Policies target a diversified and digitalised industrial base in Thailand

With a robust export economy dominated by the manufacturing industry, Thailand has long benefitted from foreign investment in key sectors, such as automotive and electronics, while its agriculture and agro-food base has pushed it to the forefront in global rubber, rice and seafood production. Trade and investment have been under pressure in recent years, however, a number of factors have contributed to foreign direct investment (FDI) gradually falling in recent years. Combined with an ageing population and a shrinking low-cost labour force, it is struggling to compete regionally. Government plans to attract new investment in special economic zones (SEZs) located on the border have not come to fruition, and the country is being outpaced by its ASEAN neighbours in terms of investment growth.

To help Thailand regain traction in attracting investment, a series of new policies targeting technology-driven industrial development were launched in 2016. Under the auspices of the Thailand 4.0 plan and the Eastern Economic Corridor (EEC) policy, which seeks to attract investment into the country’s industrial base along the eastern seaboard, Thailand’s foreign trade and inward investment flows are expected to undergo a transformation, as the country shifts its export base away from labour-intensive, low valued-added manufacturing and towards 10 priority hi-tech industries. Early efforts have already seen some successes: FDI commitments outpaced government targets for 2017, while exports recorded double-digit growth, led by the automotive and electronics sectors.

Challenges

However, Thailand’s competitive trade advantages also make it vulnerable to external headwinds. Its large trade surpluses with countries such as the US and the baht’s appreciation have left stakeholders concerned Thailand could be labelled a currency manipulator, which would lead to some negative impacts. An escalating Sino-US trade war puts local steel producers at risk of Chinese steel dumping, and new non-tariff barriers (NTBs) in ASEAN could impact automotive exports in 2018.

Despite these challenges, trade and investment will likely remain on an upwards trajectory in 2018, bolstered by rising global growth, ongoing economic recovery, and new investment in aviation, chemical and industrial projects. Recent legal reforms are offering attractive investor incentives, while plans to revitalise the EEC will see the private sector play a vital role in delivering new infrastructure projects.

Although several delays to elections have rattled investor confidence since 2014, the US International Trade Administration (ITA) reports that Thailand maintains an open, market-oriented economy with increasingly investor-friendly policies and an impetus on boosting FDI inflows. Declining competitiveness, rising labour costs, regulatory bottlenecks and a shortage of a highly skilled workforce remain significant obstacles to trade and investment growth. Nevertheless, both sectors registered strong performances in 2017, supported by ongoing economic recovery and the government’s announcement that general elections will be held in November 2018, which was later revised to May 2019.

Investment

The Board of Investment (BOI) is Thailand’s central investment agency, operating under the Office of the Prime Minister, and is responsible for promoting investment into and out of the country. The agency’s primary objective is to enhance investment competitiveness, improve the productivity of existing industries. In addition, the BOI is one of a number of different units that helps navigate Thailand away from the middle-income trap. An economy reaches middle-income status when its GNI per capita is between $1006 and $12,235, as defined by the World Bank. Thailand’s GNI per capita rose from $3100 in 2006 to peak at $5730 in 2013, before moderating to $5640 in 2016.

BOI policies focus on encouraging research and development (R&D), innovation and added value in the agricultural, industrial and services sectors; supporting small and medium-sized enterprises (SMEs); and reducing economic disparity. Environmentally friendly practices and cluster development are also promoted by the board, in addition to investment in border provinces located in the south and the development of SEZs in border areas.

The BOI works with government agencies to oversee foreign investment in Thailand. The government sets policies and approves applications for foreign investment in restricted sectors, and works with the BOI to formulate investor-friendly policies that target high-technology industries, in addition to granting investor incentives.

Recent reform efforts have had a profound impact on Thailand’s investment climate, with the country rising 20 spots to rank 26th out of 190 economies in the World Bank’s “Doing Business 2018” report. Streamlined procedures and new online service alternatives improved the country’s ranking across nearly all of the survey’s 11 indicators, including starting a business (36th), getting electricity (13th), registering property (68th) and obtaining credit (42nd). Although Singapore and Malaysia were higher ranked, at second and 24th, respectively, Thailand outpaced Brunei Darussalam (56th), Vietnam (68th), Indonesia (72nd)and the Philippines (113th). Overall, it ranked fifth out of all 25 economies in the East Asia and Pacific region.

