Ignoring political risk in Asia

IFR 2017 25 January to 31 January 2014
5 min read
Asia
Jonathan Rogers

AS THE OLD adage in the political risk insurance business goes, by the time the phone starts ringing it’s already too late. Once investors realise a country is in trouble, they have already missed their chance to get cover at anything other than a prohibitively expensive price.

I wonder if that’s been the case with regard to Thailand, where things started to look bad in October but last week began to look considerably worse.

When anti-government protesters took to the streets late last year to vent their anger at a proposed amnesty bill that would have paved the way for the return of ex-president Thaksin Shinawatra, the general mood among investors was optimistic. Thailand’s financial markets and corporate profits have in the past proved remarkably resilient in the face of civil unrest.

In 2010, a year marked by street protests in which 90 people were killed, the Thai stock market managed a 44% gain, albeit after an initial wobble.

So is there reason to worry that the state of emergency declared last week by the government of Yingluck Shinawatra, Thaksin’s sister, portends something that should be a real cause for concern this time? Certainly some parts of the Thai market are carrying on regardless, with the bank that funds the country’s rice subsidies raising more than expected in its latest issue.

But I’m told the cost of buying risk policies against a series of possible contingencies – including a military coup, the imposition of currency controls and the calling in of letters of credit – has risen. Despite the previous sanguine tone, that now seems right.

While business rolls on, there is such an impasse in Thai politics that it has the tinge of failed state about it. The problem is that Yingluck’s government is perceived by the protesters as being run by her brother.

If currencies in the region plummet, the streets are likely to be thronged with noisy crowds

THERE’S PROBABLY SOME truth to this, at least as far as the big policy decisions are concerned. From his base in self-imposed exile in Dubai, Thaksin regularly holds long Skype sessions with members of the Thai cabinet. Such direct influence, from a man who was convicted of corruption charges in 2008 and fled to avoid his sentence, should not happen in such a flagrant manner.

Elections have been called for February 2, but the main opposition party intends to boycott them, and it seems unlikely they will go ahead.

In the meantime, the spectre has emerged of the return of the pro-government redshirts who participated in the 2010 violence. One of their leaders, Kwanchai Praipana, was shot last Wednesday in Northern Thailand, soon after the state of emergency was declared.

Unfortunately for the anti-government protesters, the emergence of the redshirts will square with the underlying political reality in Thailand: Yingluck’s party is immensely popular in the poor rural areas and is almost certain to win the election again. Unless she can be persuaded to stand aside and break the perceived chain of command with her brother, a prolonged impasse and escalating violence look like certainties.

For those who believe mass civil disobedience can mobilise entire populations, Thailand is the most likely country to host an Asian version of the Arab spring. Certainly the recent events there have shone a spotlight on the way ingrained nepotist politics work in Asia, and pockets of publicly expressed civil discontent are also already present in neighbouring countries.

Last year in Malaysia the general election result was disputed in mass rallies organised by the opposition parties, and potential tipping points are there in Bangladesh, Cambodia and Sri Lanka as the malcontents of incumbent governments take in increasing numbers to the streets.

Last year’s mass unrest in the Turkish capital and the burgeoning protests in the Ukraine will surely have pundits pushing out the thesis that 2014 may come to resemble 1968, when it seemed the established political order was about to be torn down.

TO GO BACK to political risk insurance, it seems likely that this will be a year in which premiums for covering the various contingencies that are the components of political risk will rise across Asia. Credit default swaps can be a useful tool, but are an imperfect hedge when it comes to events that can cause financial loss but do not precipitate sovereign default, such as the introduction of exchange controls.

I say this not just because of the events in Thailand – although they will surely be an input – but because if ever there has been a year since the 1997 financial crisis when Asia’s currencies look vulnerable, it is this one.

Tapering in the US, worsening national income and household accounts and increasingly noisy market chatter are among the reasons. If currencies in the region plummet, the streets are likely to be thronged with noisy crowds, as they were over 15 years ago. When it comes to Asian political risk, now might be time to make that phone call.