Violence in the streets of Bangkok and the declaration of a state of emergency in the capital will have a long-term negative impact on the economy, according to economists. A widespread lack of political confidence, due to uncertainty over outstanding court cases against politicians in the ruling People Power Party as well as suspicion about the government's motives in seeking to amend the constitution, has caused private investment to languish since the beginning of the year.
The siege imposed on Government House by the anti-government People's Alliance for Democracy and the ensuing clashes with pro-government protesters have battered investors' confidence in a peaceful resolution to the crisis.
Yesterday's declaration of a state of emergency, handing power to a committee headed by army chief Gen Anupong Paochinda, could worsen the situation.
Prof Teerana Bhongmakapat, dean of Chulalongkorn University's Faculty of Economics, said the government's announcement of a state of emergency in Bangkok had created the perception that there was violence and fighting on the streets.
The actual confrontation, early on Tuesday morning between PAD supporters and members of the pro-government Democratic Alliance Against Dictatorship, left one dead and scores injured.
But Prof Teerana said the present crisis could have a greater impact than the violence that occurred during Black May in 1992, a clash between Bangkok residents and the armed forces that later led to the appointment of a reformist government under Anand Panyarachun.
This time, the political crisis reflected social divisions between two different political camps.
''The current political crisis has been chronic and it has intensified,'' said Prof Teerana. ''The government's refusal to resign is a tactic of buying time. It is also unnecessarily causing economic damage.''
He added that the announcement of a state of emergency would prolong the situation, rather than resolve the deadlock.
Foreign direct investment stood at $2.95 billion in the first half of 2008, falling steeply from $4.17 billion in the same period last year.
Most economists project economic growth this year at around 5%, or slightly higher than the 4.8% posted in 2007. But global oil prices, market volatility and inflation are among the negative factors that have affected growth.
Political risk would carry its own opportunity cost for the economy. Political instability and paralysis in the civil service has already led to delays in key long-term development programmes such as the infrastructure megaprojects.
Munenori Yamada, the president of Jetro, said Japanese foreign direct investment decelerated this year because investors had adopted a wait-and-see attitude.
But he added that the Japanese business community still regarded Thailand as its most important business base.
''The confidence has been formulated over a long time, and is not affected by short-term factors,'' he said.
In any case, he said the government should resolve the political crisis as soon as possible to avoid further economic damage.
''The performance of the Thai economy and the government has been impressive but if the situation is prolonged the country's competitiveness will decrease,'' he said.
Kim Eng Tan, primary credit analyst with Standard and Poor's, said the political situation had put Thailand's sovereign rating under pressure.
Although the economy is driven primarily by exports, low investment could harm growth potential and stall future exports, he said. The violence has undermined investors' confidence as it could damage their operations or even their facilities.
Mr Tan noted that employees of key infrastructure companies had signalled they may go on strike.
''Political uncertainty creates an unpredictable policy environment. The post-coup government's implementation of capital controls and its proposed amendments to the Foreign Business Act are examples,'' he said, referring to policies enacted by the Surayud Chulanont government that were poorly received by the markets.
''As long as there is no violence, the deterioration of credit fundamentals will be gradual. So the risk of a rating downgrade in the next year or so is not high,'' he added.
''However, a couple of years of continuing deterioration (with no violence) could bring us to a point when the chances of a downgrade may no longer be low.''