Prime Minister Abhisit Vejjajiva appears set on wielding the military to enforce a tough crackdown on the opposition pro-Thaksin Shinawatra ‘Red Shirt’ protestors, currently encamped in the commercial Ratchaprasong area. In my view, the use of force will do little to address the deep-rooted issues dividing the urban elites and the rural poor. Thai assets should suffer relative to the rest of the region.

Increased Likelihood Of Decentralised Demonstrations
Over the past week, clashes between the army and the ‘Red Shirts’ have led to 35 casualties and over 200 injured, marking Thailand’s worst political violence in two decades. Despite the tightening noose around the main protest area, there is an increasing probability of smaller-scale demonstrations erupting in various parts of the country, particularly in the rural areas if the violence persists. Around 500 members of the United Front for Democracy against Dictatorship (UDD, the political arm of the ‘Red Shirts’) converged at the Chang Mai railway station on May 16 to pressure the government to refrain from using force against the protestors in Ratchaprasong. If this movement is duplicated in other provinces, the scope of unrest will no longer be contained in Bangkok.

Is Civil War A Possibility?
For now, the chance of an outright civil war in Thailand is low but growing. Firstly, the much revered (but aging) Thai monarch, King Bhumibol Adulyadej, has been ill for an extended period and has conspicuously avoided mentioning about the ongoing unrest. In his absence, Thailand has and will continue to lack a common unifying ground, potentially leading to even more conflict. Secondly, while the military appears united in the crackdown against the ‘Red Shirts’ at this point, there were signs just a few months ago that the military is split on the use of more violence. It is conceivable that the pro-Thaksin elements within the military will split from the main unit, triggering civil war.

Spread of Indonesia over Thailand 5-Year CDS (bottom)

Underperformance Of Thai Sovereign Debt To Continue
In contrast to Thailand, Indonesia has enjoyed greater political stability and economic growth over the last few years. As such, the spread of Indonesia’s 5-Year CDS over Thailand’s 5-Year CDS has narrowed considerably from around 150bps in the pre-crisis period to 30bps at the time of writing, the spike in spread in Q408 notwithstanding. This should begin to narrow and there is a distinct possibility that Indonesia’s 5-year CDS spread may trade inside of Thailand’s in the near future, with the key risk between a prolonged return of risk aversion leading to a knee-jerk selloff in Indonesian assets.