Thailand’s Testy Temple Tiffs

Thai shares struggled to keep Asia-leading status as the worst fighting in decades again erupted along the Cambodia border over disputed temple ownership amid rumors the army action was designed to interfere with upcoming elections which exiled former premier Thaksin intends to contest through allied parties, as the incumbent Ahbisit seeks coalition support to hang on to power. The UN appealed for calm and urged that the spat be referred to outside arbitration. The government temporarily closed activist radio stations under the pretext of state security in an effort to ensure backing for the skirmish and avoid a repeat of last year’s bloody anti-regime street protests over such policies. The move came as Japan’s post-earthquake trade cutoff may begin to pinch, although exports were up 30 percent in March with ample current and capital account surpluses. 10 percent of foreign sales go to Japan with autos and electronics the top categories, and over half of external debt is yen-denominated. Imports include machinery, plastics and steel, and likely higher costs from the disaster’s supply squeeze combine with the oil price spike from the Mideast crisis to dent the balance of payments. In response to the energy burden the timetable for slashing diesel subsidies has been postponed to the second half even as the fiscal deficit could break the 4 percent target. It has also sent inflation toward 3 percent which could bring a further series of central bank rate hikes. The official stance is that neither near-term economic or political shifts should change underlying currency direction which has recently been steady against the dollar with occasional intervention on the back of re-institution of the bond inflow tax.

However many private analysts question the $20 billion expansion of overseas borrowing the past year, almost half through the banking sector, which may have used the channel for forex hedging as well as domestic credit availability. The amount was the largest since the 1990s financial crisis, and companies have also tapped the lines given the cheap greenback funding offered and difficulties in consummating local capital markets transactions with uncertain IPO appetite and hefty government paper issuance crowding the space. The GDP growth forecast remains intact for 4-5 percent heading into the first “normal” election and post-crisis rates cycles in years, although neither the prospect of unconventional prudential or military measures can be dismissed with tenacious tensions.