Thai politics threatens to overwhelm economy

BANGKOK, Mar 15 (Reuters) Thailand has a matter of weeks to resolve the political turmoil engulfing Prime Minister Thaksin Shinawatra before it threatens to muzzle economic growth, analysts said today.

Calls for Thaksin to step down, which have so far culminated in peaceful protests by thousands on the streets, are raising concerns that the uncertainty could cloud Thailand's investment picture for longer than expected.

''There are some political issues in some countries such as Thailand that cast a negative shadow in the short term,'' David Marshall, managing director of Asia financial institutions at Fitch Ratings, told Reuters.

''But we haven't yet revised down our expectations for the economy or for the banks,'' he said.

''I think we probably won't do that if the political problems can be resolved within a matter of weeks, but if they persist for a month, it will have a negative impact on the economy and then we may have to take another look.'' Investors must now contend with a highly volatile political situation just as the country comes off its slowest rate of economic growth in four years.

Investors are fretting the furore - fuelled by the sale of the telecoms firm Thaksin founded -- could strangle economic reforms, driving foreigners to become net sellers of 5 billion baht (128 million dollars) of shares over the past week.

While short-term capital flows could easily return, Thaksin's tottering power base could end up marring more long-standing investment decisions such as foreign direct investment.

''If you are a sensible investor you want to know that the underlying conditions determining that investment will not change,'' said Sriyan Pietersz, head of research at JPMorgan in Thailand.

Finance Minister Thanong Bidaya said the political impasse could take months, if not a year, to resolve.

''It's not good if the situation is prolonged, which should not be more than six months or one year,'' he told reporters.

SHORT-TERM BOOST The 3.8 billion dollars takeover of Shin Corp, which also holds assets such as satellites, by Singapore's Temasek Holdings was initiated by Thaksin's relatives who did not have to pay tax, angering taxpayers and fanning national security concerns. In a bid to stave off a growing campaign to oust him, Thaksin said on Wednesday he might consider stepping aside temporarily to defuse the crisis, lifting the baht from two-week lows, but also suggested he was not yet ready to do so.

''If he says he's going to step down, the markets would receive it quite well, but that would be short term,'' said Amarit Sukhavanij, deputy managing director at Kasikorn Securities.

An interim caretaker government without Thaksin at the helm would still face difficulties making key decisions, a state of affairs that would not please investors.

''It is unlikely for any interim government to make serious economic decisions because they will be held to those reforms,'' said a Bangkok-based analyst, who declined to be identified.

Thaksin's troubles may even make it difficult for ministries to spend money as he focuses on broking compromises to maintain power.

''As political uncertainties drag on, I now think that it would be a challenge for the government offices to get the disbursement rate target that they have previously set,'' said Charl Kengchon of Kasikorn Research Center.

But Marshall said Thai bank profitability remained sound and fundamentals stable, suggesting Thailand had made some progress since the 1997/98 financial crisis.

''While the economy is growing and banks are performing well, clearly it may be a good time for banks to really focus on the fundamentals on improving risk management with an aim to having much better growth,'' he said.

''It still looks okay for the short term as long as the political problem in Thailand is sorted out very soon.''

REUTERS