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Long political conflict hurts investment

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From 2005 onward investment slowed dramatically while consumption remained roughly the same. 

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Photo above of a road blockade during the PAD airport seizure (Read article).

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BEHIND THE NUMBERS: Economic casualties of Thai politics by Dr Benjarong Suwankiri and Naris Sathapholdeja


protestersOn Sunday, Thai voters will walk into polling stations after five years of political battles and violence. Supporters of different sides have been seeking non-parliamentary ways out of the political cul-de-sac, from the courtroom to street rallies, in the vain hope of changing the system. This protracted political struggle has left the Thai economy wounded and crippled, as domestic and foreign investors alike shy away from the country and look for better opportunities elsewhere. One thing is certain: No matter who prevails after Sunday, the conflict will be far from over.

Is it possible to measure the economic cost of the events of the past few years? A careful analysis of available data suggests that it is. Let's start with the seemingly obvious, confidence and sentiment. We have found that, in the past, elections have had no impact on the Consumer Confidence Index (CCI), produced by University of the Thai Chamber of Commerce, which comes as no surprise. In short, the result of an election always pleases about half the voters and disappoints the rest. With political unrest, such as the airport seizure and road blockades, the effects were highly localised, mainly concentrated in a particular area of Bangkok. So nationwide, not much impact was detected.

Adverse impact on the Business Sentiment Index (BSI), produced by the Bank of Thailand, has been more pronounced. Many sectors rely heavily on consistency and continuation of government policies, so there is always uncertainty every time a new government is formed. In addition, businesses are highly sensitive to political unrest and a decline in the confidence index can last up to three months when such events occur.

However, the CCI and BSI adjust rapidly and may not in the end mirror actual activities in the economy. Confidence indices and economic indicators only move together in a longer cycle, in which confidence has time to seep into private decisions. In the shorter run, confidence indices only indicate a change in momentum, not in the level of real economic activities.

Using data that reflect real activities instead, namely the Private Consumption Index (PCI) and Private Investment Index (PII), both produced by the central bank, we find that consumption rose 2.4% and investment by almost 5.6% in the three-month period following an election.

However, political unrest took a much heavier toll on both private consumption and investment, falling by 2.3% and 5.9%, respectively. The duration of the impact is also longer, lasting up to six months after the unrest ends. Again, we come to the conclusion that investment, and businesses, are much more sensitive to political uncertainties, whether on the upside or the downside.

In addition to a significantly larger short-run impact on businesses than on consumers, the long-run effects depict the same pattern. When we focus our attention on a shift in long-run trends of consumption and investment, we find that, during the years of political turbulence from 2005 onward, the investment trend slowed dramatically, while the consumption trend remained roughly the same.

Before 2005, private investment grew on average at 11.5%, but after that, the average rate dropped to merely 4.5% (with the effects of the crisis already removed). The same average growth figures for private consumption changed from 4.1% to 2.7% over the same period. These were neither due solely to elections or political unrest but the combination of the two as the frequency of political events more than doubled after 2005.

It's now obvious that periods of political instability lead to a slowdown in private investment. But is this also the case for foreign investors? Looking at a decade of data on historical fund flows from abroad, much to our surprise we find that each component has its own individual pattern of response.

Let's start with foreign direct investment (FDI), which is highly relevant to long-term activity in the economy. While we found that elections in general do not create any substantial impact, political unrest can badly damage FDI inflows to Thailand. On average, an event of political struggle, be it from the airport seizure to a coup, leads to a sudden loss of 80% from potential investment inflows. Moreover, it typically takes at least half a year for foreign investors' anxiety to dissipate and FDI flows to resume. Since FDI accounts for almost 10% of total private investment and also contributes greatly to transmission of know-how and technology, this certainly has detrimental consequences for our economy.

The story is more mixed on the foreign portfolio investment front. Foreign fund flows tend to favour Thai debt more than equity when it comes to political events. By and large, portfolio investment inflows tend to rise after an election. However, the bond market is the major recipient of this windfall - usually double the amount that goes into the SET.

Still, political unrest consistently paints a dreadful picture. The so-called flight to quality has become a commonplace characteristic of foreign fund flows in and out of the Thai stock market. Whenever there is political disorder, foreign investors not only shun but also flee the SET almost all-out. This unwinding process usually takes around a quarter to complete after the end of political incidence

The impact on foreign holdings of Thai debts from political unrest is a little more forgiving than on equity. In fact, for a very short while after an incident, we found that fund flows are diverted from the SET into the bond market. But as we move further in time, the bond market cannot defy gravitational forces either. Though not as large in comparison to the outflows from the SET, foreign fund flows typically evaporate, lasting for about two quarters before starting to come back.

