has won praise for a series of deft moves. “Initially, everyone’s perception was ‘why this guy,’” Vorapak says of Surapong. “But in his first few weeks, people have been quite impressed by the progress he has made.” Vorapak cites the swift abolition of a capital control instituted by the military junta to stop baht speculation and protect exporters, which required 30 per cent of inward funds to be withheld for up to one year. That pitted Surapong against Bank of Thailand governor and ex-IMF economist Tarisa Watanagase, a carryover appointment from junta days and considered a supporter of the capital controls instituted by her predecessor, Pridiyathorn Devakula, who became finance minister in the military-led government. The Thai press has reported considerable tension between Tarisa and Surapong, speculating she will soon be replaced as governor. Investors responded positively to the abolition. Korn’s opposition Democrats also supported capital control abolition. “It was one of the main issues that impacted on the way the economy was being managed in the eyes of foreign investors,” he says.

The market responded favourably; foreign reserve levels jumped by 6% to $125 billion and the bond market and the baht both rallied, the currency strengthening to around 31.4 to the $US. The currency consensus among economists, says Deutsche Bank’s country chief Rags Raghavan, is for it to settle around 30.5 by year-end. “They are sending a clear message that this government wants to stimulate the economy,” he says.

With two-thirds of its economy export-led, Thailand’s key risk is external, notably a US slowdown. Vorapak says Thai corporates are now much more risk-averse than the dark days of the 1990’s. “In the past, before the credit deterioration when money was very easy, business didn’t worry….they used to say ‘I can get re-financing from a dozen banks wanting my business’.. now they are much more disciplined, particularly on dollar-baht management. In the past, when I visited clients you would ask about EBITDA and they wouldn’t understand. Now they do, now they are much more disciplined.”

Bandid Nijathaworn, deputy governor of the Bank of Thailand, says Thailand, as a “small, open economy will not be able to avoid the global slowdown and the increased volatility.” He thinks that could come from export declines as the wider external economy endures the credit crunch and the impact on demand, which may “impart additional volatility” on Thailand.

That said, Bandid says, Thai banks’ direct exposure to the subprime crisis and its overflow is a minimal 0.26% of bank’s total assets. Thai banks, he claims, are in “excellent shape” citing strong profitability, sturdy asset base and much-improved capital support. He measures Thai banks’ capital adequacy ratio at around 14.6%, well above the minimum BIS requirement of 8.5%. Bandid insists Thailand is today more capable of weathering external shocks than it was a decade ago during the financial crisis.”

Deutsche Bank's Chief Economist for Asia, Michael Spencer agrees “this will be a year in Thailand that, after the return of political stability, the 4-5 years of gradually weakening consumption and investment will be reversed.”

Shadow finance minister Korn says it is essential for the government to deliver growth of at least 6% to guarantee its political survival. Anything less could force another election within a year, he says. With turmoil abroad, “we can’t trust the external economy to help us as it always has,” he says. Korn says the US trade impact on Thailand has increased so “there is no de-coupling here even if they want to, our economy is not as sophisticated for that. There is simply a greater emphasis on the government to display its skills in boosting the economy and somehow cushion any external pressures.”

While he’s happy to call on Surapong and offer policy support, Korn doesn’t give the new government a free ride. He says the government is enjoying a feelgood wave at present but adds that many of its policies seem contradictory. He cites a tax cut package aimed at stimulating spending and add one per cent to GDP. Its inflationary, he says, citing levels creeping up to around 8 per cent, alarming the central Bank of Thailand, which has said it will be favouring inflation-targetting over exchange rate management. But Korn says cutting the government’s take is nakedly political, while limiting the state’s capacity to raise funds able to be directed at the planned big-spend mega-projects. Some of Surapong’s tax measures encourage saving, he says, rather than lift consumer spending. “They sometimes seem to be working in opposite directions,” he says. “We don’t think the package provides as much stimulus as it could.”

Thailand’s need for funds has raised speculation that sovereign wealth funds will be encouraged to finance Samak-Thaksin’s mega-project and privatisation plans, given the massive scope of their ambition. Certainly there could be strategic reasons for SWFs to get involved. Take the much-vaunted plan to span the Kra Isthmus of the south with either a massive shipping canal or oil pipeline, and slice east-west shipping lanes through the Gulf of Thailand to connect the Middle East oil producers and Europe with the booming North Asia economies, notably China. Such a project could cut the expensive week-long transit through the refineries and ports further south in Singapore and southern Malaysia. With construction cost measured above $30 billion, it would also have the benefit of bringing economic activity to Thailand’s most restive regions, its violent Islamic south where ethnic Malay rebels are pushing to break away from the mostly Buddhist rump of Thailand. A Kra canal has clear strategic benefit to China’s top-down planners and their Middle Eastern resource partners. But inviting foreign government-backed funds is potentially fraught in Thailand, where barely-concealed nationalist fervour was ignited by Thaksin’s cosy deal with Singapore’s Temasek Holdings, prompting the 2006 coup. “This has to be very carefully managed,” says Deutsche Bank’s Spencer, lest it be seen as re-nationalisation.