A military coup and a submerging market

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For the third time in a month, Thailand has been exposed as the high-risk emerging market that has always lurked under the country’s veneer of relaxed, foreigner-friendly capitalism.

First, the government installed by the army after a coup d’état imposed capital controls to try to hold down the surging local currency, and then hurriedly withdrew most of the controls when the stock market predictably plunged. Next, a mysterious series of bombs exploded in Bangkok on New Year’s eve, killing three people.

The government on Tuesday added to the confusion by announcing new limits on foreign ownership of Thai companies, ignoring the pleas of foreign chambers of commerce in Bangkok and prompting yet another decline in Thai equities to their lowest level for more than two years.

It can be argued that the previous arrangements were opaque and unsatisfactory: for decades, Thailand had allowed foreigners to breach the spirit of the law by using Thai nominees, permitting an investor who was technically a minority shareholder to have de facto control of a company.

For many existing investors, furthermore, the direct impact of the latest proposals will not be significant. Hoteliers and law firms, for example, will be permitted to retain majority foreign control, although they will have to report their shareholdings to the state.

But the Thai government has introduced these changes to the Foreign Business Act in the wrong way and for the wrong motives. As with its earlier blunders, it has acted without transparency or sufficient consultation. It has not even moved with the firmness and determination expected of a military-installed regime, leaving domestic and foreign investors full of doubt about the possibility of yet more changes to investment legislation in the future.

On the face of it, Tuesday’s announcement might look like a nationalist attempt to protect Thai companies from foreign competition, but the real reason is doubtless to punish Thaksin Shinawatra, the prime minister ousted by the coup. He was overthrown after the controversial, tax-free sale of his family’s telecoms empire to Temasek, the Singapore state holding company, for $1.9bn. It is no surprise that telecoms is not one of the sectors exempted from the new requirement that foreigners reduce their voting rights to below 50 per cent of a Thai company within two years.

The result is that the changes to the law will be bad for the business climate in Thailand, and not only because some investors will be pushed into a forced sale of their assets. Perversely, both Thai and existing foreign investors in most service industries will profit from discrimination against new entrants, to the detriment of competition. Above all, business will be more reluctant than ever to invest in a country where the authorities do not seem to know what they are doing.

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