Thailand Election Commission's chairman Supachai Somcharoen holds a ballot during an event to promote voting at the next August 7 referendum over military-back draft constitution in Bangkok, Thailand, August 4, 2016. REUTERS/Chaiwat Subprasom

Thailand’s stock market continued to lead Asia, with a 25% gain in dollar terms on the MSCI Index through July, as infrastructure stimulus and a strong baht offset the military government’s misplaced attempts to win approval for a new constitution in an upcoming national referendum.

Thailand Election Commission’s chairman Supachai Somcharoen holds a ballot during an event to promote voting at the next August 7 referendum over military-backed draft constitution in Bangkok, Thailand, August 4, 2016. REUTERS/Chaiwat Subprasom

The army mounted an all-out ad campaign for support with its media control, as both main political parties oppose the draft and opinion surveys reveal a large indifferent and undecided voter bloc.

The revisions would enshrine soldiers’ influence in parliament over a five-year transition period to democracy return, with initial elections foreseen in 2017. The junta arrested “no” campaigners heading into the August 7 ballot, as ailing King Bhumipol,  absent from public view for months, has not weighed in on the debate to reprise his crisis resolution role.

Political standoff will linger regardless of the outcome and could again turn violent, with foreign direct and portfolio investors preferring neighbors for long-term commitments.

Since Prime Minister Prayuth Chan-ocha took power two years ago, GDP growth has sputtered, and 2016 is on track to match 2015’s 2.5% result, according to the World Bank. Exports are two-thirds of output but rose less than half a percent on an annual basis through May on lower commodity and manufacturing demand from China and diversion to cheaper locations like Vietnam.

Deputy Prime Minister Somkid Jatusripitak, a technocrat who last served under the ousted Thaksin Shinawatra administration, unveiled new special zones and tax incentives to keep international companies. He has also overseen a transport spending binge, with a $1.25 billion railway package approved in July, to fire domestic demand with private consumption still slumping.

Tourism increased 12% through mid-year, but the currency up 3.5% against the dollar has brought central bank pressure to intervene from the hospitality and shipping industries.

Inflation is minimal and the 1.5% benchmark interest rate has accompanied subdued 5% credit growth, as banks grapple with a jump in the bad loan ratio to 3.5% on severe household debt at 85% of GDP.

Somkid has focused on luring investment from China and India through the Eastern Economic Corridor, which offers free land and corporate and personal income tax privileges to attract high-tech health and digital services in particular.

It aims for $50 billion in outlays, but interest has been meager, reinforcing the one-third drop in foreign investor applications in 2015 as ratings agencies like Moody’s continue to caution on “political uncertainty FDI risk.”

Japan’s Toyota, in the country for decades, announced a 10% workforce reduction in July.

Public spending will again surge over 10% this year as the main economic catalyst, with business and consumer confidence otherwise in the dumps, but the spree will take medium term direct government debt to 35% of GDP, Fitch Ratings calculates.

Leading agriculture conglomerate CP Group, listed on the stock exchange, has been a top buy with the purchasing power push for its pork and shrimp staples, and has drawn allocation from regional fund managers in view of neighboring country food production shortages.

However, the World Bank noted in a June report that pump priming will not alleviate long-term competitive disadvantages of an aging population, and lagging education and productivity levels versus the rest of East Asia awaiting “key reforms.”

Indonesia was just behind on the MSCI Index with a 20% advance, and FDI in contrast was ahead 12% in the first half of the year on 5% economic growth. Japan and Singapore were the biggest overseas players in the paper, metal, and chemical sectors, and island diversification away from Java jumped.

In a cabinet reshuffle, the new investment board head will be Thomas Lembong, the former Trade Minister and a private equity veteran. Sri Mulyani was brought back from the World Bank, where she was a Managing Director, to serve again as Finance Minister after a previous 5-year stint under President Jokowi’s predecessor.

Investor doubts that the 3% of GDP budget deficit can be covered with a tax amnesty were dispelled with the appointment, with fiscal cleanup once more prominent after messy early term accumulation with subsidy cut delays.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.

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Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.

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