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An already tense situation in the Southeast Asian nation of Thailand intensified on Monday after the Election Commission recommended that the ruling Democratic Party be prosecuted for allegedly accepting illegal campaign contributions. The vote came after protests in the Thai capital over the weekend turned violent. Four soldiers and 17 civilians were killed after the army attempted to clear an area of protesters.

The protests stem from the army’s role in governing the country. After populist leader Thaksin Shinawatra was overthrown by the military in 2006, the country’s new constitution guaranteed more powers to the army. The result, according to some analysts, is a “military is free to operate outside the control of civilian leaders while pretending it is still under the command of a democratic government.” Now Thaskin’s supporters–known as “Red Shirts” because of their attire–have swarmed Bangkok to protest the current system and demand new elections.

That scenario has become increasingly likely in recent days. The country’s army chief encouraged politicians to resolve the situation on Monday, suggesting at a news conference that early elections would help to end the conflicts. Prime Minister Abhisit Vejjajiva is required to call a vote by the end of 2011, but has been under pressure to hold elections long before that date, and a peaceful resolution seems unlikely without such a concession. “We will continue to protest until Mr. Abhisit is no longer prime minister,” said protest leader Jatuporn Prompan on Monday.

But analysts predict that any election would be carried easily by the Red Shirts, potentially setting off protests from pro-government groups that would only exacerbate the current situation.

History of Turmoil

Since the end of Thailand’s monarchy nearly 80 years ago, there have been at least 18 military coups, undermining attempts to establish a stable economic power. Moreover, widespread corruption has long stood as a roadblock to developed market status (see Seven Most Corrupt Country ETFs). Thailand’s economy has soared over the last 12 months, more than doubling since the market bottom in March 2009 before pulling back sharply in the wake of the political crisis.

Thailand’s Finance Ministry recently cut its economic growth forecast for 2010 to 4% from 4.5%, noting that the extended period of turmoil would have a material adverse effect on tourism and local spending. The central bank governor said on Monday that the likelihood of a credit downgrade from ratings firms has increased as a result of the conflicts. The Fiscal Policy Office estimated that the weekend’s violence could cost the economy about $1.6 billion in revenue on the year, as countless reports of canceled flights translated into big losses in the tourism sector.

Thailand ETF in Focus

Thai financial markets are closed on Tuesday, Wednesday, and Thursday for New Years celebrations, but the last day before the holiday was anything but quiet. The iShares MSCI Thailand Index Fund (THD) lost 4.6% on the day as trading volumes more than doubled the daily average. Tourism-related components tumbled, with Thai Airways dropping 13% and hotel operator Minor International sliding nearly 9% on the day. Several governments have advised their citizens to avoid Bangkok, one of the continent’s most popular tourist attractions.

THD tracks the performance of the MSCI Thailand Investable Market Index, a benchmark that includes about 85 of the largest Thai stocks. Currently, the fund is tilted heavily towards the financial and energy sectors, which in aggregate make up about 70% of assets. Even after its recent slide, THD is still up about 8% on the year, making it one of 2010’s best performers. Many of the ETFs found in the Asia Pacific Equities ETFdb Category also maintain significant exposure to Thailand, one of Southeast Asia’s largest and fastest-growing economies.

Disclosure: No positions at time of writing.

Source: Thailand ETF Plummets as Crisis Intensifies: A Good Contrarian Buy?