Military Coup Raises Civil War Threat

BMI View: The Thai military's assumption of power following failed talks between rival factions in the ongoing political crisis raises the prospect of an unelected government being installed. Such a move would risk a violent pro-government backlash, and we maintain our view that the path of least resistance is for escalating violent unrest.

Just two days after the Thai military announced the imposition of martial law while stressing that the Pheu Thai Party (PTP) government would remain in power, failed talks between rival factions have resulted in the army's assumption of power, marking the country's 12th coup d'état in just over 80 years. This also marks the third time in 13 years that power has been taken away from the PTP by court rulings or coups.

As we argued on May 21 ( see 'Political Deadlock At A Crossroads As Military Enters Scene'), the Thai establishment has been closing in on the government over recent months, and the introduction of the military into the struggle raises the odds that an unelected government will ultimately be put in place. The probability of this has now increased further.

Major Wealth Disparity Underpins Crisis
Thailand - GDP Per Capita By Province, USD

BMI View: The Thai military's assumption of power following failed talks between rival factions in the ongoing political crisis raises the prospect of an unelected government being installed. Such a move would risk a violent pro-government backlash, and we maintain our view that the path of least resistance is for escalating violent unrest.

Just two days after the Thai military announced the imposition of martial law while stressing that the Pheu Thai Party (PTP) government would remain in power, failed talks between rival factions have resulted in the army's assumption of power, marking the country's 12th coup d'état in just over 80 years. This also marks the third time in 13 years that power has been taken away from the PTP by court rulings or coups.

As we argued on May 21 ( see 'Political Deadlock At A Crossroads As Military Enters Scene'), the Thai establishment has been closing in on the government over recent months, and the introduction of the military into the struggle raises the odds that an unelected government will ultimately be put in place. The probability of this has now increased further.

An Unelected Government Would Trigger Violent Clashes

Indeed, a group of senators is pushing for the instalment of an unelected government, and reportedly has the backing of senior bureaucrats and military officers. Their putative aim is to install an interim government that should be responsible for planning a long-term reform process and tackling immediate problems. While the senators have stated that power would ultimately be handed back to a democratically-elected government, which would carry out long-term reforms, the Red Shirts are highly unlikely to view this as a credible or satisfactory solution. In their eyes, it would likely represent yet another attempt to indefinitely undermine democracy.

Major Wealth Disparity Underpins Crisis
Thailand - GDP Per Capita By Province, USD

Should the military's involvement pave the way for the Thai Senate to appoint a non-elected government, it is likely that supporters for the now ousted PTP administration would take to the streets in protest. This is something they have long warned of, and the threat seems very credible in light of the continued attempts by establishment forces to usurp power from the democratically elected pro-Thaksin government. There is a great deal at stake for Thailand's rural poor, who hail largely from the north and north eastern parts of the country, and feel they have benefitted greatly under the leadership of former leader Thaksin Shinawatra and more recently his sister Yingluck. The Red Shirt-led protests seen in 2010 provide a template of what could be expected under this scenario. Back then, the Red Shirts protested in opposition to what they saw as illegitimate rule by then Prime Minister Abhisit Vejjajiva of the Democrat Party, which resulted in the death of over 80 civilians and six soldiers. We cannot rule out a much more violent confrontation considering that tensions have been brewing between the opposing forces since then.

Civil War A Growing Possibility

In the event of the instalment of an unelected government, and a subsequent Red Shirt backlash, the risk of a civil war would rise greatly. While this is not our core view, and would require a series of missteps on both sides, the probability is rising rapidly, and is certainly a salient risk. At present, the military is reported to be strongly united behind General Prayuth Chan-ocha, but there is no guarantee that this would remain the case in the event that violent clashes were to break out, especially given that a large proportion of the rank-and-file are Red Shirt supporters.

Peaceful Solution Possible, But Looking Less Likely

A surge in violence, while increasingly likely, is by no means a foregone conclusion. The military has stated that its goal is to maintain peace and prevent pro and anti-government supporters from engaging in violent clashes. There is still the potential for the military to broker some sort of agreement between the two rival factions. The hope is that this could pave the way for a speedy return to free and fair elections. The international community will likely put pressure on the military to return to its constitutional processes over the coming weeks and months.

Green Shirt Control Raises Risks
Thailand - 5-Year Credit Default Swap, bps

Maintaining Our Bearish Credit View

That being said, we maintain that the path of least resistance is one of further violent unrest, and as such we continue to hold a bearish view on the country's economic growth outlook, and expect to see more financial market instability. While we do not believe that Thailand is at risk of a sovereign default, we maintain our call for a rise in Thailand's 5-year credit default swap (CDS) as headline risk mounts. The view is currently up 12 basis points since we initiated it on April 28.

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