Thai economy is hurting as generals scare investors off

Bangkok’s 131-year-old Oriental Hotel stands on the bank of the Chao Praya River as a white-colonnaded symbol of Thais’ long openness to outsiders who came to seek their fortunes and, in the process, helped build a country.

Founded by a pair of Danish sea captains, the hotel was deemed fit for guests of the Thai royal family and hosted dignitaries such as Russia’s Crown Prince Nicholas in 1891. After the Japanese occupation of the city in the second world war, the Oriental was revived by a group of Americans and Thais, before an entrepreneurial Italian submariner and his Thai partner bought it in 1967. Seven years later the Hong Kong-based Jardine Matheson acquired a 49 per cent stake and still runs the property today.

Capital, technology and labour from abroad have helped lift what was an impoverished agrarian society to middle-income status. Yet the cosmopolitanism so evident at the Oriental appears to be on the wane. Since last September’s coup that overthrew Thaksin Shinawatra, the telecommunications mogul turned prime minister, the military-installed government has signalled an ambivalence towards foreign participation in the economy and a desire to see Thais reassert control over many businesses that had slipped into foreign hands.

Authorities are tightening up surveillance of property transactions to ensure foreigners are not evading land ownership restrictions, which until recently were fairly easily circumvented. The cabinet is also pushing to tighten foreign investment laws with provisions that would constrain capital inflows and force many existing investors to sell down their Thai holdings.

The unexpected imposition of capital controls in December sent the stock market plunging 15 per cent before those were partly reversed less than 24 hours later. The restrictions have since been eased further but concern about a change in regulatory and legal direction – coupled with the ongoing political turmoil – has had a chilling effect on both consumer and investor sentiment.

“There is a strong nationalist backlash that seems to be in the making,” says Kazi Matin, chief economist for the World Bank in Thailand. “The overarching idea seems to be that Thailand has given too much to foreigners – it has been ‘too liberal, too relaxed, too open and probably it’s time that Thailand realised that it doesn’t have to be that open’.”

The change of mood comes at an inopportune moment. Once a favoured investment destination for both Japanese and western companies, Thailand faces intensifying competition from destinations including Vietnam, which joined the World Trade Organisation this year and has fired the imagination of foreign executives who see it as a “little China”.

Both Thailand’s low-end labour-intensive exports and its prospects for moving into higher-value technological sectors are under pressure. Intel, for example, considered Thailand for a $1bn (£502m, €738m) chip assembly and testing facility but ultimately decided to locate the plant in Ho Chi Minh City, a corner­stone for what Vietnam’s communist leaders hope will be a high-tech sector.

Meanwhile, Bangkok policymakers have yet to identify a clear strategy to move the country towards higher-income status. Instead, they simply talk of expanding existing stalwarts such as tourism, agriculture and a highly competitive industry making light trucks. The poor quality of secondary and higher education and a shortage of technical and foreign language skills remain concerns for foreign business and potential investors.

“The Thai economy is caught in what a lot of middle income countries are caught in – which is what I would call the pincer movement,” says Mr Matin. “The ‘flying geese model’ – which is that you leave behind the old and move to the new – is having difficulty operating in the current environment in Thailand. Moving from middle to upper income – that transition – has become much more difficult.”

Bangkok is not alone in grappling with this. But Thailand seems to be having a tougher time than its regional peers. The World Bank expects the Thai economy to grow 4.3 per cent this year, far less than the average 5.5 per cent annual growth that south-east Asia’s other middle-income economies – Indonesia, Malaysia and the Philippines – are expected to have clocked between 2005-07. Thailand’s growth in the same three-year period is forecast at an average annual rate of 4.6 per cent.

Restricting foreign involvement in the economy will hardly help. “Thailand in some sense has been very dependent on foreign skills, foreign technology, foreign capital – you had a lot of foreign combining with the local,” Mr Matin says. “If that changes, they are in for bigger trouble.”

For more than a century, Thailand, the only south-east Asian country to fend off formal colonisation, had its doors open to virtually any import it deemed useful. That included absorbing nearly 1m Chinese immigrants in the late 19th and early twentieth centuries, US aid in the cold war, Japanese direct investment from the 1970s and western portfolio investment in the 1990s.

These inflows did provoke brief spells of resistance. In the 1930s, the then rulers spoke of creating a “Thai economy for Thai people”, a reaction in part to Chinese influence, while the 1970s saw anti-Japanese protests by students. But as the economy expanded by an average of 7.8 per cent a year for nearly four decades until the 1997 Asian financial crisis, nationalistic pleas for greater restrictions generally fell on deaf ears.

