A time for trading: As inward FDI recovers, focus shifts to securing Thailand’s position as a regional trade centre

Thailand is the second-largest recipient of foreign direct investment (FDI) in South-east Asia after Indonesia, and exports accounted for 62.3% of GDP in 2012, or 75% including goods and services, according to the International Monetary Fund (IMF). Thailand stands as a key beneficiary of ASEAN integration given its central location, competitive production costs, investment climate and extensive industrial base. As multinationals expand their production chains in ASEAN, Thailand’s regional trade is growing, while outward investment reached record levels in 2013, despite the headwinds of portfolio outflows. The restructuring of investment policies and a more active trade policy will support key development goals of establishing higher value-added production while broadening its array of trade partners.

Sustained FDI

Inward FDI has recovered sharply from the devastating floods in the last quarter of 2011, despite losses of BT1trn ($32.7bn) recorded by roughly 1000 factories affected by flooding. Foreign investment rose from $8.99bn in 2011 to $10.7bn in 2012 and $11.25bn in the first three quarters of 2013, according to figures from the central bank, the Bank of Thailand (BOT). The value of projects approved by the Board of Investment (BOI) rose from BT278bn ($9.1bn) in 2011 to BT549bn ($17.95bn) in 2012 and BT470bn ($15.37bn) in 2013. Outward direct investment overtook inward flows for the first time in 2012 as Thai corporations capitalised on the strength of the baht with government support.

The sectors attracting the highest FDI inflows in the first nine months of 2013 were, in order, finance and insurance (39.1% of the total), manufacturing (29.4%) and real estate (11.3%), although manufacturing had led in 2012 with 36.6% of the total. Despite significant flood-induced losses, the government’s quick response to the floods allowed Thailand to rise four places to become eighth-most attractive FDI destination, trailing only Indonesia within ASEAN, in the 2012-14 World Investment Prospects Survey compiled by the UN Conference on Trade and Development (UNCTAD). Indeed, 54% of applications for investment in the year leading to May 2013 were for capacity expansion, reflecting both post-flood machinery replacements as well as longer-term trends. “Most inward FDI to Thailand typically consists of expansions in existing capacity rather than greenfield investments,” Kirida Bhaopichitr, senior economist at the World Bank in Bangkok, told OBG.

Leading The Way

Japan has cemented its position as the largest source of FDI: its share of investment reached 44% in the first three quarters of 2013, up from the 30-40% annual range in the decade to 2012, according to Mitsubishi UFG. Japanese BOI-approved FDI rose 119% year-on-year (y-o-y) in 2012 to BT348.4bn ($11.39bn) and came in at BT290.5bn ($9.5bn) in 2013, according to BOI. While large auto manufacturers like Toyota are expanding investments in assembly in Indonesia for instance, Thailand overtook China as Toyota’s third-largest production base globally in the past two years, according to UNCTAD.

Although other countries in ASEAN are attracting investments in final assembly, Thailand’s automotive cluster, with five tiers of contractors, remains a strong advantage. Surging inflows in 2013 also reflect the impact of Abenomics, Japan’s version of quantitative easing. Given the dominance of banks tied to large industrial conglomerates in Japan’s financial sector, loose monetary policy has favoured higher direct outflows over portfolio investment, according to research firm Capital Economics.

Investments from the US, the second-largest source of FDI with 17% of the total in the first three quarters of 2013, have followed a similar trend. US BOI-approved investments surged 93.7% y-o-y in 2012 to BT17.9bn ($585.3m), before falling back to BT9.4bn ($307.38m) in 2013, according to the board. Although the UK remains the third-largest source of FDI, with 12% of the total from the first nine months of 2013, its investments have remained fairly flat, with BOI-approved FDI rising by 17.9% y-o-y to BT1.8bn ($58.86m) in 2012 but remaining flat at BT1.3bn ($42.51m) the following year.

Portfolio Investment

While FDI inflows have been relatively stable, portfolio investment has been more volatile amidst global risk-on-risk-off shifts driven by Western monetary policy. Following a 46% rise on the Stock Exchange of Thailand (SET) in the 14 months to April 2013, equities suffered a BT140bn ($4.58bn) outflow in three months to September due to concerns over looming tapering of US quantitative easing and a further $2.8bn outflow in the last two months of 2013 driven by concerns about rising levels of political unrest (see Economy chapter). Despite higher volatility, however, liquidity on the SET overtook that of Singapore’s exchange in 2013 for the first time, with a total of $320bn in equity trading in Thailand compared to $265bn in Singapore, according to the World Federation of Exchanges. While Thailand’s bond market, one of the region’s most liquid after Singapore and Malaysia, witnessed a $1bn outflow in three months to September 2013 and $1.3bn in November, it witnessed a return of foreign buyers from December. Despite uncertainties in the 2014 outlook caused by political unrest, the equity markets witnessed the return of foreign buyers in January 2014, though this was offset by sustained selling by Thai asset managers.

