These are difficult times for Thailand. Last year’s military coup was a major shock in a country that foreign investors regarded as relatively stable. Since taking power, military leaders have made worrying noises about shutting the door to investors from overseas. The new government is insisting that it will press ahead with changes to investment laws that would make it harder for foreigners to control Thai companies, even though its trading partners believe they would breach the country’s commitments to the World Trade Organisation. But Pridiyathorn Devakula, the government’s leading economic policymaker, has been trying to play down the effect of the plans, saying they are simply closing a loophole in existing rules and that foreign manufacturers, exporters, or companies with investment privileges would be unaffected.

Restructuring
Even so, foreign executives are unsettled. Several have appeared in media reports saying that it is too early to know whether the changes would force them to sell some Thai holdings or not. The British Chamber of Commerce, meanwhile, has said all foreign investors would be “forced to divest shares currently held by nominees.” That would leave some firms with a choice of selling down their holdings to be truly Thai-owned, or of restructuring and applying for licenses to operate as a foreign-owned company. Western diplomats complain that the legal overhaul would give Bangkok too much control over the activities of foreign companies. One diplomat told the Washington Post that the government was “playing with matches.” He added; “It is a clear policy decision that at least in the service sector Thailand will be a closed market and foreign capital will only be authorised if it is a minority both in shareholding and in control.” Yet the government insists it does not want to limit inward investment. Mr Devakula has insisted that the government was forced reluctantly to overhaul the laws after the furore that surrounded Temasek Holdings’ takeover of Shin Corp, the telecommunications empire founded by ousted former Prime Minister Thaksin Shinawatra. Last year, the commerce ministry ruled that Temasek had violated Thai foreign equity restrictions and asked police to investigate – alarming other foreign companies using similar structures for their Thai holdings. The legal changes relate to Thailand’s Foreign Business Act 1999, which regulates the rights of foreigners to carry on certain businesses in Thailand. The details of the act are quite complicated, but the basic structure is simple, according to a briefing produced by lawyers Herbert Smith.

Governmental approval
Foreigners are prohibited from carrying on certain businesses that are especially reserved to Thai nationals. These ‘list one’ businesses include, for example, media ownership and certain farming activities. Foreigners are also prohibited from carrying on other ‘national interest’ and similar businesses without government approval. These ‘list two’ businesses include weapons production, domestic transportation and domestic airlines, mining, and Thai arts and cultural activities. Finally, and of greatest impact in practice, according to the lawyers, foreigners are prohibited from carrying on various other businesses without official permission. These so-called ‘list three’ businesses include accounting, legal and other professional services; advertising businesses; many construction and engineering services; retail and wholesale businesses, with some exemptions; hotel ownership; and other service businesses. The government’s plan is to change the act, and draft proposals are working their way through the legal system. “It is not clear when these changes may come into force, though it is likely to take several months. Neither is it clear what form they may finally take,” says Herbert Smith. “The current proposals have attracted significant criticism in Thailand and overseas, and there is scope for further changes during the legislative process.” The controversial element of the changes to emerge so far is that ‘foreigner’ will be redefined under the act. Currently, a foreigner is a foreign national, a foreign-registered company or a Thai company with majority foreign shareholding. Under the new proposals, this definition will be extended to include companies that are currently treated as Thai due to majority Thai share ownership but where foreign individuals or foreign companies have more than half of the voting rights by law, agreement or under the articles of association. Many foreign businesses have previously adopted such structures in order to be treated as Thai while maintaining effective foreign control of the business. This enabled them to carry on a business in list one, two or three without having to comply with the Foreign Business Act. “The effect of the proposed amendment will be to re-classify such companies as ‘foreign’ and therefore to bring them within the scope of the Foreign Business Act,” says Herbert Smith. “They will therefore become subject to all of the restrictions that apply under that Act.” Foreigners wishing to set up a new Thai business after the changes come into force will have no choice but to comply with the amended law. That is why worried observers have said that the revised law will deter new foreign investment. “There is concern that the extended scope of the Foreign Business Act will deter foreigners from investing in Thailand and will encourage them to look elsewhere,” says Herbert Smith. “It remains to be seen whether these fears are well-founded.”