Legislation

The Foreign Business Act (FBA) of 1999 restricts foreign investment, either wholly or partially, in certain sectors divided into three lists. The first list covers business areas that only Thai nationals can engage in, such as broadcasting and newspaper publishing, rice and livestock farming, forestry and timber processing, fisheries in Thai territorial waters, antique auctioning and medicinal herb cultivation. The second list outlines industries in which a foreign majority-owned company can engage, provided Thai nationals hold at least 40% of the share capital and 40% of directorial positions, although the mandatory minimum can be reduced to 75% with Cabinet permission. These include the production, sales and maintenance of firearms; mining; timber processing; and domestic transport services on land, water and air. Activities on the third list are restricted to foreigners for the economic protection of Thai nationals, and include services such as accounting, law, architecture, engineering, retail and wholesale, advertising, hotels, and food and beverage sales. The Ministry of Commerce (MoC) and Industrial Estate Authority of Thailand may grant exemptions to services on list three.

Exemptions to the FBA include the US, Japan, Australia and the ASEAN Economic Community. In January 2017 the Ministry of Finance (MoF) lifted restrictions on foreign ownership of insurance businesses, and foreigners are now permitted to own up to 100% of an insurance company provided they receive permission from the MoF. This followed the MoC’s removal of banking, bank representative offices, life insurance, and property and casualty insurance from the FBA’s third list in February 2016. The MoC is also reviewing the removal of accounting services; legal services given to subsidiaries; space and facility rental; lending to subsidiaries; and consulting services from the third list.

Digital Strategies

In a bid to further encourage investment, Thailand is looking to enhance its digital economy. The Digital Development for Economy and Society Act was enacted in January 2017, when it also established the Digital Economy Promotion Agency (depa), which is mandated to prepare and promote the country’s digital economy strategy, support investment and human resource development in digital industries, and work to introduce legislation that will improve intellectual property protection and digital development (see ICT chapter).

In March 2017 Nuttapon Nimmanphatcharin, president of depa, announced plans to build new infrastructure, including a digital park, smart city and digital community, with a focus on fostering startups and SMEs. Depa has set the target of creating 500,000 digital start-ups and entrepreneurs, as well as the digital transformation of 24,700 communities in 77 cities, 3m existing SMEs and 5m households by 2037. Depa’s strategy dovetails with Thailand 4.0, an economic and industrial development strategy that seeks to move Thailand beyond labour-intensive manufacturing through the adoption of digital technology and innovative business practices.

Thailand 4.0 has set four primary goals: economic prosperity, social well-being, human values and environmental protection. Within the framework of these four goals, the country aims to boost R&D expenditure to 4% of GDP, increase GDP growth to between 5% and 6% by 2021, and boost GNI per capita to $15,000 by 2032. Other targets include transforming at least 20,000 rural households into “smart farms” by 2021, boosting the country’s human development index to rank among the top-50 globally by 2026, and having five Thai universities rank among the world’s top-100 by 2036.

S-Curves & EEC Policy

The government has identified 10 priority investment sectors, evenly split into First S-Curve and New S-Curve industries (see analysis). The latter targets high-tech sectors such as robotics and digital industries. “The New S-Curve sectors have just been introduced in Thailand, but we have the potential to become a regional centre for these industries,” Polapat Naphavaranoth, senior investment promotion officer at the BOI, told OBG. Somsak Tantachon, CEO of gold trading company Shining Gold Bullio, agrees that investment in these areas is vital, as machinery is the way of the future. “Investment in machinery is a natural response to rising labour costs,” he told OBG.

New projects in these sectors are most likely to be concentrated in the EEC, an investment area that has been targeted by the government since the EEC policy was approved by the Cabinet in June 2016. The policy focuses on revitalising the country’s existing manufacturing hub, located along its eastern seaboard. In February 2018 the National Legislative Assembly passed the EEC Act into law, setting out the rules and procedures for promoting and incentivising investment in the EEC (see analysis).

Investment Recovery

Thailand is still amid an economic recovery, and in 2017 it saw a marked turnaround for investment, according to BOI statistics. Though the total number of investment project applications submitted in 2017 only rose by one from 1455 in 2016, the total value of proposed projects jumped from BT524.3bn ($15.2bn) in 2016 to stand at BT642bn ($18.6bn). Total foreign registered capital also increased over that period, from BT31.5bn ($911.8m) to BT36.6bn ($1.1bn). Additionally, the board reported that the total number of jobs rose from 93,851 in 2015 to 105,729 in 2017.

Though investment applications from 100% foreign-owned firms were valued at BT111.3bn ($3.2bn) in 2017, down from BT150.6bn ($4.4bn) in 2016, the value of joint venture projects between foreign and Thai companies increased from BT209.6bn ($6.1bn) in 2016 to BT379bn ($11bn) in 2017.

Furthermore, investment applications from Japan accounted for some 47% of total FDI commitments in 2017, or BT133bn ($3.8bn); followed by Singapore, with BT40.4bn ($1.2bn); China with BT27.5bn ($796m); and the US with BT20bn ($578.9m). Given investment applications in 2017 jumped in value by almost a quarter on 2016 figures, the BOI has targeted BT720bn ($20.8bn) of investment applications for 2018, supported by rising investment in new aerospace and chemical projects, which will be located in the EEC (see analysis).

