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A Public Forum on “Macroeconomic Impact of Thailand’s Military Intervention”

 

A Public Forum on “Macroeconomic Impact of Thailand’s Military Intervention”

Wednesday, 23rd July 2014 at 8.30 - 11.30 a.m.

The Chumbhot-Pantip Conference Room, 4th Floor Prajadhipok-Rambhaibarni Building,
Faculty of Political Science, Chulalongkorn University

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Program

08.30 – 09.00 a.m.                  Registration and Coffee

09.00 – 09.20 a.m.                  Opening Remarks

                                                Mr. Tetsuya Iguchi
                                                Editor-in-chief, Editorial Headquarters for Asia, Nikkei Inc.

 09.20 – 10.50 a.m.                 Speakers:

                                                Dr. Narongchai Akrasanee
                                                Chairman of MFC Asset Management Plc
                                                Former Minister of Commerce and Senator of Thailand

                                                Mr. Hiroshi Yakame
                                                Regional Head of Greater Mekong Sub-Region
                                                Country Head of Thailand
                                                Sumitomo Matsui Bangkok Corporation

                                                Mr. Leigh Scott-Kemmis
                                                President, Australian Chamber of Commerce (Thailand)
                                                Chairman Lee Hecht Harrison/DBM

 

                                                Dr. Supavud Saicheua
                                                Managing Director (Head of Research Group)
                                                Phatra Securities Public Company Limited

                                                Moderator:

                                                Assoc. Prof. Dr. Thitinan Pongsudhirak
                                                Director of ISIS Thailand
                                                Faculty of Political Science, Chulalongkorn University

10.50 – 11.30 a.m.                  Open Forum

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Videos: Macroeconomic Impact of Thailand’s Military Intervention

Macroeconomic Impact of Thailand’s Military Intervention 1/2: www.youtube.com/watch

Macroeconomic Impact of Thailand’s Military Intervention 2/2: www.youtube.com/watch

 

If you wish more detailed information concerning this seminar please click 
http://www.facebook.com/ISISThailand

..............................................................................................................

 

Mr. Tetsuya Iguchi

The Nikkei Asian Review is a weekly magazine and online news service which focuses on business and political issues in Asia. Mr. Iguchi explained that Nikkei’s decision to expand beyond is stock index service and business newspaper was spurred by a need for Asian voices in analysing the region’s economic and political issues. Nikkei also made the decision to base its editorial headquarters in Bangkok; this decision is reflective of the importance of Southeast Asia to an increasing number of Japanese companies.

Total Japanese investment in the ASEAN6 (Thailand, Malaysia, the Philippines, Singapore, Vietnam and Indonesia) amounted to US$135 billion at the end of 2013, which is nearly 40% more than the total Japanese investment in China. The number of workers employed by Japanese companies in the ASEAN6 was 1.85 million, which is 10% more than those in China. Japanese businesses have invested more in Thailand than any other ASEAN country. This all comes despite the fact that the total population and GDP of the ASEAN6 is less than half of that of China.

The reason for the close relationship of Japan with Thailand and the ASEAN6 is because of its stability and predictability, as well as their friendly relationships, particularly when compared with China. One of the most important elements in a business is productivity. The business philosophy of kaizen is the constant education and improvement of a workforce thereby increasing productivity over a long period of time. To make such a long-term commitment stability, productivity and friendliness in the host-country is essential. That is why so many Japanese companies prefer Southeast Asia, especially Thailand over other countries in the region.

Despite political crisis in Thailand, upheaval in Cambodia and Laos, and a potential switch towards nationalism and protectionism in Indonesia, Nikkei and many other Japanese companies are still confident that ASEAN and Thailand will remain an ideal and welcoming place for Japanese investors to put down long-term roots.

 

Moderator: Prof. Dr. Thitinan Pongsudhirak

We are in the business of explaining what has happened, what is happening and what is likely to happen. At the beginning of the year it looked as though Thailand could have headed for a yearly economic contraction; GDP was pointing towards a yearly contraction of 0.6%. However the military intervention has provided some clarity and the end of year growth looks much more promising, despite continued political challenges.

