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Published on January 21, 2008

Foreign investors have been net sellers of Thai stocks since the beginning of the year. Net selling averages about Bt2 billion a day. Overall, the Thai stock market has lost almost 10 per cent on year to date. Have foreign investors lost faith in Thailand or in the domestic political situation in this country in particular? That is not the case. The selling of Thai equities has been a result of foreign investors re-balancing their equity portfolios rather than a complete sell-off.

The US is facing the threat of recession, prompting investors to head for safe havens. US financial markets have taken a beating due to the sub-prime mortgage loan crisis, with major banks and investment banks losing their capital in a hurry. Alan Greenspan, the former US Federal Reserve chairman, has also warned about the impending recession. Economic reports have further raised concerns of a recession hitting the US this year, with the national unemployment rate hitting 5 per cent, a two-year high, manufacturing slowly, and US banks piling up major losses.

This has prompted US President George W Bush to announce a stimulus package. Altogether the stimulus package is worth US$140 billion (Bt4.4 trillion). Bush has also challenged the Congress to come up with drastic tax-cutting measures to further aid the economy.

Analysts believe that if the US is really committed to the stimulus and tax-cutting plan, there is a substantial chance for the US economy to turn around.

When the world's largest economy is in trouble, the rest might catch a cold. Yet Asia is still in a healthy condition, with sound economic fundamentals and a strong outlook. Debates have been going on as to whether Asia has de-coupled from the US. Is Asia strong enough to resist a US recession?

However, Thai investors have been buying up Thai stocks since the second half of 2007. This trend in the purchase of Thai stocks has been in anticipation of a smooth transition to democracy. Investors have bet that once the new government is formed, investment and consumption will bounce back and put Thailand back on the track towards positive economic growth.

Signs of the recovery of the Thai economy are encouraging, with a growth in domestic demand in the final quarter of 2007. Several brokerage houses are optimistic that the Stock Exchange of Thailand index should hover above 1,000 by the end of the year. Recent weaknesses felt in the market could be attributed to profit-taking in the energy sector. This year bank, telecom and property stocks should lead the market drive.

The only problem now lies with this country's political situation. Samak Sundaravej, the leader of the People Power Party, has unveiled his coalition government, which will be supported by a solid majority of 315 MPs. The Democrat Party has been isolated and will serve as the country's sole opposition party.

The House is set to convene its first session today, a House Speaker will be selected tomorrow, and the prime minister will be named by the end of this week. Following the selection of premier and after he is given royal endorsement, the six parties in the coalition will select Cabinet members.

Once the new prime minister and his Cabinet are sworn in before His Majesty the King, a new democratically elected government will take over from the Surayud government and put an end to 16 months of military rule.

But few are betting on the stability of the coalition government. It is not clear whether Samak is the real thing.

Even the People Power Party members can't speak candidly about Samak's premiership. He might be a short-term nominee prime minister before stepping aside for someone else.

On the surface, Thai politics looks as if it has overcome certain rifts to achieve a degree of reconciliation. Yet can the new coalition government assure investors of its stability?

Investors need a strong government to be assured that those in charge can follow through with economic programmes to bring Thailand back on a growth path. If the coalition government is beset by ministerial conflict, as has been the case with past governments, this would not bode well for Thailand in the medium term.

The Nation