Thailand’s government is focusing its efforts on reviving the country’s appeal as a major foreign investment destination in south-east Asia. To do this, the ruling military junta has launched a number of initiatives ranging from the establishment of new special economic zones (SEZs) to the development of industrial clusters, all oiled by generous incentives. It is hoped that these moves will lure back foreign investors, whose waning sentiment caused a sheer drop in FDI in the country in 2015.
Thailand has achieved impressive economic development in the past four decades, moving from a low-income country to an upper-income country in less than a generation and becoming a darling of foreign investors in south-east Asia. Nonetheless, the engines of the country’s economic growth have been losing steam because of “a combination of some decline in export competitiveness to newly emerging regional economies [and] a shortage of skilled labour and knowledge workers for the modern knowledge economy”, according to the World Bank.
A new chapter
The country’s political environment further clouds the minds of foreign investors. With a transition back to democracy slated for completion by the end of 2017, authorities are now trying to make the most of the stability granted by the military junta to set the foundation for a new chapter of Thailand’s success story.
“We would like to develop further and resemble a south-east Asian [South] Korea,” says Thailand's commerce vice-minister, Winichai Chaemchaeng. “We have to embrace trends of the future, such as technology or green development. Of course, we also have to absorb the current labour shortage problem.”
Thailand's economy grew at about 8% to 9% in the late 1980s and early 1990s, before growth slowed to less than 4% after the Asian crisis of the late 1990s. The controversies surrounding former prime minister Thaksin Shinawatra then prompted a decade-long political crisis, with the military seizing power in May 2014. As the country's political outlook grew more uncertain, the economy lost momentum. Thailand’s GDP expanded by 2.8% in 2015, up from 0.8% in 2014, according to government figures. The Bank of Thailand expects the economy to grow between 3.1% and 3.5% in 2016.
Beyond politics, Thailand’s business proposition has been partly compromised by its own success. Salaries have been increasing and the economy has been running close to full employment for years. Regional neighbours such as Vietnam and Myanmar offer a cheaper, more available labour base for labour-intensive productions. As a consequence, FDI into Thailand fell to capital expenditure of $4.8bn and $3.7bn in 2015 and 2014, respectively, down from $15.9bn in 2013, according to figures from the Bank of Thailand. At the same time, Vietnam posted record levels of realised FDI at $14.5bn in 2015, according to figures from Vietnam’s General Statistics Office.
“We don’t want to stay in traditional industries, we want to move up the value chain as we cannot compete with countries such as Vietnam in labour-intensive industries,” says Mr Chaemchaeng.
In order to achieve this, the Thai government has launched a clusters development policy “to develop a manufacturing base for target industries to support hi-tech activities [and] to enhance industrial competitive advantages”, according to a recent presentation by the Board of Investment of Thailand. The 10 prioritised clusters include, among others, automotive, electronic appliances, aerospace, automation and robotics. Investors in these sectors will enjoy an eight-year corporate income tax (CIT) exemption, followed by an additional five-year 50% reduction, and import duty exemption on machinery.
“These initiatives mostly focus on re-investment, not new investment, because their tight time requirements are hard to meet for new investors,” says John Evans, managing director of consulting company Tractus Asia. “However, my personal feeling is that a lot of really good companies would consider re-investing but not necessarily with that new level of technology.”
On the right track
Waiting for the cluster initiative to gain traction, the Thai government is not giving up on labour-intensive manufacturing and has set up 10 SEZs in areas near borders with Myanmar, Laos and Cambodia.
“We want to reduce the income gap between different regions across the country,” says Mr Chaemchaeng. “We have labour shortages, [and in these zones] we can use labour from neighbouring countries, and we will also provide visa facilitation for migrant workers in those areas.”
Companies willing to relocate to SEZs will benefit from similar CIT incentives offered by the clusters initiative, alongside additional benefits, explicitly including the chance to use “foreign unskilled workers”.
“I think SEZs on the border could actually work; it’s a good way for Thailand to stay focused on the manufacturing base that helped the country grow in the past 20 years,” says Mr Evans. “Thailand has the infrastructure in place that its neighbours lack. The targeted sectors are not necessarily competitive in Thailand today, but with SEZs they might end up keeping some of the investment that otherwise would go elsewhere.”
With the final outcome of these two initiatives still hanging in the balance, the military junta has to deal with the potential impact of its decision not to join the US-led Trans-Pacific Partnership (TPP). Signed in 2016 by 12 countries on both sides of the Pacific Ocean, it is predicted to take another couple of years for its ratification process to wrap up. This gives the Thai government additional time to assess a possible future membership. But businesses are already incorporating the TPP effects in their decision making.
“Whether it makes sense or not, Vietnam is already top of our clients’ list as a possible location in the region, which eventually is the real goal of any investment promotion strategy – make sure somebody is going to come and take a look at you,” says Mr Evans.
But the biggest uncertainty in Thailand’s near future surrounds possible future elections. “This government is trying to build a good foundation for a future elected government to move forward. An election will mean that we have reached enough stability to go back to the polls,” says Mr Chaemchaeng.
Investors will keep a close eye on the country's political scene, waiting and hoping that Thailand’s economy gets back on an even keel in the not-too-distant future.