 

Dr. Narongchai Akrasanee

Dr. Narongchai confessed that since December 2013 he had been hoping for a coup d’état. Between November and May political conflicts were growing out of control. There was sporadic violence, casualties and the economy was being seriously disrupted. Hopes for a democratic solution had very much faded away. As a member of the policy board at the Bank of Thailand, Dr. Narongchai explained that there were no ways he could arrest the fall of key economic figures like consumer confidence, credit expansion and production. However, the military intervention on 22 May 2014 was able to turn the economy around.

Thailand has not been able to achieve a stable political system since the major change in 1932. Dr. Narongchai believes that attempts to balance ‘market forces driving growth’ with ‘social forces ensuring equality’ are behind this failure. Differences in opinion on how these forces should be prioritised have undermined Thailand’s democracy; should we have democracy and capitalism with accountability or with opportunity? So far, a suitable balance between both has not been found.

Past military interventions have ushered in periods of great economic change in Thailand. After coups in the 1960s, Thailand adopted market economics.  The coup of 1977 led by General Prem spurred Thailand’s industrialisation efforts throughout the 1980s. After the 1991 intervention, Thailand began the process of military intervention. In Thailand we see major economic changes taking place after military interventions. The 2014 military intervention will hopefully follow this lead and implement major reforms needed in the country. 

Thailand has developed strong links with Southeast Asian neighbours, and other countries in Asia and Oceania. Its volume of foreign trade in goods and services stands at about 1.4 times GDP, indicating a very open economy sized at about US$560 billion. Tourist arrivals now number about 27 billion. But because of the political crisis in the first half, growth this year will only reach around 1-2%.

Dr. Narongchai explained that Thailand is now in “Episode One: Military Governing.” The interim Constitution is the beginning-of-the-end of this period. Prospects are looking much better now. The military are making quick and efficient decisions, implementing reforms demanded by all sides and eliminating tensions on the streets. Investment promotion, factory permits and the rice-pledging scheme are no longer clogging the economy.

“Episode Two: Military Participation.” This aims to have government by December. This military supported government should retain the same open market principles attractive to foreign investors.

The government will begin the process of transforming the economy towards more value-adding and value-creating economic activities. They will aim for more integration with neighbouring economies in the GMS, ASEAN and East Asia. The transformation will be achieved by investment in the new learning and producing paradigm relying more on digital technology and a new generation of infrastructure which will provide increased connectivity with neighbouring countries. This will promote independent work and spur growth in many major cities around the country. We need an integrated system to allow the entire country and sector to apply rapidly evolving IT technology to improve productivity and efficiency. Total factor productivity and per capita income growth remain poor in Thailand. Thailand is stuck in the middle income trap, but this can be changed with improvements in productivity and use of IT technologies. Just as there were great advances after previous coups, the military will hopefully implement quick and efficient reforms to get this ball rolling.

Other issues include regulating migrant workers. There is a large market for migrant workers checked by supply and demand, but there are many opportunities for them to be exploited. Thailand must put in place a system which will minimise that exploitation.

Ensuring fiscal sustainability is also a priority. Sustainable growth and development cannot be achieved if the country continues to run deficits of more than 250 billion baht. Debt is approaching 50% of GDP if the rice-pledging scheme is included. Major tax reform, particularly for people with a lot of wealth, as well as the reform of state enterprises are on the agenda. Dr. Narongchai argued that Thailand needs sustainable growth for the health and well-being of its people. Ideally, this is done through representative government. But what is more important – and has been perpetually lacking in Thailand – is a system of good governance. Thailand’s problem is not necessarily bad government or politicians, but bad governance. Unless Thailand operates with good governance, it will be faced with political and economic instability for a long time.

 

The final step is “Episode 3: Military Oversight.” Hopefully with the military watching over democracy, accountability and good governance will be delivered.