In any case, the real threat to the Thai economy has been the atmosphere of political tension, which has continually loomed over Thailand in the past decade, not just elections. Still, we often find people reacting to the word "election" with distaste and hopelessness.

Elections are not always bad. In fact, the air of change should induce more optimism than pessimism, and we have provided some evidence that supports the point. The crux is not the election, but what comes after. So don't let the political gridlock weigh us down. After all, this election is the first legitimate means for us to politically express our opinion.

TMB Analytics is the economic analysis unit of TMB Bank. Behind the Numbers is co-authored by Dr Benjarong Suwankiri and Naris Sathapholdeja, senior analysts at the unit. They can be reached at macro@tmbbank.com

(Source: Bangkok Post, BEHIND THE NUMBERS, Economic casualties of thai politics, 1/07/2011, Dr Benjarong Suwankiri and Naris Sathapholdeja, link)

Economics and Political Risk Vocabulary

casualties - deaths and injuries ผู้บาดเจ็บ เสียชีวิต
economic casualties - the economic harm done to the country (in terms of people losing income and pulling themselves out of poverty)

polling stations - places where people vote during an election


street rallies -
protests on the street, large political gatherings on people
seizure - the act of taking control of something, especially by using power or force การบุกเข้ายึด
airport seizure
blockades - stopping cars and other traffic from travelling along a road
violence - physical force with the deliberate intention of causing damage to property or injury or death to people ความรุนแรง

cul-de-sac -
a deadend, a road that goes nowhere
political cul-de-sac -
a political deadend, a political process that will not lead to economic growth and progress, will not lead to people having better lives economically)

protracted
- lasting for a long time ที่ยืดเยื้อเป็นเวลานาน
struggle - a difficult fight or an attempt to defeat someone การต่อสู้เพื่อความอยู่รอด an attempt to stop someone from having power over you; a fight or a war การต่อสู้ดิ้นรน
political struggle - when different people who envision different futures for the country, fight over control and changes
protracted struggle - a fight that lasts for a long time

disorder - lack of order, a situation in which people behave in a noisy or violent way in public, often as a protest against something ความวุ่นวาย
political disorder - when politics lacks order

conflict - an angry disagreement between people or groups ความขัดแย้ง ความไม่ลงรอยกัน
threat - a danger อันตราย

political unrest - situation when there are a lot of protests and random acts of violence (with grenade launchers, for example) and people don't what will happen next politically
unrest - same as "political unrest"

turbulence - a state of confusion, disagreement or lack of order ความวุ่นวาย (also: strong sudden movements within air or water การเคลื่อนไหวผิดปกติของบรรยากาศ)
crisis
- a situation that has reached and extremely difficult or dangerous point ช่วงวิกฤต an urgent, difficult or dangerous situation วิกฤต,  วิกฤตการณ์
instability - unstable, can change suddenly without notice, this makes it difficult to work with

wounded - injured, especially where your skin or flesh is damaged, usually seriously บาดเจ็บ
crippled - damaged so badly that it cannot function properly anymore (originally: a crippled person cannot use their legs or arms because of an injury from a car crash, for example)

atmosphere
- the mood or feeling that exists in a place บรรยากาศ
tension - the feeling caused by a lack of trust between people, groups or countries ความตึงเครียด the feeling of being so nervous or worried that you can't relax  
atmosphere of political tension - the general feeling was one of people not trusting or liking each other much
continually loomed over Thailand -
people had the feeling that some bad event was going to happen

shun - to deliberately avoid a person, place or activity
flee - to leave a place or person quickly because you are afraid of possible danger หนี อพยพ
shy away - not go near a person or place (because you are afraid of them, scared of them)

holdings - things that you own
foreign holdings - assets (stocks, bonds, etc) owned by foreign investors

flight
- run away from a place หนีออกไป
flight to quality - when investment money leaves a country to go to a safer (higher quality) country

evaporate - to disappear; to appear to disappear like a liquid changing into gas or steam หายไปกับตา เปรียบเหมือนน้ำที่ระเหยกลายเป็นไอ