Notification date
However, the lawyers point out that for businesses already operating in Thailand, the draft amendments contain important relief’s. Any such company that falls within the scope of the Foreign Business Act will have one year from the effective date of the act to notify the Ministry of Commerce of that fact and to apply for a certificate to continue trading. The criteria for getting a certificate are not yet known. But once a company gets one, those from list one or list two activities will have two years to restructure their shareholdings or voting rights in order to ensure full compliance with the law. Those engaged in list three activities will be allowed to continue to operate indefinitely, without any need to restructure, until the business is finally dissolved. Herbert Smith says that this ‘grandfathering’ arrangement could mean that businesses already operating in Thailand will be able to continue under corporate structures that will not be permitted to new market entrants, unless they apply for permission under the new laws. However, there’s not enough information to know yet, they add. The changes to the law also propose a redefinition of what types of business fall into the list three category. “Primarily, this is simply to remove certain businesses that are now regulated under other laws, but one very important change is to remove an exemption that previously applied to retail and wholesale businesses with capitalisation above prescribed levels,” says Herbert Smith. “All retail and wholesale businesses will now be included, irrespective of capitalisation.”

Maximum fine
Finally, the new proposals will significantly increase the fines that may be imposed on Thais and foreigners found to be in breach of the amended Act, including directors and shareholders who connive in the commission of offences or who do not prevent the commission of offences. The maximum fine will be raised to five million baht, which is around $140,000. Despite the legal changes, Prime Minister Surayud Chulanont, an army general, has been telling foreign businessmen and diplomats that the country welcomes foreign investment and businesses. He told a lunch organised by the Joint Foreign Chambers of Commerce in Thailand that changes to the Foreign Business Act and capital control measures were meant to strengthen transparency and good corporate governance within Thailand. He said the moves were just part of the government’s efforts to create a level-playing field and remove obstacles to foreign investment activities. While uncertainty always worries investors, Thailand’s underlying economic performance has remained strong. According to the latest edition of the Asian Development Bank’s Thailand Economic Monitor, the country’s GDP growth will remain at 4.5 percent in 2006, the same as in 2005. High export growth has greatly contributed to Thailand’s economic performance, even as domestic demand has remained depressed. Growth this year is expected to be 4.6 percent – a notch higher than 2006. Domestic demand is expected to perform better, but export growth will be held back by lower growth in the global economy and world trade.

Economic crisis
Looking back further, average GDP growth has fallen from the six percent levels achieved in the years between 2002 and 2004. “This is in part because the easy gains from utilisation of post-crisis excess capacity are over,” says Kazi Matin, World Bank Lead Economist for Southeast Asia – referring to the country’s 1997 economic crisis. “Higher growth can now come mainly from efficient adjustment to high oil prices, higher private investment to expand capacity,” he added. “As a middle income country, Thailand’s growth must come more and more from more rapid productivity growth, and for that the firms have to innovate products and processes, the workers have to acquire more skills to compete with labour in China, Vietnam, India and other competitors producing technology intensive goods, and the government has to urgently support these initiatives of firms and workers through policies and investments.” Thailand needs to focus on supply-side reforms to promote private investment and higher productivity growth and several measures can be taken quickly with good effect, he says. Reducing regulatory burden is one and this could include rationalisation of price controls, clarification of foreign ownership rules, speeding up customs processing, and so on. Renegotiating a US trade deal that is about to expire and signing a treaty with Japan are two steps that would help to sustain strong export growth. Similarly, supporting improvements in secondary education, and vocational training including English language and IT skills and promoting greater private participation in education service delivery can relax skill-constraints that companies have said are holding back investment and productivity growth. Also, actions to improve infrastructure services could reduce costs and raise rates of return to private investment. Can all that be achieved? Despite the recent crisis, “Thailand’s strengths in terms of sustained macro-stability and increasing openness remain,” says Dr Kirida Bhaopichitr, country economist and author of the Thai Economic Monitor. The fiscal situation remains strong, with the government running a balanced budget this year and a slight deficit next year,” he said. Public debt as a share of GDP is 41 percent and is projected to remain below 50 percent over the next five years. Dr Bhaopichitr also said that Thailand’s external vulnerability is low – with a current account in surplus and pre-coup foreign reserves standing at $59bn. Also, total external debt is around 28 percent of GDP, one of the lowest levels in the region. A military coup is hardly the sort of event to settle investors’ nerves, but Dr Bhaopichitr says that “political uncertainty has diminished” since the interim government was established in October. “Nevertheless, both consumers and investors are waiting to see the policy direction of the interim government.”