 

Mr. Hiroshi Yakame

Mr. Yakame focussed on explaining the current viewpoints of Japanese companies investing in Thailand. He discussed the way that Japanese companies see the Thai economy after the coup d’état, their views on macro-economic direction going forward, and the major business risks of doing business in Thailand.

Japanese investment in Thailand has been very strong. Japanese investors have respectively made up 49%, 58% and 54% of total foreign investment into Thailand in the past three years. Between Q1 2009 between Q1 2014 total investment into Thailand was about 1 trillion baht, half of which was related to the automotive industry. According to a survey a few years ago, total sales revenue of all Japanese companies was about 40% of the nominal GDP of Thailand. In other ASEAN countries the ratio was only about 10%. This is relevant and impressive, as it shows how big the operations of Japanese companies are in Thailand.

Japanese companies find in investment in Thailand very attractive. In the 60 years since the Japanese Chamber of Commerce was established, there have been 9 coup d’états. Nevertheless, Japanese investment has been increasing. The first reason for this is that despite political instability, the bureaucratic system and investment laws have not changed dramatically. Second, security for foreigners and expatriates is always ensured. Third, infrastructure such as electricity, transport and industrial estates, is well developed. Fourth, regulations related to foreign investment are comparatively transparent for the region. Fifth, many companies, particularly automotive companies, are already well established in Thailand. Finally, Thailand is at the centre of the Greater Mekong Subregion, both politically and economically.

Japanese companies have not been hugely affected by the political crisis. In an April survey conducted by the JCC before the coup, Japanese companies were asked whether they had been affected by the anti-government protests. 17% responded ‘yes,’ 43% responded ‘slightly’ while 38% responded ‘no.’ Businesspeople and tourists in Japan have been scared off by the thought of martial law and coup d’état in Thailand. But Japanese companies, many of which have their headquarters in Rayong or Chonburi, have not been affected.

Since the military intervention in May, Japanese concerns about doing business in Thailand have decreased for a number of reasons. First, the junta has not intervened in the areas that makes Thailand attractive; public services, government services and public transportation, and public peace has been secured. Secondly, the junta has prioritised the normalisation of the economy, investment and industry. Third, Thailand still has good economic conditions. It has a low unemployment, inflation and interest rates. 

Thailand has many attractions, but there are still challenges for further investment and growth, such as the Middle Income Trap. To overcome this, the government will need further deregulation as well as fiscal and financial reform. Promotion of industry, technology and improved productivity is required. Tax reform, particularly a decrease in corporate tax, should be considered.  Overall, Mr. Yakame believes that new ways of thinking about balanced policies are required.

Finally, Mr. Yakame discussed the post-coup economy. Since the coup d’état in May, the SET has risen by about 9% while the Thai baht has risen by 1%. After previous coups, the economy has tended to regain confidence and grow quickly. This time around, Mr. Yakame warns that the case could be different. In 2006, the economy and stock price continued to grow after the coup. However, before then the GDP growth rate was about 5% on a year-on-year basis. This year, Q1 GDP was -0.6%. In 2006 the ratio of household debt against GDP was 47%, but currently the ratio is about 83%. This means that consumer confidence may not translate into increased expenditure.

 

Mr. Leigh Scott-Kemmis

Japanese investment in Thailand is a great success story. The Board of Investment strategy for building a manufacturing industry in Thailand ought to be congratulated. The issue is that this has not contributed to continual productivity growth in the Thai economy overall. This is a problem.

Mr. Scott-Kemmis noted that the Australian economic and trade relationship to Thailand is almost the opposite of Japan’s. Thailand’s trade with Australia exceeds Australian trade with Thailand. Similarly, in the last 2-3 years, Thai investment in Australia exceeds Australian investment in Thailand. This would not be the case with many other major economies, but it says a lot about how the Thai economy and corporate sector are developing.

Last year 920,000 – 1 in 25 – