“THE government of Thailand has capably steered the economy through a major external economic shock, and a potentially destabilising domestic crisis.” This was how Moody’s assistant vice-president Christian de Guzman explained the decision of his credit rating agency to raise Thailand’s credit outlook from negative to stable last week.

So is the worst over for the troubled country? In a statement to the media justifying the upgrade, Moody’s referred to recent improvements in the nation’s economic fundamentals. The current situation is certainly better than it was in December 2008, when the agency downgraded the country in the wake of political volatility and concerns that increased spending could lead to a sharp deterioration in the government’s fiscal position.

Quarter-on-quarter, the economy shrank by a seasonally adjusted 0.2 per cent in the July to September period. But since most economists were expecting a fall of between 0.4 and 0.7 per cent, last week’s announcement by the National Economic and Social Development Board was received positively. Year-on-year, third-quarter growth was 6.7 per cent.

The country’s improved foreign exchange reserves position, Moody’s pointed out, has also given it an important cushion against volatile capital flows.

The stock exchange has risen by 38 per cent since the violent crackdown on opposition demonstrators in May. The baht has gained more than 8 per cent against the dollar in the same period. Foreign direct investment is up. The total value of foreign investment applications received by the Board of Investment rose 11 per cent to 174,884 million baht (S$7.6 billion) in the first 10 months of this year.

Moody’s optimistic assessment, however, needs to be seen in the context of its narrow focus on debt. This is reflected in the rating agency’s comment that political changes were unlikely to lead to a deterioration in government finances or a weakened balance of payments, which would have increased the risk of default.

Political risks in other areas, however, remain high, and many investors, not to mention potential tourists, may be better advised to take a second look.

Thai politics has been deeply polarised since 2006, when then Prime Minister Thaksin Shinawatra was ousted in a military coup. Popular among the poor, the wealthy businessman has lived in self-imposed exile ever since. The current government has issued a warrant for his arrest, accusing him of terrorism, a charge he denies.

The protesters, most of whom remain loyal to Thaksin, believe that the current government is illegitimate. They also accuse the military of acting with impunity, and point in particular to the alleged failure of the authorities to carry out a proper investigation of the killings in May. In that month, violent clashes in Bangkok between troops and anti-government demonstrators resulted in the deaths of at least 89 people.

Despite the fact that most opposition leaders are either in hiding or in jail, opposition groups are still capable of mobilising thousands of demonstrators. Around 10,000 massed in the capital on Sept 19, Oct 10 and again on Nov 19. Another 12,000 marched in Ayutthaya, north-east of Bangkok, on Oct 17.

The numbers may be small compared to the peak in mid-March, when up to 100,000 citizens took to the streets. But the fact that the demonstrations are continuing despite media censorship and the arrest of activists suggests that large numbers of Thais remain disenchanted.

A series of unexplained bombings is adding to the tension. On Nov 15, a grenade thrown into a minibus in the eastern outskirts of the Thai capital killed one person and injured eight. The blast came just hours after the government extended a state of emergency in four provinces, including Bangkok, for three more months.

The promotion of General Prayuth Chanocha to army chief in September is a sign that Thailand’s current leadership is in no mood to compromise. A staunch royalist, the general played a key role in the 2006 coup. He was also an important figure in the military crackdowns on red-shirt protesters last year and this year.

Potential triggers for further political turmoil in the coming months include yet another court case that could see Prime Minister Abhisit Vejjajiva’s Democrat Party disbanded on the grounds that it accepted an illegal 258 million baht donation from the nation’s third-biggest cement maker.

Elections must also be held before November next year, and most analysts believe that a free election would result in Thaksin’s supporters and their allies being voted back into office. This is an outcome the army is unlikely to tolerate.

“If we can maintain political stability, everything will be just fine,” Mr Viboon Kromadit, head of industrial estate developer Amata Corp, told Bloomberg last week.

Problem is, that’s a big “if”.

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