confidence
- feeling sure about something ความเชื่อมั่น
sentiment - feelings about a situation กระแส, แนวความคิด, ความคิดเห็น อารมณ์ทางความคิด
air of change -  the general feeling among people that a situation is changing

impact - an effect or influence ผลกระทบ
substantial - in a large amount or degree
substantial impact - a big effect

election - the process of choosing a person or a group of person for a position, especially by voting elect (v) electoral (adj) synonym: the polls การเลือกตั้ง

effects were highly localised -
the only effect or impact was in one local area (only in Bangkok area, for example)
nationwide - throughout a whole country ทั่วทั้งประเทศ

data - facts or information used for making calculations or decisions ข้อมูล
consistency - doing things in the same way everytime (in a way that doesn't contradict or go against previous actions)

sensitive
- easily influenced, changed or damaged รับอิทธิ-พลภายนอกได้ง่าย
adjust - to change something slightly, especially to make it more correct, effective, or suitable ปรับ

X mirrors Y -
X shows Y (X shows what is happening in Y) 
actual - real; existing in fact จริง

seep into -
move slowly into (example: After heavy rain, there was heavy flooding that seeped into the ground slowly and disappeared.)
private decisions - the decisions that individuals, families and businesses make about how they will spend their money

momentum
- the force of moving forward that keeps something moving forward (makes it difficult to stop)
indices -
plural of "index" (example: economic indices)
index -
a statistical number that shows the level of prices or wages in an economy (example: A stock price index shows the level of a certain group of stocks sold on the stock exchange.)
indicator - a statistical number that shows how a situation is changing (example: The consumer confidence index shows how optimistic consumers are about the future.)
confidence indices - statistical numbers that show how confident and optimistic people or businesses are about the future
economic indicators - 
statistical numbers that show how good the economy is doing
cycle - a series of events repeated over and over again (in the same order)

consumption
- money spent by households and families on goods and services in the economy (See Wikipedia) การบริโภค
investment - taking your money and putting it into projects to make a profit or earn interest (buying stock shares, bonds, real estate)
private consumption - goods and services bought by households
private investment
- investment by businesses (and households in homes) (See Wikipedia)

central bank
-  the main bank in a country that controls interest rates, the availability of loans in an economy (credit), the money supply and as a long-term target, the inflation rate

toll
- normally the number of people killed or injured in an accident or disaster, number of job losses, etc
take a heavy toll - cause a lot of damage

duration
- length of time it exists
lasting - continuing to exist or have an effect for a long time ที่กินเวลานาน

significantly - in an important way อย่างสำคัญ
dramatically - in a big way อย่างใหญ่หลวง

short-run impact - the effect of some event or process over a short period of time
long-run effect - the effect of some event or process over a long period of time
long-run trends - the direction of change over a period of time in some value or activity
trend - a gradual change or development that produces a particular result ทิศทาง แนวโน้ม a new development in clothing, make-up, etc แนวโน้ม

consumers
- people who buy things (individuals and families)
figures - statistics, numbers describing the economy  

decade - a period of ten years ทศวรรษ, ระยะเวลา 10 ปี
fund - money provided for something (here investment) เงินทุน กองทุน

Foreign Direct Investment (FDI) -
investing directly in production in another country, either by buying a company there or establishing new operations of an existing business  (See The Economist's Glossary and Wikipedia)
FDI inflows - FDI investment coming into the country from foreign companies (operating in the country)

coup - when the military takes over control of the government

potential - possible ความเป็นไปได้
potential investment flows - possible investment money coming into the country

anxiety - a feeling of nervousness or worry (about something bad that could happen)
foreign investors' anxiety to dissipate

resume - to begin again after stopping for a period of time ดำเนินต่อไปใหม่, กลับมาอีกครั้ง
FDI flows to resume - foreigners start making FDI investments in the country again
X accounts for Y% of Z - X is Y% of Z

transmission - the spreading of something from one place to another place การแพร
transmission of know-how and technology - when the knowledge of technology and associated skills moves from a foreign company to local workers

consequences - results of some actions or events
detrimental consequences - the bad things that happen as a result of an action or event

portfolio - a set of investments owned by a person or organization, securities (stocks, bonds) owned and derivatives owned by a firm or individual หลักทรัพย์
foreign portfolio investment - money invested by foreigners in the stock and bond markets of a country (not directly in the operations of a company like FDI)
on the front - in the middle of a battle between two opposing armies (right where the action is happening in a given area or problem being solved) 
on the foreign portfolio investment front - in the area of foreign portfolio investment in a country
foreign fund flows - money flowing into the country (from  foreign investors)

