Ratana Poonsombudlert and Jessada Sawatdipong of Chandler & Thong-ek identify the initiatives and hurdles shaping FDI in Thailand
The outlook for Thailand's gross domestic product (GDP) and foreign direct investment (FDI) has come a long way since the country experienced a coup d'état in May 2014. In March 2016, the Bank of Thailand projected GDP to be 3.1% in 2016, while the Asian Development Bank (ADB) projected 3% (an increase over earlier expectations of 2.8%). At the same time, FDI performance and expectations have risen from -0.6% in 2014 to 4% for 2016, and 5% for 2017. New FDI in the first quarter of 2016 showed an increase of 234% compared with the same period in 2015, based on Board of Investment (BOI) records. Also, during the first three months of 2016, Thailand's Ministry of Commerce reported that exports had swung into positive territory with a 0.9% expansion, valued at $53.82 billion. Thailand was the only country in the Association of Southeast Asian Nations (ASEAN) to report growth in exports during this period.
Despite the political changes in 2014, Thailand continues to maintain an open, market-oriented economy which encourages FDI as one way to promote economic development, employment and technology transfer. Thailand welcomes investment from all countries, and seeks to avoid dependence on any one country as a major source of investment.
The government is focused on enhancing Thailand's world competitiveness ranking, and ongoing efforts to accomplish this are expected to have a positive effect on FDI. Thus, three key initiatives of the National Economic and Social Development Board are to: improve the ease of doing business; speed up infrastructure development; and invest more in research and development. So far, results are promising. Since the start of 2016, the government, in collaboration with the private sector, has: streamlined the business incorporation process from three steps to one; reduced the number of paper documents required for the incorporation process from 22 to one; and the Customs Department has reduced the export clearance period from four days to three. More easing of business strictures is anticipated.
Some FDI challenges
Slower than anticipated growth among major trading partners continues to pose a risk to FDI in Thailand. Japan is typically ranked as Thailand's largest continuous investor, and represented approximately 53% of FDI in 2015. However, Japan faces internal challenges, such as an economy which, in the first quarter of 2016, experienced the lowest industrial output since 2011. Even considering Japan's internal economic issues, more than 5,000 Japanese companies operate in Thailand today, and Thailand remains Japan's auto production hub for Asia.
China's economic slowdown is affecting not just Thailand, but countries across Southeast Asia. However, despite a major economic transition at home, China remains Thailand's largest overall trading partner.
South Korea represents an up-and-coming investor in Thailand, accounting for 7% of FDI in 2015. Currently, Vietnam remains South Korea's favoured FDI destination, but the Thai government is actively courting this important Northeast Asian investor.
The graph below highlights the major FDI investors in Thailand in 2015. Preferred sectors include: infrastructure; automotive; electrical and electric goods; information communications technology (ICT); renewable energy; chemical and petrochemical operations; rubber; agricultural products and food; and, metal products and machinery. Through February 2016, the Bank of Thailand ranked Singapore, Japan, Germany, the US, and the Netherlands (respectively) as Thailand's major contributors to FDI.
Source: Bank of Thailand [BOT] FDI statistics 2015
The slight slowdown in funding for major infrastructure projects has been another issue in attracting FDI. Some 20 infrastructure projects, valued at nearly $50.2 billion, and covering rail, roads, air transport and ports, were expected to be underway before 2018. Accompanying FDI was anticipated to come from China, Japan, the US, as well as other sources. Lengthy negotiations with China on a Thai-Sino railway project resulted in the Thai government deciding to scale-down and wholly fund this project. It is still expected that Chinese technology will contribute to constructing and operating the train on the shortened, 250 km route, which will extend from Bangkok to Nakhon Ratchasima. Despite some funding delays, the Thai government is aggressively working to move forward its major infrastructure plans. Contracts for the Ministry of Transport's 20 megaprojects are likely to be signed before the end of 2016.
The BOI is Thailand's central investment promotion authority and offers investment incentives to qualified foreign and domestic investors, through clearly communicated application procedures. Effective in January 2015, the BOI launched a new seven-year investment incentive policy that gives preferential benefits to projects, based on the level of technology involved in the activities. Firms employing a high level of advanced technologies can qualify for the maximum incentive package, including an eight-year exemption from corporate income taxes.