Capitalising on the under-developed nature of neighbouring countries’ capital markets, management at the SET aims to develop into a regional platform for capital-raising. While the ASEAN electronic linkage of the SET to its Malaysian and Singaporean counterparts, allowing brokers to trade foreign-listed stocks from their home-base, from September 2012 had a negligible impact on liquidity in the short term, it marked an important step in building regional trading infrastructure and establishing ASEAN as an asset class. The SET has proved more successful in attracting regional listings. A watershed was reached in 2013 when the Laos government raised BT1.5bn ($49.05m) in debt to finance infrastructure on the Thai bond market, with aims to raise another BT3bn ($98.1m) in 2014. Alongside partnerships to develop Laos’ small stock market and establish Myanmar’s exchange from 2015, the SET is attracting listings from firms active in CLMV (Cambodia, Laos, Myanmar and Vietnam) countries. In July 2013, CK Power, a subsidiary of Thai construction firm Charn Karnchang, which is developing power plants in Laos, raised BT2.34bn ($76.52m) through an initial offering. Industrial estate operator Amata is preparing to list its Vietnam subsidiary Amata-VN on the SET in 2014, aiming to raise BT5bn ($163.5m). Although Thailand still lags behind Singapore’s exchange, where 40% of listed firms are non-Singaporean, authorities’ ambitions of meeting the capital needs of neighbouring economies holds significant promise. The redirection of Thailand’s trade towards Asia over the past decade reflects the strong potential of regional economic linkages.

Predirecting Trade

The world’s 30th-largest exporter and 17th-largest manufacturer in 2013, according to the National Economic and Social Development Board (NESDB), Thailand leads in key high-value-added sectors like hard disk and jewellery production globally, alongside automotive and electrical appliance output in ASEAN. It is also a key exporter of agricultural goods as the world’s largest exporter of rice (until 2012) and rubber. Thailand’s trade patterns have shifted eastwards over the past decade, with Asian countries now accounting for over half of Thai exports.

Exports to the US, Japan and Europe slumped from over 50% of the total in 1997 to 29% in 2012, while exports to new markets in Asia, including China and ASEAN countries, grew from 32% to 53% in the same span, according to data from the Ministry of Commerce. Trade with China in particular grew significantly, at an average of 26.7% annually in the decade to 2011 (with the exception of 2009), reaching roughly $70bn in 2012. China’s share of exports rose from 10.99% to 11.51% between 2010 and the first nine months of 2013, reaching $21.75bn. Dominated by electrical equipment and machinery exports, which accounted for 57% of the 2012 total according to CIMB research, in May 2013 the two governments agreed to boost bilateral trade to $100bn by 2015. Although Thailand runs a trade deficit with China, which reached a record $1.5bn in July 2013 alone according to Kasikornbank, based in Thailand, trade with China proved instrumental in supporting Thai exports throughout the global financial crisis, growing 21.03% in 2011. As the Chinese economy slowed in 2013, however, exports to the mainland shrunk 1.61% y-o-y in the first three quarters of 2013.

Lacklustre growth in key developed markets like the US, Japan and Europe has also weighed on Thai exports, whose value rose only 3.1% in 2012, and remained flat in 2013. Exports to the US, which comprised 10.04% of the total in the first three quarters of 2013, and to Japan, which made up 9.71%, weighed on Thailand’s foreign sales in 2013 with contractions of 0.23% and 6.61% y-o-y, respectively. “Exports shrank in 2013 due to lower growth in the US, EU and China, lower prices for key commodities like petrochemicals and lower rice exports,” Yongyuth Chalamwong, research director at the Thailand Development Research Institute (TDRI), told OBG. Export prices dropped 1.3% on average in the year to November 2013 according to BOT data, while lower export volumes of key commodities weighed on aggregate trade figures. The impact of the domestic rice-pledging scheme, curbing exports from 8.5m to 6.4 tonnes between 2011 and 2013, played a key role. Although trade with ASEAN has grown swiftly in recent years, accounting for 16% of total exports in 2012, slowing regional growth and the effect of slumping currencies caused exports to ASEAN to grow at a slower 6.3% y-o-y in the first nine months of 2013, contracting 2.2% y-o-y alone in November 2013, according to Siam Commercial Bank (SCB). While trade with CLMV countries, which accounted for 8% of 2012 exports, continued to grow in the high single digits in 2013, this was insufficient to offset declines in traditional export markets (see analysis). The strengthening baht until May 2013 was blamed for cooler export growth from 2012, while analysts see currency appreciation as a factor secondary to lower import demand from key trading partners. “Thai exports tend to depend much more on the level of demand than on pricing,” the World Bank’s Kirida told OBG. “Barring any very drastic drop in the baht, a lower exchange rate has not had a significant impact on exports.” While exports of agricultural commodities like rice and sugar declined by 25% and 8% y-o-y, respectively, in the first nine months of 2013, exports of manufactured goods also went down, led by an 80% y-o-y drop in steel goods, according to SCB.

Recovery in electronics exports provided some stimulus however, with y-o-y growth of 2.8% in exports of computer part exports in the first three quarters of 2013. However, cognisant of the need to increase the domestic value-added component of exports in order to compete internationally in coming decades. the government is reforming its trade and investment policies to channel investment to key sunrise industries.