Export Economy

Thailand’s economy is primarily driven by exports, with decades of investment in the labour-intensive manufacturing sector, which has led it to become a major regional source of electronics and automobiles.

According to the Bank of Thailand (BOT), the country recorded a trade surplus for the past three consecutive years, reversing a BT92.8bn ($2.7bn) deficit in 2014 to reach a BT319.6bn ($9.3bn) surplus in 2015 and BT662.5bn ($19.2bn) in 2016. In 2017 the surplus moderated to BT378.5bn ($11bn), mainly the result of a 10.7% rise in imports, which hit BT7.6trn ($220bn) that year, compared to BT6.9trn ($199.7bn) in 2016. Exports reached BT8trn ($231.6bn) in 2017, up 6% from BT7.6trn ($220bn) in 2016.

Thailand’s outbound trade activity is dominated by the manufacturing industry, which accounted for 87.8% of total export receipts in 2017, or BT7trn ($202.6bn) from a total of BT8trn ($231.6bn), followed by the agricultural sector at BT611.8bn ($17.7bn), fisheries with BT72.7bn ($2.1bn), forestry at BT58.9bn ($1.7bn) and mining at BT38bn ($1.1bn).

Major import categories include fuel, non-agro manufacturing products, electronics parts and electrical appliances, and machinery, equipment and supplies. The BOT reported that fuel imports jumped by 26.5% in 2017 to reach BT1trn ($28.9bn), led by a 30.4% increase in crude oil imports, which stood at BT679.4bn ($19.7bn). Imports of electronic parts and electrical appliances rose by 7.4% to hit BT969.9bn ($28.1bn), while non-agro manufacturing products increased by 8.7% to reach BT2.6trn ($75.3bn), led by 11.6% growth in base metal material imports, which stood at BT646.4bn ($18.7bn).

Manufacturing Strength

Thailand’s manufacturing base is driven by the automotive and electronics sectors, which each recording export receipts of BT1.2trn ($34.7bn) in 2017. Electronics exports rose by 10% in 2017, from BT1.1trn ($31.8bn) in 2016, while automotive exports rose by 2.6%, from BT1.17trn ($33.9bn) in 2016, led by a 9.7% increase in vehicle parts and accessories exports, which hit BT520.5bn ($15.1bn) in 2017.

This was followed by agro-manufacturing exports, which rose by 8.4%, from BT906.8bn ($26.2bn) in 2016 to BT982.6bn ($28.4bn) in 2017, and machinery and equipment exports, which grew by 3.6%, from BT672.6bn ($19.5bn) to BT696.8bn ($20.2bn).

Thailand is the world’s largest natural rubber producer and exporter. The BOT reported that raw rubber export receipts jumped by 31.5% in 2017 to hit BT204.8bn ($5.9bn), while manufactured rubber product exports rose by 36.3% to reach BT186bn ($5.4bn). It is also the world’s third-largest seafood exporter, with outbound seafood products reaching BT126.2bn ($3.7bn) in 2017, up from BT125.8bn ($3.6bn) in the previous year.

Trade Partners

Thailand’s five largest trade partners by total trade value in 2017 were ASEAN with BT3.4trn ($98.4bn), followed by China at BT2.5trn ($72.4bn), Japan with BT1.9trn ($55bn), the EU with BT1.5trn ($43.4bn) and the US with BT1.4trn ($40.5bn), according to the BOT. Thailand maintains its largest trade surpluses with ASEAN, the US and the EU, and maintains a trade deficit with China and Japan. Its trade surplus with ASEAN in 2017 hit BT597.2bn ($17.3bn), with BT2trn ($57.9bn) of exports recorded against BT1.4trn ($40.5bn) of imports. Meanwhile, the country’s trade surplus with the US rose from BT339.3bn ($9.8bn) in 2015 to peak at BT413bn ($12bn) in 2016 before moderating to BT385.9bn ($11.1bn) in 2017. Similarly, its surplus with the EU moderated from BT132bn ($3.8bn) in 2016 to end 2017 at BT99.5bn ($2.9bn).

The country’s largest trade deficits are with China and Japan. According to the BOT, trade deficit with China dropped from BT657.4bn ($19bn) in 2016 to BT519.5bn ($15bn) in 2017, while its deficit with Japan shrank from BT370.2bn ($10.7bn) in 2016 to BT342.5bn ($9.9bn) in 2017.

Thai exports have benefitted from rising trade with the fast-emerging Cambodia, Laos, Myanmar and Vietnam (CLMV) region, with the trade surplus among those countries rising from BT297.7bn ($8.6bn) in 2013 to hit BT420.9bn ($12.2bn) in 2015, before peaking at BT490.6bn ($14.2bn) in 2017.

