IS FOREIGN INVESTMENT UP OR DOWN?

UNCLAS SECTION 01 OF 02 BANGKOK 004753 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/MLS STATE PASS USTR USDOC FOR 4430/EAP/MAC/OKSA SINGAPORE FOR TREASURY ATTACHE BAKER E.O. 12958:N/A TAGS: ECON EINV ETRD TH SUBJECT: IS FOREIGN INVESTMENT UP OR DOWN? REFTEL: BANGKOK 4442 ¶1. (SBU) Summary: Thailand's Board of Investment (BOI) is reporting substantial increases in foreign direct investment in 2007, flying in the face of sour economic news and controversial economic policies. Some of the increase can be attributed to a repackaging of investment through the BOI, as investors trade a certain degree of freedom in their investment for guarantees of legal majority control. Other major investors are in fact postponing investment decisions to await resolution of Thailand's political and economic uncertainties. For many established manufacturing industries, however, investment proceeds apace and the actions of the government are substantially less important than current market realities. End Summary. ¶2. (SBU) Nearly a year and a half of political instability, a military coup, controversial economic moves and a sluggish economy have diminished Thailand's allure among investors as an attractive foreign investment destination. Yet, Thailand's Board of Investment is recording significant increases in applications for foreign direct investment (FDI) in 2007 and claiming that political and economic difficulties are not affecting investment flows. It is difficult to pinpoint an investment trend in sometimes wildly fluctuating investment statistics over time, but BOI statistics do show a 17 percent year-on-year increase in new investment applications through July, with USD 5 billion in investment flowing in to 467 projects. ¶3. (SBU) Anecdotally, business groups from most major sources of FDI into Thailand report a slowdown in investment. Many investors are postponing investment decisions in light of continuing political uncertainty and pending amendments to the Foreign Business Act that could further restrict foreign ownership in certain sectors (see reftel). Others have simply taken increasing notice of countries in the region with lower costs such as Vietnam, China and India, or with superior labor skills and infrastructure such as Malaysia and Singapore. Getting Behind the Numbers -------------- ¶4. (U) BOI statistics are likely reflecting changing avenues of investment rather than substantial increases. Law firms handling investment applications note that BOI figures do not reflect total investment in Thailand, only investment seeking promotional privileges through the Board. The lawyers speculate that a significant percentage of new investment coming through the BOI normally would have entered as standard joint ventures with Thai firms, investment that is not reflected in BOI statistics. The recent controversy over foreign ownership and the convoluted ownership structures that have allowed many overseas investors to skirt restrictions has inspired caution. Although investing through the BOI requires extra scrutiny and oversight, new investors are willing to accept the extra work in exchange for majority control. Even current investments are being repackaged as new investments to guarantee foreign ownership rights from the BOI. ¶5. (U) BOI's statistics show overall decreases in investment from most sources of FDI in 2007, including the U.S., but with notable exceptions. There were substantial increases in inflows from the Cayman Islands and British Virgin Islands, tax havens that can conceal the actual source of the investment (including from Thais looking for investment privileges as foreigners). ¶6. (U) Another exception is top investor Japan whose investment applications increased 13 percent in value in 2007 year-on-year. However, a BOI staffer on its Japan desk said investment from Japan was lower than expected. A survey of 351 Japanese corporations in May signaled a steep decline in business sentiment toward Thailand; for the first time since 1998 more Japanese companies reported deteriorating business sentiment rather than improving. Most firms reported no change in their investment willingness, but 27 percent rated themselves negative on investment compared to 11 percent positive. Nine percent said they would postpone investment and five percent would reduce current investments. Reasons cited most for the decline in investment sentiment were, in order, appreciation of the baht, political instability, current economic policy and rising labor costs. 56 percent of the companies said they were looking at Vietnam as an alternative destination for their investments. ¶7. (SBU) Despite the overall gloomy outlook, certain well-established industries have been more or less insulated from BANGKOK 00004753 002 OF 002 downturns in the local investment environment. Investment in automobile manufacturing and parts, electronics and chemicals made up more than half of new investment thus far in 2007. The auto and electronics sectors in particular have developed strong manufacturing capacity and supplier networks over past decades and manufacturers from all major investing countries continue to pour in investment. In addition, manufacturers in this sector import a significant percentage of components for assembly, easing the impact of the strong baht on eventual exports of the finished product. Increases in Japanese investment in 2007 are attributed mostly to continued investment in vehicle and electronics manufacturing in Thailand. Honda and Toyota have announced substantial expansions of investment in their plants; Ford as well is nearing a decision on a proposed sizable investment in new production facilities in Thailand. FBA and its impact -------------- ¶8. (SBU) Proposed amendments to the Foreign Business Act (FBA) that would tighten restrictions on foreign investment have concerned investors since the amendments were proposed in January. The legislation came up for debate in the National Legislative Assembly on August 8, but was sent back to committee for revision after sharp debate. Foreign embassies and chambers of commerce have conveyed to the RTG ominous predictions of sharp dropoffs in investment if the amendments enter into law as drafted. Estimates of the number of companies that would be affected vary widely from several hundred to tens of thousands. ¶9. (SBU) However, the FBA changes would affect relatively few major investors, and would likely have little impact on overall investment. Restrictions on foreign ownership are confined to service sectors and the impact of the restrictions therefore would be slight on the more sizable manufacturing sectors (some manufacturers also have service functions that could potentially be affected). In addition, many current and future investors in service sectors are authorized majority ownership from the BOI. BOI reported over a billion dollars in investment in services, although the BOI does not focus strongly on this area and most services investment enters through other channels. U.S. investors can obtain majority control by investing through the Treaty of Amity and Economic Relations (AER),which provides national treatment for U.S. investors in most service sectors. Nevertheless, for many foreign investors in the service industries the FBA amendments loom darkly on the horizon. Post-election prospects -------------- ¶10. (U) Some economic analysts predict a marked uptick in investment after December elections sweep in a new government, the political situation eases and pent-up investment demand is set loose on the Thai economy. However, wary investors will likely wait and see if the succeeding government institutes investor-friendly policies before signing off on major investment decisions. Moreover, there are lingering concerns about the Thai economy that pre-date the current troubles, including high labor costs, infrastructure deficiencies, shortages of qualified employees and the strong baht; these concerns will not disappear overnight after elections. ¶11. (SBU) Comment: Official pronouncements to the contrary, clearly the political uncertainty and restrictive economic policies in the past year have put a chill on the investment environment and caused at least a postponement if not outright cancellation of some investments. With the exception of investments in Thailand's established manufacturing sectors, many service sectors are seeing a slowdown in new investment as investors watch political developments. Many investors are also keeping an eye on their alternatives, whether that be changing their ownership structures to ensure compliance with the law or looking at alternative destinations in the region for their investments. That said, the final chapter has not been written on investment in Thailand. Thailand has a reassuring capacity to muddle through difficult times and will likely do so again. End Comment. BOYCE