Cablegate: Is Foreign Investment Up or Down?

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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

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

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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

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

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.

© Scoop Media

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