External Headwinds

Despite ASEAN being Thailand’s largest trading partner, its trade surplus dropped by 4.4% in 2017, from BT624.4bn ($18.1bn) in the previous year, and it is expected to remain under pressure following the enactment of new NTBs in January 2018, which are aimed at reducing Thai vehicles imported into Vietnam.

Prior to the new measures, which mandate that all imported automobiles must be accompanied by proof of origin, Thailand was Vietnam’s largest automobile import market. The BOT reported that total exports to Vietnam rose from BT165.1bn ($4.8bn) in 2008 to BT217.6bn ($6.3bn) in 2013, before climbing further to stand at BT393.7bn ($11.4bn) in 2017.

“Everyone knows that ASEAN still has non-tariff measures in place, and we’ve seen that NTBs have been rising recently, which will impact intra-ASEAN trade,” Pimchanok Vonkorpon, director-general at the Trade Policy and Strategy Office of the Ministry of Commerce, told OBG. “In theory we are supposed to have zero tariffs, but they are becoming a bit of a headache, particularly for automobile products and exports.” Other external headwinds that could impact trade include rising protectionism from the US, which would affect the Thai steel industry.

US Trade Concerns

In the US, the Seafood Import Monitoring Programme (SIMP), launched in January 2018, requires that imported seafood be traced from the time it is caught until it reaches the US. Although it originally targeted only Atlantic cod, mahi mahi (dolphinfish), grouper, swordfish and tuna, a group of US senators has lobbied since February 2018 to add shrimp to the list. Ryan Bradley, director of the Mississippi Commercial Fisheries United, told local media that lower-priced shrimp imports from India, Indonesia, Thailand and Vietnam had a significant impact on the US wild-caught shrimp industry, and in March 2018 the US House of Representatives added shrimp to the SIMP.

Thailand, which has already been identified by US President Donald Trump as one of 16 countries with an excessive US trade surplus, faces further challenges as the baht continues to strengthen against the US dollar (see analysis). An escalating Sino-US trade war could also have significant ramifications for Thailand. The US-China Business Council reported in May 2018 that the US had requested China cut its bilateral trade surplus by $200bn before 2021. This followed a March 2018 announcement of a 25% import tariff in the US on 1300 products, including steel. Although Thailand is not a major steel exporter, concerns have been raised that restrictions on Chinese imports to the US could lead Chinese steel producers to dump their products in Thailand and other ASEAN markets. At the same time, US business owners have reported that they would turn to Thailand, Malaysia and Vietnam as suppliers, while China’s retaliatory tariffs on US agricultural exports could also benefit Thai cassava and soybean producers.

In June 2018 the Trump administration announced plans to introduce tariffs on $34bn of Chinese goods, which went into effect at the end of that month. This was followed in early July by China’s introduction of 25% tariffs on an equivalently valued list of US goods, including soybeans, pork and electric vehicles. With President Trump threatening in July to escalate the list of tariffs to $500bn in retalisation, observers are closely following ongoing developments.

Potential Partnerships

With US export growth in question, Thailand’s regional trade relations and potential membership in free trade zones have come under the spotlight. Although the country was not a signatory of the original Trans-Pacific Partnership (TPP) – a massive free trade agreement (FTA) encompassing the US, Japan and other Pacific Rim countries – the Thai government has since signalled its intention to join the Comprehensive and Progressive Agreement for TPP (CPTPP), a modified TPP accord created after the US announced plans to withdraw in early 2017. In March 2018 Sontirat Sontijirawong, minister of commerce, told media the government planned to hold a joint meeting with stakeholders to discuss CPTPP membership. Other members include Australia, Brunei Darussalam, Canada, Chile, Malaysia, Mexico, Japan, New Zealand, Peru, Singapore and Vietnam. The same month saw Somkid Jatusripitak, deputy prime minister, voice support for both the CPTPP and the Regional Comprehensive Economic Partnership (RCEP), an FTA between China, India, South Korea and ASEAN, among others. The Thailand Development Research Institute estimates RCEP membership could boost Thai GDP growth by up to four percentage points.

Outlook

Geopolitical volatility and external headwinds remain the most significant risks to trade and investment growth in Thailand, despite a favourable outlook for both areas in 2018. Efforts to develop the EEC and push digital development and technological innovation have already positively impacted FDI growth and export diversification, as well as create new opportunities for private investors.

There are concerns that the general election expected in May 2019 could create short-term uncertainty, while rising US protectionism and regional NTBs are likely to continue challenging exporters, raising doubts as to whether the country will attract its targeted BT720bn ($20.8bn) of investment applications in 2018.

However, new investor-friendly legislation, ongoing reforms aimed at improving the business environment and a potential rise in demand for Thai products are expected to keep exports and inward investment on steady growth trajectories.