New Restrictions on Foreigners

[Gadfly]

A few months back I started a thread about new restrictions in various areas on foreigners. Some questioned the information I posted. In particular, while agreeing that there may be restrictions in other areas (specifically property laws), many questioned my comments about new regulations intended to enforce the alien business law.

 

The alien business law restricts foreigners from owning companies in many areas. Violating this law carries a three year prison sentence. There are probably tens of thousands of companies, many of them subsidiaries of recognizable multinational companies, that have addressed the restrictions in the alien business law by setting up companies that are Thai majority owned, but effectively controlled by foreign parties. They have foreign directors, they pay their taxes and they meet demands in the Thai economy (otherwise they wouldn't be here.)

 

These arenâ??t rogue outfits, but companies that have legitimate and productive contributions to the Thai economy. Companies that all of us would recognize as household names.

 

When I mentioned new restrictions in this area, plenty of doubt was expressed, justifiably given the problems that strict enforcement of the alien business law would create. I couldnâ??t give a specific cite on this new restriction before (for reasons I canâ??t discuss), but I can now.

 

The Business Development publicly announced a new order (order no. 102/2549 if anyone wants to check), and this new order applies to any new company with a foreign director or foreign shareholding between 40-50%, requiring the Thai shareholders to submit financial documents to the Ministry of Commerce to prove that they are wealthy enough to invest in this company.

 

It only applies to companies with foreign directors or foreign shareholding of between 40 - 50%. Since almost all companies set up by foreigners will have foreign directors (a new investor usually doesn't simply hand over the keys to the new business and funds they have invested into a business to their recent local hires), it basically applies to any foreign business that will be established in Thailand on or after 15 August.

 

The Thai shareholders will be required to submit a bank account statement, a passbook, some other statement from a bank or â??other evidenceâ? to prove that they have enough funds to support their investment in the company. And this only applies when forigners are involved.

 

This new regulation is very similar to the regulation that the Land Department issued a few months back to prevent foreigners from acquiring property through Thai majority owned companies. We now see a new regulation that applies to all companies in Thailand. If the company has a foreign director, the Thai shareholders have to turn over financial information to the ministry of commerce for â??evaluationâ?Â.

 

We saw that this sort of regulation did the property market in Phuket and Koh Samui. Now a similar regulation will apply to all companies in Thailand. There may (or may not) be a way around this, but the trend is really troubling.

 

Meanwhile, foreign direct investment in Thailand continues to decline and many banks and investment firms are lower their predictions of GDP growth in Thailand by another 1%. From early estimates of about 6% GDP growth this year, we are now seeing estimates going as low as 3%.

 

I wasnâ??t joking when I made that initial post. I am not sure why this is happening (I have a few hunches), but I donâ??t think it can be disputed now that what I mentioned before is happening.

 

[BKKanalist]

Gadfly

 

"I am not sure why this is happening...."

 

Nationalism often has little or no logic. That is why it is called nationalism.

[Bangkoktraveler]

Thanks for the info. With the government in an unstable situation, things can go just about any way. I look at the stability of Thailand's neighbors and wonder if Thailand may start to fit in with the rest of the bunch (neighbors).

[elef]

Meanwhile, foreign direct investment in Thailand continues to decline and many banks and investment firms are lower their predictions of GDP growth in Thailand by another 1%. From early estimates of about 6% GDP growth this year, we are now seeing estimates going as low as 3%.

 

As 7 months already passed I don't think that is realistic - 4 - 4.5 % is much more probable.

[gummigut]

Gadfly: Really appreciated your post.

 

That new order looks particularly nasty.

 

Net foreign direct investment is a tough one. All of last year it was 128.8 billion baht. This year, for the first four months it's higher at 136.3 billion baht. Though you've got to take out 55 or 60 billion for Temasek. Still, around 80 billion baht.

 

So on a year by year comparison so far, FDI looks very good. Even better if you take into account Thai Beverage in May (May FDI numbers are not reported yet).

 

But yes, on the whole, sentiment is down widely.

 

As for 3% GDP growth, I don't know anybody credible who is suggesting that quite yet. "Yet" being the operative word, but I don't think it'll get that bad.

 

Hopefully the whole stuff with the EC will allow the whole process to move forward.

 

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[Gadfly]

The last I checked, the BOI figures for the first part of the year showed a sharp drop in FDI. The transactions you mentioned would push up the invesment figues, but they wouldn't be covered by BOI. (Now that would be quite a scandal if the BOI granted investment privileges to Temsak when it acquired Shin). They are acquisitions of exisiting businesses.

 

The 3% figure is probably too low, but I know I saw a report where the lower end of the range started with a "3". In any event, I think we all agree that there has been a trend of downward revisions in GDP figures this year.

 

There are other worries. The biggest market for Thai goods is the US, consumer spending seems to be slowing in the US and it doesn't look like Thailand will be able to conclude negotiations with the US over a FTA. This will be the first time that the US has started negotiating a FTA with a country but hasn't been able to conclude negotiations.

 

Thailand's failure to negotiate a FTA with the US in light of the apparant collapse of the Doha rounds is worrying. There is protectionist static coming from the US and the EU, and if the US and the EU start to move in that direction, Thailand's failure to secure a FTA with the US will put Thailand in a precarious position. Protectionist measures by Thailand will only make matters worse.

 

With sentiment down, I cannot figure out why Thailand is imposing these sorts of measures now. This Ministry of Commerce's new order is part of a number of measures Thailand is promulgating that are not exactly friendly to foreigners or foreign investors.

[William_Ginnzer]

No matter how you define it, it is a slippery slope. Wasn't there a political party that came to power in Germany in the 1930's that incoroported both nationalism and socialism. National socialists, or...

 

On a related subject, the restriction on foreign ownership of land certainly doesn't help Thais or Thailand. That is basic economics, and a point so obvious it is beyond serious debate.

 

 

[gummigut]

Got my net FDI numbers from the BOT website. There's a huge ass number for March, and I can only surmise that's the Shin deal.

 

Trade stuff I don't follow as closely.

 

Yes, not good at all that some sort of FTA was not hammered out and doesn't look likely. I don't think that fast track law that allows the US Gov't to sign FTA's has expired yet, but soon if I remember correctly.

 

Anyways, do you know anything about the changes to GSP? The US was making noises that Thailand might lose its ranking awhile ago. I know that was to spur on the FTA talks, but do you think it likely?

 

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[Gadfly]

Got my net FDI numbers from the BOT website. There's a huge ass number for March, and I can only surmise that's the Shin deal.

 

Trade stuff I don't follow as closely.

 

Yes, not good at all that some sort of FTA was not hammered out and doesn't look likely. I don't think that fast track law that allows the US Gov't to sign FTA's has expired yet, but soon if I remember correctly.

 

Anyways, do you know anything about the changes to GSP? The US was making noises that Thailand might lose its ranking awhile ago. I know that was to spur on the FTA talks, but do you think it likely?

The BOI is a good for information on new projects, although plenty of FDI in new projects falls outside of BOI.

 

I also have a fundamental problem with the entire philosophy behind BOI. It is based on the premise that governments can and should pick the businesses that are good for the Thai economy. I call this the â??French modelâ?Â. Governments everywhere are notoriously bad at making these sorts of decisions and putting these sorts of decisions in the hands of government officials practically guarantees political manipulation. The market is far better and cleaner at making these sorts of decisions.

 

The BOT figures are good, but this year I suspect they are being driven up by acquisitions of existing businesses. They don't reflect new projects. I am all in favor of such acquisitions for a variety of reasons (e.g., economies of scale, new management, synergies, making new capital available for expansion, etc.), but they donâ??t reflect new investment. And Thailand needs new investment.

 

I believe the fast track authority expires early next year. If Thailand doesnâ??t have a new government by the end of this year, itâ??s going to be damn hard to conclude the FTA negotiations. Thailand is vulnerable on GSP because it is one of the wealthiest nations under the GSP program. GSP is intended to for seriously poor countries (African poverty); not newly industrializing economies.

 

Further, with the collapse of Doha, protectionists in the EU and the US will be emboldened. There is some senior Republican legislator from Iowa (a farm state) seriously pushing for an end to GSP and ramping protection of US farms. Without protection, the US probably wouldnâ??t have a cotton industry (which means it shouldnâ??t have one). With mid-term elections coming up and the Republicans looking weak, it is easy to seem them â?? particularly in farm states â?? digressing from their traditional (although less of a tradition now under the current administration) pro-free trade stance.

 

Still, Bhagawati thinks that the Doha rounds may be resurrected. But even if the US does take a more realistic approach, the EU and large developing countries, particularly India which has shown little interest in the current negotiations, will remain problematic. This makes a FTA between the US and Thailand all the more important and protectionist anti foreign investment measures by Thailand all the more problematic.