A post-coup bounce - but can it last?

By Robert Horn, Fortune

(Fortune Magazine) -- Bangkok traffic is jammed again. The tanks and soldiers that cleared the Thai capital's boulevards during the September coup have gone back to their barracks. The crowds who cheered them on--gleeful at the ousting of Prime Minister Thaksin Shinawatra--have returned to work.

Despite international condemnation of the military for deposing a democratically elected government, Thailand's economy is enjoying a post-coup bounce. The Stock Exchange of Thailand is up more than 5% since Sept. 19, with foreign buyers pumping $650 million into the market. The currency, the baht, is at its highest level in nine years. Business confidence has increased as political uncertainty has decreased, and consumer confidence rose in October for the first time in nine months. Exports are strong, GDP is growing, and falling oil prices have eased inflation. "You can feel the vibrancy," Finance Minister Pridiyathorn Devakula told FORTUNE.

Yet some foreign investors are wary. "They've been spooked by the coup," says Andrew Stotz, head of research at Citibank in Thailand. They want to see how the government resolves the issue of foreign business ownership, which contributed to Thaksin's downfall.

Last January, less than a year after sweeping to reelection by the largest margin in Thai history, Thaksin sold his family's telecom firm, Shin Corp., which was dependent on Thai government concessions, to Temasek Holdings, the investment arm of the Singaporean government. The $1.9 billion tax-free deal sparked outcries over possible insider trading, tax avoidance, conflicts of interest, and whether it violated the 49% limit on foreign ownership of Thai companies. Public anger erupted into street protests against Thaksin, setting off a chain of events culminating in the coup.

Government agencies are examining the Shin sale, and a panel is investigating Thaksin--who has maintained his innocence from exile abroad--for alleged abuses of power. A Commerce Ministry committee concluded that Temasek exceeded foreign-ownership limits by using Thai nominees to hold Shin shares, and findings have been forwarded to the police. But nominees are used by thousands of foreign investors in Thailand. If that loophole is closed, Stotz says, "it will have a huge negative impact on foreign investment."

Pridiyathorn disagrees. Amendments to the Foreign Business Act, which will be ready early next year, will make the law clearer and fairer, he says. The 49% ownership limit will be kept. "We want investors to stay, but to stay legally," he says. Those affected are to be given a grace period to come into compliance.

Foreign investors are needed to keep the economy growing. As a pump-primer, the cabinet cleared nearly $1 billion in mass transit projects planned by the previous government. Without overseas investment, they would be derailed. So Pridiyathorn marshaled government ministers to meet investors in mid-November. They explained their shift from the populist-spending policies of Thaksinomics to what the government is calling a "sufficiency economy." Pridiyathorn insists this simply means a sustainable development path, not a rejection of foreign investors.

The investment in public relations is already paying off. Mazda subsequently announced that it would spend $450 million to build a new plant in Thailand, and Dow Chemical followed with two more factories worth $900 million. "They built a lot of confidence," says Paul Strunk, executive director of the German-Thai Chamber of Commerce, who attended the November meeting. "But we still want to know more about those foreign-ownership regulations."  Top of page