Business Climate

The 1999 Foreign Business Act includes restrictions on foreign ownership in key sectors like telecoms (capped at 49%), although this is matched by incentives for investing in industrial estates or in BOI-sponsored sectors, where full ownership is permitted. Thailand has opened roughly 100 sectors to foreign ownership of up to 70% as of the end of 2013, according to the World Bank, although it remains far from reaching its target of 200 sectors by 2015.

“While Thailand has traditionally protected its services sector and opened its industry to FDI, it will need to liberalise investment restrictions under its various bilateral and multilateral trade agreements, such as the AEC in 2015,” Kirida told OBG. Despite governance challenges, successive governments’ investment policies have proven decidedly pro-business.

Policy Review

The current BOI incentives, such as up to eight years of tax holidays and another five years of 50% lower corporate taxes, import duty reductions and exemptions and land ownership rights, have traditionally been graduated according to the location of investment, in three main zones of Thailand. Since 2010 the government has also awarded 10-year corporate tax exemptions on income from overseas operations and a flat 10% tax on domestic revenue for regional operating headquarters. In early 2013, however, the BOI, which has run a one-stop service for investors since 2009, announced the revision of its investment policy focusing on clusters of new sunrise industries that have higher value added. “The investment policy has evolved away from labour-intensive industries towards encouraging higher-value-added production,” Porametee Vimolsiri, the deputy secretary-general of the NESDB, told OBG. “These higher-technology areas include green industries such as eco-cars, alternative energies and food processing.” Effective from 2015, the new policy moves from a focus on tax incentives to facilitation (while maintaining tax holidays), broadens investment promotion to Thai investments overseas, and moves from a zone-based approach to merit-based investment appraisals (see analysis). Amidst cuts in corporate tax nationwide from 30% to 23% in 2012 and 20% in 2013, implemented partly to offset a minimum wage hike to BT300 ($9.81) from 2012, the relative attractiveness of BOI incentives was slightly reduced, however.

In particular, the BOI aims to promote investments in knowledge-based sectors, green and alternative energies, hospitality and wellness, and developing Thailand’s logistics capacity. The Thai law firm Pugnatorius estimated in a January 2013 presentation that some 80 of the former 240 businesses will exit BOI promotion under the new policy, although existing BOI-promoted projects will be grandfathered from 2015. The new broad list of 10 promoted industries includes basic infrastructure and logistics, basic industries, medical equipment, alternative energy, services supporting the industrial sector, advanced technologies, agro-processing, hospitality and wellness, automotive and transport equipment, and electrical appliances.

Trade Liberalisation

Thailand has also forged a twin strategy of deepening trade with traditional partners through bilateral and regional trade agreements (FTAs as well as RTAs), as well as promoting exports to non-traditional markets in Africa, Latin America and the Middle East. With six FTAs (with Australia, New Zealand, India, Japan, Peru and since 2013 Chile), six RTAs through ASEAN (with Australia, New Zealand, China, South Korea, India and Japan) and BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation), Thailand is negotiating new agreements with the EU in 2014. Although talks with the US on a bilateral FTA launched in 2004 were put on hold in 2006, Thailand is an observer at the Trans-Pacific Partnership (TPP) negotiations. Trade within ASEAN has been gradually liberalised since the conclusion of the ASEAN-FTA in 1992: tariffs on 90% of goods traded were regionally reduced to nil by 2012 and full liberalisation will occur by the end of 2015. While numerous trade barriers have been dismantled both bilaterally and multilaterally, thereby creating a ”noodle bowl” of overlapping trade agreements, research from TDRI shows that Thai exporters have not seized all benefits.

Negotiations on a Comprehensive Economic Partnership Agreement with the EU are far-ranging, covering items including the “Singapore issues” of intellectual property, public procurement and investment. One of these issues, that of trade facilitation, was addressed in the Bali WTO Ministerial in December 2013, although streamlining of cross-border trade procedures still requires legal overview and ratification in 2014. A TPP deal would replace the eight existing bilateral investment treaties, with the EU asking for privileges similar to those granted to US investors under the 1966 Treaty of Amity, extending equal benefits to both countries. “With the EU seeking similar access as that guaranteed under the US-Thai Treaty of Amity, if an FTA is concluded this would be an important step for Thailand towards participating in the TPP,” Christopher Bruton, director for Thailand and Indochina at Dataconsult, told OBG. Facing the expiration of market-access privileges under the EU’s Generalised System of Preferences in 2015, Thailand would benefit from reaching a deal in 2014. In 2012 Kasikorn Research estimated that expiry of GSP would affect 39% of exports to the EU. Other ASEAN members are negotiating their own bilateral agreements with the EU: Malaysia in 2010, Vietnam in 2012 and Singapore in December 2012.

Outlook

Despite political instability, Thailand’s investment policy has proven consistent in favour of attracting FDI, despite the more restrictive elements of the 1999 Foreign Business Act. A vast export base has allowed Thailand to pursue an active trade policy, which is now bearing fruit in diversifying trade flows and ensuring its position in both regional and global supply chains. Success in leveraging its role to drive higher value-added production will be key for Thailand to avoid the “middle-income trap” over the coming years.