A Public Holiday

By Yiannis G. Mostrous

MCLEAN, Va.–It was raining last night in Bangkok, Thailand, as tanks rolled into the city and made their way to the Government House, putting a temporary end to the political turmoil that’s plagued Thailand since last April’s elections gave Prime Minister Thaksin Shinawatra a second term.

The military–at least the troops loyal to Thai army commander General Sonthi Boonyaratklin–was able to declare that it had seized power without encountering any resistance. Apparently, officers loyal to the prime minister attempted no counter moves, probably in an effort to avoid unnecessary bloodshed. Prime Minister Shinawatra was in New York at the time of the military’s move, preparing to address the United Nations General Assembly.

A military spokesman–appearing in civilian clothes–announced on national television “that the army had temporarily suspended the irresponsible civilian government and would soon return power to the people.”

Scattered reports from people on the ground indicate that “as of Wednesday morning international channels, including the BBC,CNNand CNBC, are unavailable. Local television stations are now repeating homages to the king, which the BBC describes as images of the royal family and patriotic songs.” To some long-time observers of Thai politics, recent developments brought back memories of the 1991 coup resulting in the overthrow of the democratically elected government led by Chatichai Choonhavan.

The leader of the present coup, General Sonthi Boonyaratklin, seems to have the backing of the palace and King Bhumibol Adulyadej, Rama IX. The 79-year-old king, the world’s longest-serving monarch, came to the throne 60 years ago and is highly respected by the Thai people–he’s often called “The Light of Thailand.”

Bhumibol came to the throne after his brother, King Ananda Mahidol, Rama VIII, was found dead in his room on June 9, 1946, one of his revolvers close by. His death was never fully explained. Although Bhumibol Adulyadej has an unprecedented aura among Thai people, the fact remains that he has backed authoritarian leaders before–as well as the democratization process. But no matter the situation, he’s always been a stabilizing force in times of political uncertainty–i.e., military coups, insurgencies, etc. It’s possible that the army has the king’s backing. If that’s the case, Bhumibol could once again emerge as the savior, provided things return to normal sooner rather than later.

In fact, Bhumibol announced today that General Sonthi will head an interim government and that elections would be held by October 2007.

Investors shouldn’t fear any contagion affecting the rest of the region ( la 1997). Some commentators have suggested the emergence of a regionwide problem based on the fact that the Thai baht sold off violently on the news. The chart below depicts the exchange rate between the Thai baht and the US dollar; a rising line indicates depreciation.

THB
Source: Bloomberg LP

As I’ve discussed in this space and argued in The Silk Road to Riches: How You Can Profit by Investing in Asia’s Newfound Prosperity, Asia isn’t the same place it was 10 years ago; I’ll address the various reasons for this change in an upcoming issue. When it comes to currencies, you must remember that Asian nations hold huge foreign exchange reserves that can be used to smooth out currency instability. Thailand has USD56 billion for that purpose.

And an agreement among Asian countries–the Chiang Mai Initiative–provides for the swapping of currency reserves in case of a crisis. Given that total Asian reserves (excluding Japan) reached USD1.7 trillion at the end of 2005, it’s easy to understand how dramatically the situation has changed. In addition, Asian currencies–the Thai baht among them–are relatively strong and have been rooted in sound fundamentals.

THB1
Source: Bloomberg LP

The Thai market hasn’t performed very well year to date. It’s down 2 percent in local currency terms, though it’s up almost 7 percent in USD terms because of the baht’s appreciation. Unless something dramatic happens to steer things toward normalcy, once it’s allowed to operate again, the market will lose ground. The Thai army has declared a “public holiday,” shutting in the stock market and banks in the country. A period of uncertainty will obviously follow yesterday’s coup. Investors must adopt a wait-and-see attitude.

I addressed the SRI Portfolio’s Thailand exposure three months ago (see SRI, 14 June 2006, Complications), noting:
Thailand is also an economy I really like, but the political turmoil has been affecting the market negatively. It’s unfortunate that the economic advances in Thailand are being held hostage by the capriciousness of an elitist group in Bangkok’s inner circle. The Portfolio’s only Thai recommendation, Bangkok Bank (OTC: BKKPF), has been a weak one. It’s only a small part of the Portfolio, but it’s the best way to gain exposure to Thailand.

Recent developments haven’t led me to alter this assessment–neither the political nor the investing component. Those who purchased shares of Bangkok Bank should stay with the investment. Those who haven’t done so should start accumulating shares (always in the context of a diversified portfolio) once the market opens in Thailand and the first shock has been digested.

Thailand is still one of the Asian economies best positioned for growth, and the local market trades at fairly undemanding valuations (a price-to-earnings ratio of 10) that will only improve as the current crisis is resolved.

I must also reiterate my longstanding view that Prime Minister Thaksin Shinawatra has been a big positive for Thailand. Time will tell if his successor–provided there is one–can carry on with the structural changes the Thai economy requires. This is the strategic issue investors must be aware of, given that the Thai market could, under the right circumstances, perform well going forward.

SET
Source: Bloomberg LP

Global markets have been looking for direction this week, understandable in light of the concerted efforts of commentators to assess the (upcoming?) slowdown in the US economy and the effects such would have on the rest of the world. (See SRI, 13 September 2006, Condoflip.com.)

Recent comments by Group of Seven (G-7) finance ministers, International Monetary Fund (IMF) officials and other dignitaries gathered in Singapore to discuss the global economy have added to the excitement. The G-7, in particular, took up an opportunity to discuss one of its favorite subjects, currency manipulation.

Based on a statement released in the names of the G-7 finance ministers, you can safely assume that the newly appointed US Secretary of the Treasury, former Goldman Sachs CEO Henry M. Paulson Jr., is trying to change the US–and consequently the G-7–approach toward China. The G-7 statement, while urging China to make its currency more flexible, avoided this time its usual call for outright renminbi (RMB) appreciation. The decision is in line with previous comments by Secretary Paulson that China needs time to adjust its currency in order to deal with the consequences of the move.

At the same time, the US has been calling for the IMF to assume a more prominent role as the “watchdog” of currency manipulation, thus removing pressure from the US Treasury Dept. If this can be achieved, Paulson won’t have to deal with cries from the US Senate for the Treasury Dept to “punish China” for its “unacceptable” currency regime.

China has demonstrated that it won’t respond to outright pressure, something Paulson well knows; he’s been doing business with the Chinese for a long time. He’s currently visiting China again, and I expect an understanding to be reached during his time there. China’s leadership (especially its central bank officials) knows what needs to be done, but it also knows it needs more time than the G-7 would allow.

RNB
Source: Bloomberg LP

Long-term readers know that geopolitical developments are an integral part of SRI’s strategic investment process. This is why the Geopolitics & Investing reports are offered free to SRI readers.

Given recent global developments (e.g., Thailand, Iran and Russia), now is a good time to read those reports–or re-read them. The long-term benefits should more than justify your efforts. See The Dragon And The Eunuch: Wars, Spies And Profits In 21st Century Asia, 8 February 2006, and Still Playing The Great Game: Business, Investments And Politics In Central Asia, 2 August 2006.