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Economy

Junta sends clear message: More foreign investment a must

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Prime Minister Prayuth Chan-ocha, pictured here at the Greater Mekong Subregion Summit in Bangkok on Dec. 20, is keen to boost foreign investment in Thailand.   © Reuters

BANGKOK -- "Today is a happy day for Thailand, and if we succeed today we will be making history," Thai Prime Minister Prayuth Chan-ocha told more than 2,000 Thai and foreign businesspeople at the mid-December launch of his government's new investment promotion strategy.

   Prayuth, whose motto since seizing power in a May 22 coup has been "return happiness to the people," made the remark days after scoring points with the business community by shelving plans to tighten up on foreign investment. The proposal by bureaucrats was to close a loophole that allows foreign investors to use preference shares to circumvent requirements for 51% Thai ownership of joint ventures.

     His decision to drop the proposed change to the Foreign Business Act avoided fresh damage to the country's investment climate, already shaken by earlier political unrest. "The FBA will be left untouched for now, and any potential future change will be for the better," Prayuth told the Joint Foreign Chamber of Commerce on Dec. 3.

     While Thailand's military-led government is clearly aware of the need to avoid scaring off foreign investment, it remains to be seen whether the junta will be any better than its elected predecessors at attracting it.

Engines have cooled     

Foreign direct investment was a key driver of growth in Thailand's economic heyday in the late 1980s and early 1990s, when the country's growth rate was among the world's highest, peaking at 13.3% in 1988, according to the World Bank.

     Huge inflows, in some years reaching as much as 20% of gross domestic product, were drawn by abundant cheap labor, a vibrant private sector and the discovery of offshore natural gas, which led to the birth of a petrochemical industry. The government further boosted investment by developing the country's eastern seaboard, which lies near Bangkok and along the Gulf of Thailand, as an industrial hub.

     But rising costs and greater competition from China began to take their toll on competitiveness by the mid-1990s. Thailand and the rest of Southeast Asia stumbled badly in the Asian financial crisis of 1997, while China continued to expand rapidly. Thailand recovered from the crisis fairly quickly, but the heady era of fast growth was over, and the flood of foreign investment moved largely elsewhere.

     Although the country has coasted along for the past two decades on the robust performance of its export sectors, most of them dominated by foreign companies, none of Thailand's numerous governments has been able to come up with a convincing new growth model. The workforce is no longer young nor cheap, compared with regional competitors such as Indonesia and Vietnam, and it is expensive compared with newer rivals such as Cambodia, Laos and Myanmar.

     Thailand has benefited from the use of migrant labor from these three neighbors. But that process has run its course and opened the country to accusations of human trafficking and rights abuses. In any case, these foreign laborers are entitled, at least in theory, to the same minimum wage that Thais receive, which, at $10 a day, is among the region's highest.

     Government think tanks, such as the National Economic and Social Development Board, have long been aware of Thailand's economic dilemma, and the military coup has brought the NESDB back to the forefront of economic planning as the regime seeks alternatives to the populism of recent civilian governments.

Clearing the way     

The think tank's influence was clear in the strategy announced at the Dec. 15 event where the prime minister talked about "making history." The Board of Investment, the government's principal inward investment agency, unveiled a package focusing on drawing value-added activities to Thailand and finding ways to propel the country out of the so-called middle-income trap -- the phenomenon in which a developing country experiences strong initial growth but fails to make the transition to a more advanced economy.

     "We are stuck if we don't change," Thai Deputy Prime Minister Pridiyathorn Devakula said at the event. "We have to move to higher technologies."

     Under a new seven-year incentive program, effective from Jan. 1, 2015, the BOI will offer broadened inducements to investors, including exemptions from corporate income tax for up to eight years, the maximum allowed under Thai law, without a cap on income.

     There will also be exemptions from import duties on machinery and raw materials, and "non-tax incentives" for investments in research and development, product design, and environmentally friendly activities such as the production of electricity from waste.

     Ajarin Pattanapanchai, a senior BOI executive, said: "The principle [is] the same as the NESDB plan, which the BOI has to follow." The NESDB has set a goal of raising investment in R&D to at least 1% of GDP by 2016, compared with less than 0.3% annually in recent years. "If the country has targeted a shift from middle income to higher income," Ajarin said, "we have to focus more on value-added industries and build up the competitiveness of our industries." 

     The BOI has been offering privileges for R&D investment for the past decade. The difference under the new regime is its broader definition of value-added sectors. "We promote private companies, so for us R&D means applied research, or commercialized research like product development," Ajarin said.

     The package provides a range of tax waivers to enhance competitiveness, support the government's digital economy drive, encourage environmentally friendly industries, and establish new industrial "clusters" similar to those in Thailand's successful automotive sector, which includes 18 assemblers and some 2,500 suppliers. There are hopes that the country may attract more parts makers to supply Asia's developing aerospace industry.

     The government is also seeking to attract investment to the country's troubled deep south, where there is a long-running Muslim separatist insurgency, and to special economic zones in border areas of Tak, Mukdahan, Sa Kaew, Songkhla and Trat provinces.

Thailand goes abroad

A final goal is to promote Thai investment abroad -- which has surpassed inward investment in the past two years -- led by giant groups such as Siam Cement and Charoen Pokphand Group, a food, retail and telecommunications conglomerate.

 

   The measures aimed at border areas and the south signal a fresh focus on these troubled regions by the junta, which also wants to alleviate social problems with migrant laborers from neighboring countries.

     In line with this emerging priority, the BOI has also dropped a ban that prevented companies receiving incentives to hire unskilled and semiskilled foreign workers in the border zones.

     "Certainly you would want to use Cambodian laborers if you were on the Cambodian border," said David Nardone, chief executive of Hemaraj Land and Development, a leading operator of industrial estates.

     "People would be willing to pay foreign laborers the Thai wage, and there would be less competition for labor if you were on the border," he said. Nardone also noted, however, that there may be some disputes over the locations of businesses. "The Cambodians, Laos and Myanmar, they also want to have the industry on their side. I think it will take time to see what develops."

     It may also take time to see how foreign investors respond to Thailand's new bid to attract higher value-added sectors to a country not renowned for a competitive educational system. "One wonders where they will get the talent," said Luca Vianelli, managing director of MDA Consulting SEA, an Italian-owned consultancy based in Bangkok.

     "Thailand is in a strange place, without enough unskilled labor to be a manufacturing hub anymore, and not enough skilled people to be an R&D hub," said Vianelli, who was attending the BOI conference. Like many other foreign businessmen, Vianelli would prefer to see Thailand open up its service sector more in such areas as finance, insurance, law and accounting, which remain largely protected.

     Thailand's other major challenge for the future is to restore social and constitutional stability by getting its political house in order. Mass political protests earlier this year, culminating in the May coup, have weighed on the economy. GDP is likely to grow by less than 1% in 2014, and perhaps by between 3.5% and 4.5% next year, according to government forecasts.

     Although the military-run government has restored some semblance of order, with the help of martial law, questions remain over whether its reform agenda will lead to a peaceful resolution of the deep political rifts that have plagued the country for almost a decade. These concerns, which seriously affect the foreign business community, cannot be addressed by investment incentives alone.

     Foreign experts say they require a more secure political climate that would pave the way for longer-term strategies to secure competitiveness in areas such as education and infrastructure provision.

     "For investors, the country's overall investment climate matters more than tax incentives," said Kirida Bhaopichitr, a senior economist at the World Bank's Thailand office. "If you don't have good roads, skilled labor ... these things are more important."

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