When the tanks rolled into Bangkok in September 2006 to effect a bloodless and oddly anticlimactic coup, investors reacted with enthusiasm. Thailand’s controversial prime minister, Thaksin Shinawatra, had been bad for market sentiment, fund managers said; even having the army in charge should be a change for the good.
It hasn’t quite worked out that way. The interim government – whose definition of interim already seems to be erring towards the permanent – has lurched into unpopular revisions of finance and business policy that have quickly made Thailand a pariah of world economic opinion.
Or has it? The capital controls announced in December (mostly since reversed) and the mooted changes to the Foreign Business Act (likely also to be diluted) have much scope for irritation and even scorn. But those who deal with the country, although discomfited, paint a picture less of anti-foreign posturing than of accidental ineptitude. And proving that foreign capital has fled as a consequence is tricky.
Exemptions
The interim government’s first market-shaking step came on December 18 when the Thai central bank announced that, from now on, foreigners would have to deposit 30% of all the money they invested in the country in non-interest-bearing accounts at the central bank itself. The stock market lost 14% the following day. Almost immediately, the government changed course: investments destined for the stock market were exempted.
Then, in early January, the government announced plans to force some foreign investors to reduce their shareholdings in sectors of the Thai economy considered crucial to national security, including telecommunications. The idea was to stop overseas investors from trying to avoid foreign investment regulations through the use of local nominees. The whole thing was prompted by the transaction that brought Thaksin unstuck in the first place: the sale of a majority stake in telco Shin Corp, which belonged to the Thaksin family, to Temasek, the investment arm of the Singapore government.
It was strange, then, that the day after the announcement telcos were exempted again. The only industries known for sure to be on the list are transportation and agriculture.
Responses
Responses to all this vary. Foreign companies on the ground are naturally restless; the most significant sign of queasiness came when Ford suggested it might shelve plans to build a $1 billion small car production facility in Thailand because of political uncertainty. Peter Van Haren, chairman of the Joint Foreign Chambers of Commerce in Thailand, has marshalled the foreign response and has put forward a series of requests about the revisions such as ensuring that new investors should be able to keep voting rights in excess of 50%.
But has capital taken flight? According to Thailand’s Board of Investment, net applications for projects from foreign investors were worth 40% less in 2006 than in 2005 but it’s important to remember that Thailand’s political environment was noxious well before the coup, and that much of the decline might well have been a result of Thaksin’s tenure. As for portfolio flows, the picture is no clearer.
"Foreigners sold a billion dollars immediately following the capital controls but in the year to that point they had put in 3 billion and, over three years, 9 billion," says Gillem Tulloch, head of Thai research at CLSA in Bangkok. "So to say that foreigners capitulated is not true. They wobbled." Most of the funds that left in December have since returned, he says.
Clumsiness
Investors suggest incompetence rather than malice. "It’s more a case of terrible clumsiness," says Hugh Young, managing director of Aberdeen Asset Management Asia, who has about $1 billion invested in Thailand – and who has, by and large, kept it there, barring some switching around of treasury positions. "They’re not fundamentally anti-foreign, or anti-investment. They’re on side, actually. It’s just a bit hopeless."
Michael Doyle, partner at Bangkok law firm Seri Manop & Doyle, says. "I’ve never seen anything like this: embassies jointly issuing announcements. But one of the things the current interim government has shown is that it listens to criticism. So I’m hopeful. There is anxiety about what might happen but to listen to the foreign business community in Thailand you would think they were talking about Afghanistan."
Damning somewhat with faint praise, he adds: "You won’t see a big change in Thailand’s foreign investment numbers because, one, the big investors will find a way to comply, and two, there wasn’t any new foreign investment in Thailand anyway. Everything was going to Vietnam and China."
The uncertainty will doubtless have an impact on foreign direct investment. But in terms of portfolio flows, regional fund managers are already looking for value. "Valuations compared with the region are cheap," says Young (Aberdeen puts Thailand at 12 times earnings and the rest of the region 17). "There is a query on what happens to earnings, and it is hard to find that many large, quality Thai companies. But the companies are as well run as they were beforehand."
Firing line
Foreign companies on the ground have mainly stayed tight-lipped, although some have probably wondered what they have done to deserve the attention. Among them is Telenor, feted as something of a saviour when it bought into TAC as part of the telco’s restructuring after the Asian financial crisis, and then placed firmly in the firing line of the new law, at least until the latest climb-down. Telenor’s Oslo head office did not respond to requests for comment.
If the interim government does go ahead and arrange for elections in the course of this year, the idiosyncrasies of its financial policy are likely to be forgiven in time as a blip. But if the government sticks around, Thailand’s reputation is in danger of suffering irreparable damage. "Issues have clearly been raised about the future direction of Thailand’s economy," says Tulloch. "Does it want to become more liberalized or more closed? A coup followed by a military government doesn’t appear to be moving in the right direction."