Is 'Teflon Thailand' finally losing its sheen?

BANGKOK (AFP) - Thailand's once-vibrant economy is buckling under the strain of months of political turmoil that has paralysed government policy, scared off tourists and spooked foreign investors, analysts warn.

Long hailed as "Teflon Thailand" for its enviable record of economic resilience in the face of political upheaval, the fallout from a six-month crisis that has left 28 people dead and hundreds wounded is mounting.

Official statistics due for release on Monday are expected to show that the economy contracted in the first quarter of 2014 from the previous quarter, and experts fear the poor performance will drag on until the deadlock is resolved.

"When there is no government, people lack confidence to spend and invest because they fear constant political chaos," said Thanavath Phonvichai, director of the Center for Economic and Business Forecasting at the University of the Thai Chamber of Commerce.

"Also foreigners will not dare to travel to Thailand." Thanavath said there was a high risk that the economy would shrink in the second, third and fourth quarters of 2014.

"It is possible that we will have neither a government nor prime minister throughout this year," he warned.

Southeast Asia's second-biggest economy has not had a fully functioning parliament or government since December, bringing major infrastructure projects to a halt and disrupting wider state spending.

Consumer confidence is at the lowest level in 12 years while foreign tourist arrivals have slumped and foreign investors are watching the saga unfold nervously.

International tourist arrivals were down by roughly eight and nine percent in February and March respectively from a year earlier, according to government figures, but have since shown signs of stabilising.

A grenade and gun attack on anti-government protesters in Bangkok on Thursday that left three people dead has added to fears that the unrest could spiral, with the coup-prone army warning that it might have to intervene to quell the violence.

Government supporters have warned of possible civil war if demonstrators achieve their goal of appointing an unelected premier following the recent removal of prime minister Yingluck Shinawatra from office in a controversial court ruling.

Poll officials say a planned July 20 general election is now in jeopardy because of the risk of a repeat of the chaos seen in February when opposition demonstrators blocked voting.

Thailand's economic growth already slowed sharply in the fourth quarter of 2013, to just 0.6 per cent year-on-year, from 2.7 per cent in the previous quarter, according to official figures.

In March the Thai central bank reduced its official interest rate to the lowest level in three years to boost the stumbling economy.

The same month the Bank of Thailand cut its growth forecast for 2014 to 2.7 per cent, after a 2.9 per cent expansion in 2013.

Fitch Ratings has warned that Thailand's "'BBB+" sovereign credit rating could be under threat if the deadlock continues through the second half of this year.

"Failure to establish a functioning government by mid-year would have a major impact on medium-term capital investment, consumer confidence and fiscal planning," it warned in a statement.

The crisis is delaying Thailand's escape from the low-investment "middle income trap" in which it has languished since the Asian financial crisis in 1997, Fitch said.

Eight years of political turmoil, along with the destruction wrought by devastating 2011 floods, have raised fears that long-term investors such as Japanese carmakers could stop new investment, or even move production to other, more stable countries.

That would be a heavy setback for a country that has earned the nickname of the "Detroit of Southeast Asia" thanks to its status as a thriving regional auto manufacturing hub.

Thai car sales plunged nearly 46 per cent in the first quarter of 2014 from a year earlier because of the weaker economy and the end of government subsidies for first-time buyers, according to an industry-wide survey by Toyota.

Experts say it appears unlikely there will be a functioning government in place in time to pass a 2015 budget within the next few months, delaying all non-essential state spending.

"It will take several months before we have a new government so by the time we have the new budget, it will be next year," said Somjai Phagaphasvivat, a political science professor at Bangkok's Thammasat University.

"Political calm will not come easily. The country will be polarised for quite a while," he said.