“Thailand doesn’t have many special gifts,” says Chalongphob Sussangkarn, who was appointed finance minister last month following his predecessor’s abrupt resignation. “But what we do have is the characteristic of the people and the society, which have been very friendly to all nationalities. We have been fairly successful in terms of becoming a moderately important production base for many multinationals and a top tourist destination.”

The current bout of nationalism has drawn on the resentment of many old Thai business families over their losses in the 1997 Asian crisis. It was ignited by the Shinawatra family’s sale last year of a 49 per cent stake in Shin Corp, the telecoms company Mr Thaksin had founded, to Singapore’s state-owned Temasek Holdings for a tax-free $1.9bn. Bangkok’s middle classes and old elites, who resented his authoritarian style when prime minister, accused him of tax evasion and selling strategic national assets to a foreign government.

Just a few months before the Shin Corp deal, Norway’s Telenor had taken control of Total Access Communications, the second largest Thai mobile operator, without public fuss. But Mr Thaksin had risen to power partly on his pledge to restore national strength after the 1997 crisis, so the allegations that he had sold out to foreigners proved galvanising. The opposition Democrats, traditionally the party most sympathetic to foreign business, led an effort to prove that Temasek’s takeover of Shin Corp violated foreign investment laws.

With Mr Thaksin in exile, the generals want to discredit him ahead of elections promised by the end of the year. While corruption investigations against the ousted leader have yet to result in charges, other weapons in the arsenal include attacks on the Shin takeover, regardless of the collateral damage.

Gen Sonthi Boonyaratkalin, the army chief who led the coup, declared the deal a threat to national security, suggesting that Shin’s satellites and phone network could be used to spy on Thailand. Police are investigating whether the takeover violated famously ambiguous foreign investment laws, a finding that would force Temasek to sell down its holding – and would also raise questions about the legality of many foreign companies’ Thai operations.

Proposed amendments to the Foreign Business Act would force many companies in service-sector businesses to restructure or reduce some of their Thai holdings. In the case of the Oriental Hotel, for instance, a clearer cap might be put on the stake controlled by Jardine.

Mr Chalongphob, in an interview, says the laws were in need of an overhaul but concedes that the aftermath of a coup was “unfortunate” timing. “It was too sudden and the wrong circumstances,” he adds. “When we have a coup, we do really need to make sure that foreign investors maintain their confidence in the policy direction.”

Thai executives are also worried about the course of events. Viboon Kromadit, senior vice-president of Amata Nakorn, a 8,500 acre (3,440 hectare) industrial estate on Bangkok’s outskirts, says the legal confusion and political uncertainty are putting off investors even though the proposed changes would not directly affect manufacturers on industrial estates.

Amata, home to operations of multinationals such as Bridgestone and PepsiCo, still has around 1,500 acres of land to offer but inquiries have dwindled from two years ago, when companies were beating a path to his door, says Mr Viboon. He complains that Thai officialdom seems indifferent towards foreign investors – in contrast to the dismay he felt when Intel opted for Vietnam. Other big companies have looked, then gone elsewhere.

“If we need foreign investment, we must fight for it,” he says. “I don’t understand what [officials] are thinking. Are they thinking that they are rich already? . . . Our people still need jobs to do.”

Aside from its battle against Mr Thaksin, the government appears to lack a strategic economic direction. Its first act was to ban alcohol advertising. Now it is trying to regulate foreign hypermarkets. It infuriated western pharmaceutical companies by overriding patents on two HIV/Aids drugs and a heart medicine, though the moves seem to have prompted some western makers to lower drug prices, for Thailand and other middle-income countries.

Still, not all government policies signal a retreat from global capital. Gen Surayud Chulanont, the prime minister, last month signed a trade liberalisation agreement with Japan – a deal that was negotiated by Mr Thaksin’s government and that analysts say should help attract investment. The coming months will determine whether Thailand can secure a $1bn economy car factory for Ford and Mazda.

Mr Chalongphob says he expects the policy confusion to dissipate once Thailand’s political future is resolved. Yet the risk for Thailand is that this could take some time, given the coup-makers’ fear that Mr Thaksin, still hugely popular in rural areas, might try to return to politics, a spectre that could prompt the military to delay the elections. There are also questions whether the Thai public will accept a draft constitution due to be published this week and later put to a referendum.

“We are going through a great deal of chaos – chaos both in terms of the political situation and chaos in terms of the policy profile,” Mr Chalongphob says. “But I believe this is a temporary chaos. With the current government, there have been very extreme measures.

“Eventually, when this chaotic period passes, the traditional Thai characteristic of being a ‘middle-path’ society, of moderation in policy and practice, will re-emerge. This is the nature of the people deep down.”

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