(Bloomberg) -- Thailand is entering a new phase of political uncertainty that threatens to further damage the nation’s fragile financial markets.

In coming weeks, Thai courts are set to decide the fate of Prime Minister Srettha Thavisin, ex-leader Thaksin Shinawatra and the main opposition party. While the outcomes are far from clear, the cases could result in Srettha’s ouster, an unraveling of the coalition government effectively run by Thaksin and a resumption of street protests by supporters of the opposition Move Forward Party.

It’s all happening against a backdrop of stock-market losses, baht weakness and capital outflows. Already spooked by a spat between the government and the central bank over monetary policy, investors now face the prospect of political upheaval that risks keeping important economic bills such as the 2025 budget in limbo. 

“We’re not yet heading into a crisis but certainly political turmoil,” said Punchada Sirivunnabood, associate professor at Mahidol University. “These events are unfolding as the fiscal 2025 budget bill will be taken up for deliberation, and it would require good management to not jeopardize it all.”

Thailand’s economy has already paid a price for delaying the 2024 budget following a post-election stalemate last year as growth slid to 1.5% in the January-March quarter, the lowest among its peers in Southeast Asia. The political instability can potentially delay a parliamentary approval for the 2025 budget. 

Global funds have sold a net $990 million of Thai bonds so far this year, while they have offloaded $2.17 billion local equities, the most in Southeast Asian markets tracked by Bloomberg. The outflows have weighed on the local currency, with the baht dropping more than 7% against the dollar this year, Asia’s worst after the yen. The benchmark stock index has tumbled more than 4%.

And with the latest “political noise” foreign investors may look elsewhere, according to Samsung Asset Management Co. 

“Any signs of political instability will make investors nervous, since the growth outlook is reliant on government policy,” said Alan Richardson, a fund manager at Samsung Asset Management. “It doesn’t help with the current Thai macro setup of low growth, high household debt and little room to cut interest rates.” 

The cases against Srettha and Thaksin are seen as warning shots from Thailand’s pro-royalist establishment resenting the duo’s moves to tighten their grip over the country. If the Constitutional Court finds Srettha guilty of ethical breach as alleged in a petition, it’s likely to set off a race to select a new prime minister. 

Weathering Scrutiny

Srettha has said he was confident he could weather the court scrutiny, adding that his decision to appoint a former Shinawatra family lawyer with a prison history as minister followed the law. 

As legal troubles mounted, the premier appointed veteran legal expert Wissanu Krea-Ngam as an adviser on Thursday, according to local media. Wissanu served under the previous military-backed government of Prayuth Chan-Ocha and helped the former junta chief survive a court scrutiny whether he had breached a tenure limit in 2022. 

Meanwhile, Move Forward is facing dissolution after its election campaign pledge to amend the country’s lese majeste law — which protects the royal family from defamation — angered the royalist establishment. In the latest twist and turn, prosecutors will formally charge Thaksin under the same law on June 18. This poses a fresh jail risk for Thaksin, who is currently on parole after being sentenced in corruption cases. He’s due to walk free after his royally commuted jail term ends in August.

Thailand’s elites may be seeking to rein in the former leader rather than end a deal that brought to power his Pheu Thai and a clutch of pro-royalist parties at the expense of the pro-reformist Move Forward party.

The former two-time prime minister returned to Thailand from a 15-year self-imposed exile last year, in what was seen as part of a deal with the then military establishment that ousted him and later his sister Yingluck Shinawatra’s government in 2014. His daughter Paetongtarn Shinawatra is the leader of the Pheu Thai party.

Thaksin and his party are still useful allies and a buffer for the establishment, particularly when conservatives lack a strong presence in parliament and viable alternative to safeguard their interests, said Napon Jatusripitak, a visiting fellow at ISEAS-Yusof Ishak Institute. 

“The establishment might be exploiting the current situation to squeeze more out of him, including potentially replacing the prime minister with someone else preferred by establishment-aligned actors,” Napon said. “A rough patch in a marriage of convenience, but not yet a divorce.” 

With the legal hurdles mounting, Srettha may not be able to fully implement Pheu Thai party’s flagship cash handout scheme that promises 10,000 baht each to about 50 million Thais, according to Peter Mumford, Southeast Asia practice head at consultancy Eurasia Group. The cash stimulus is touted by Srettha as a sure-shot way to jumpstart the economy after a decade of sub 2% growth rate.

“The political uncertainty will hinder the government’s ability to implement much-needed economic policies to help revive the sagging economy,” said Rakpong Chaisuparakul, an investment strategist at KGI Securities (Thailand) Pcl.

--With assistance from Anuchit Nguyen and Eduard Gismatullin.

(Updates with Srettha’s appointment of legal adviser in 11th paragraph.)

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