The BOI investment policies launched in 2015 promote:
The government approved the SEZ programme in Thailand in 2014. This programme is expected to be an effective tool in attracting FDI. The initial pilot SEZ programme included five SEZs, with another five added later in 2016. Major government strategies for establishing the SEZs along Thailand's borders were to create production bases that connect with ASEAN countries, and to invest in infrastructure that strengthened connectivity with, and reduced logistics costs for, Asian Economic Community (AEC) countries.
An interesting development regarding the SEZ programme is a new government initiative to set up an SEZ covering three eastern provinces of Thailand. The new Eastern Economic Corridor project was approved by the SEZ supervising committee in April 2016. It will be owned by both the Industrial Estate Authority of Thailand (IEAT) and industrial estates managed by the private sector. It will include operations in Chon Buri, Rayong, and Chachoengsao. This special SEZ has been earmarked for the high-technology industry. It is anticipated that it will offer privileges that are even more attractive than those for current BOI projects. A Thai government panel is assigning related agencies to define special privileges, investment facilitation, infrastructure and logistics, town planning, and the environmental impact associated with the Eastern Economic Corridor SEZ.
Another Thai government initiative that supports FDI is the Cluster Policy. Approved by the Thai Cabinet in November 2015, the Cluster Policy aims to increase industrial competitiveness in areas with high potential for specific manufacturing bases and advanced technology expertise. In its initial stage of development, the government defined two types of Clusters: Super Clusters, and Other Targeted Clusters. Both are associated with tax and other incentives. The 10 main Cluster industries include: next-generation cars; smart electronics; affluent/medical and wellness tourism; agriculture and biotechnology; food; robotics for industry; logistics and aviation; biofuels and bio-chemicals; digital-based industries; and medical services.
International Headquarters and Treasury Centres
Under the BOI's new incentive programme, several of the most important changes involve the establishment of International Headquarters (IHQs) and Treasury Centres (TCs), with the aim of encouraging foreign companies to set up in Thailand. Key incentives include: permission for companies to bring in foreign technicians and experts to work on promoted projects; and, permission for companies to own land. Royal Decrees No. 586 and 587 as promulgated by the Revenue Department provide details on other tax incentives. Privileges granted to IHQs that comply with these Royal Decrees include a reduction or minimisation of corporate and personal income, and specific business taxes. At the end of the first quarter of 2016, 12 companies had obtained TCs under the revised licencing scheme.
The SEZ programme, Eastern Economic Corridor, Cluster Policy and changes in IHQ and TC regulations are just a few of the ways Thailand is encouraging FDI today. The Ministry of Industry also plans to amend regulations governing the construction and operation of factories to ease investment barriers, and the Ministry of Finance recently announced a new tax structure to boost disposable income and encourage spending. Both of these should prove attractive for increasing FDI in Thailand.
Challenges remain, but the future looks promising.
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Chandler & Thong-ek
About the author
Ratana Poonsombudlert is a partner at Chandler & Thong-ek Law Offices (CTLO), specialising in corporate law, mergers and acquisitions, project finance, all aspects of energy and natural resources law, information communications technology (ICT), and logistics. Her areas of focus include the oil and gas and mining sectors, acting for both owners and lenders. She regularly advises on complex cross-border and domestic transactions. She is consistently recognised as a Leading Lawyer by international commentators, particularly for her M&A, project finance, energy, mining, and oil and gas expertise.
She obtained an LLB degree (Honours) from Chulalongkorn University in Bangkok, and an MA degree in international trade, from Eastern Michigan University, in the US. She also completed the Program of Instruction for Lawyers, at Harvard University. She is an Extraordinary Member of the Thai Bar Association, and a Member of the International Bar Association (IBA), Energy Law Section.
Chandler & Thong-ek
About the author
Jessada Sawatdipong is a partner at Chandler & Thong-ek Law Offices (CTLO), specialising in banking and finance, particularly project finance, with a focus on complex, cross-border transactions, and infrastructure and renewable energy projects. He has extensive experience with all major commercial banks in Thailand, with international commercial banks, and multinational financial institutions. He acts for both lenders and borrowers. He is consistently recognised as a Leading Lawyer by international commentators, particularly for his banking, project finance, and energy and natural resources expertise.
He obtained an LLB degree from Chulalongkorn University in Bangkok, an LLM degree from the University of Miami, a Master of American Legal Studies from the Illinois Institute of Technology, Chicago-Kent College of Law, in the US, and completed the Program of Instruction for Lawyers, at Harvard University. He is a member of the Thai Bar Association, the International Bar Association, and the Asia Pacific Lawyers Association.