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Published on April 18, 2008

Tisco Securities

Scenario 1: The Chart Thai and Matchima Thipataya parties are dissolved.

Last Friday the Election Commission ruled by four votes to one to ask the Constitutional Court to disband the parties for alleged election fraud. It also recommended that the case be forwarded to the Attorney-General's Office as a first step in the labyrinthine process of dissolution. We estimate that there is an 80 per cent chance of the Constitutional Court finding both parties guilty of vote-buying and ruling to dissolve them.

Chart Thai has 34 MPs and Matchima 11. Under the law, MPs of dissolved parties can retain their status as long as they find a new party within 60 days. However, executives of banned parties not only lose their MP status but are also disqualified from politics for five years. If both parties were dissolved, there would need to be 14 by-elections.

Scenario 2: The People Power Party is dissolved, there is a constitutional amendment and the court rules that the PPP is a proxy of the disbanded Thai Rak Thai Party.

This is the most complicated of the four scenarios and we assign a 40 per cent probability rating to it. The Constitutional Court's ruling on the allegations against Chart Thai and Matchima should set a precedent for the case against the PPP.

Note that the EC is still awaiting a ruling from the Supreme Court on whether to disqualify former PPP deputy leader Yongyuth Tiyapairat for alleged vote-buying in Chiang Rai. If Yongyuth is found guilty, the EC will consider recommending to the court that the PPP be dissolved. This case could become even more complicated if former prime minister Thaksin Shinawatra fails to answer an allegation that the PPP is a proxy of the dissolved TRT. We expect the EC to make a decision on this allegation before furthering its recommendation to the court for a final ruling.

One way for the coalition government to prevent dissolution of three of its component parties is to amend the Constitution. However, such a strategy is fraught with risk and could lead to new street demonstrations if the government fails to hold public hearings and a referendum on the proposed changes. The PPP wants a comprehensive overhaul of the Constitution, with the exception of the first and second chapters which deal with Thailand's sovereignty and Monarchy.

Chart Thai, on the other hand, wants to scrap the controversial Article 237 which states that an entire party can be held responsible for the wrongdoing of a single party executive. Chart Thai also wants to maintain Article 307 which prohibits a judicial review of the Council for National Security.

Given the government's sizeable majority in parliament (316 seats vs. the opposition Democrat Party's 164), we believe it would not be difficult for the coalition to rush through its proposed constitutional changes in the House of Representatives in three readings ending in May or June. We also expect it to win significant support for changing the Constitution in the 150-seat Senate. To prevent new protests by people opposed to charter amendments, the government may need to open public hearings on the country's supreme law and then stage a referendum. However, this raises the risk that the Constitutional Court will decide on the PPP dissolution case before a referendum can be held.

Even if the PPP succeeds in amending the Constitution, it could still be dissolved if the Constitutional Court rules that it is a proxy of TRT. An investigation into this allegation is still at an early stage. However, if the court finds against the PPP, then all of its 233 MPs will lose their seats and the Democrat Party will be invited to form a government. Rather than risk such a scenario, we believe the prime minister would decide to dissolve parliament and call new elections.

Scenario 3: The PPP is not dissolved and the party pushes through constitutional amendments.

From a PPP perspective, this is blue-sky territory. Under this scenario, the party changes the Constitution before the court can rule on whether it should be dissolved. We assign a probability of 30 per cent to this scenario under which the PPP may emerge even stronger (having gained MPs from the newly-dissolved Chart Thai and Matchima parties).

Scenario 4: The PPP is dissolved and constitutional amendments fail, but the "proxy" case is dropped. If the constitutional amendments are not passed before the Constitutional Court rules to disband the PPP on the grounds of Yongyuth's alleged vote fraud, the party's 35 executives (including 11 MPs) would be banned from politics for five years. The remaining 222 MPs could move to other parties, probably the Puea Pandin Party, another coalition member. There would need to be a Cabinet reshuffle but the current government would still be able to function. We assign a 30 per cent probability to this scenario.

Over the last few years, Thai political developments have been one of the biggest factors deciding the stock market's short-term direction. We believe that scenario 2 is the worst for the market and that scenarios 3 and 4 are the best. While the market has shrugged off Friday's EC decision (the SET was closed for the Songkran holiday), we believe investors will need to pay closer attention to political events in the latter half of 2008.

While political temperatures are on the rise, we are still a long way off from reaching boiling point. The proposed constitutional amendments, as well as verdicts on party dissolutions, should take at least 5-10 months to finalise. So far, political news has had a relatively subdued affect on stock market movements but this is likely to change as risks to the coalition government's stability increase.