debt - an amount of money owed หนี้ (bonds or bank loans)
equity - the value of a company's shares กรรมสิทธิ์หุ้นส่วนในบริษัทห้างร้าน (stock shares) money for a business that comes from owners, not borrowed money (debt) เงินลงทุน ที่มาจากการระดมหุ้นของหุ้นส่วน และผู้มีกรรมสิทธิ
bond - a way of borrowing money from a lot of people by issuing "bonds" to many people lending fixed amounts of money (securities like stocks): agreement by an organization to pay back money an investor has lent plus a fixed amount of interest at regular times (See Wikipedia)
windfall - windfall profits, to make a sudden large profit (through luck and not hard work)
recipent of a windfall - a person who receives windfall profits

process - a series of actions  แนวทางปฏิบัติ, กระบวน, วิธีการ
unwinding process - the gradually process of a change happening (for example: the investor unwound their position in the bond market by selling off all their bonds)

more forgiving than -
the negative effect is not as great

incident
- an unpleasant event (something that happened that was unpleasant)
diverted - caused something to change direction (and go to a new and different place) เบนเส้นทางเดินน้ำ

induce - cause ก่อให้เกิด
optimism
- a feeling that good things will happen in the future มีทัศนคติที่ดี
pessimism - having a negative opinion about what will happen in the future การมองโลกในแง่ร้าย

gridlock -
not able to move forward or make progress (example: traffic gridlock, legislative gridlock)

General Vocabulary

vain
- fails to achieve what is intended
in the vain hope of - wanted something to happen, but it didn't (failure)

domestic - relating to a person's own country ภายในประเทศ
opportunities - situations in which it is possible to do what you want or need to do

no matter
who - anyone, true for everyone
obvious - clear; easy to see, recognise or understand ชัดเจน

concentrated - most of it is located in one place or small area มุ่งความสนใจไปยัง
detected - noticed, discovered or found out จับได้ พบได้
pronounced - very noticeable

reflect - to show สะท้อน แสดงถึง
conclusion - something that you decide is true after consider all the evidence and thinking about it carefully การสรุป,บทสรุป

depict
- to represent or show something in a picture or story พรรณนา, บรรยายให้เห็นภาพ
pattern - the general way things normally happen or are done (repeated over and over again)

focus - think about and work on one thing (rather than waste time on many), concentrate time and attention on one thing ให้ความสำคัญ
focus our attention on - make us look closely at and work on one thing (with great care, instead of speading time over many things, which means that great care cannot be taken)

shift - change
X due solely to Y - X caused only by Y (Y is the only reason for X)

combination - the mixture you get when two or more things are combined การรวมกัน
frequency - the number of times something happens within a particular period ความบ่อย

component - the parts that something is made of, a part which combines with other parts to form something bigger ส่วนประกอบ,ส่วนเสริม
individual - relating to or involving a single, separate person or thing แต่ละบุคคล
pattern of response

relevant - connected to what is being discussed or considered ที่เกี่ยวข้อง
highly relevant - directly connected with and important to what is being discussed or considered ที่เกี่ยวข้องโดยตรง

typically - usually; normally อย่างเป็นแบบฉบับ

tend - to be likely to behave in a particular way or have a particular characteristic มักจะ
favour - to give an advantage to someone or something ช่วยเหลือ
double - to become twice as big, twice as much or twice as many เพิ่มเป็นสองเท่า

consistently - continuously; happening again and again in the same way อย่างต่อเนื่อง
dreadful - very bad, terrible

commonplace - happens often, not unusual; common
quarter
- three months

defy - to refuse to obey or accept someone or something เป็นปฏิปักษ์ต่อ
cannot defy gravitational forces - meaning: cannot go against some law of nature like the law of gravity

distaste - don't like

evidence - information that shows and proves something to be true หลักฐาน
evidence that supports a point -  things that support an argument, that show that an idea is true
crux - the most important thing

weigh us down -
1. make us move slow, 2. make us depressed

legitimate
- correct according to the law ที่ถูกต้องตามกฎหมาย reasonable and acceptable ถูกต้องสมควร
means - methods; ways วิธี, วิธีการ

legitimate
means - a reasonable and acceptable way to do something (or legally acceptable way to do something)
express our opinion - say what we think about an issue or situation

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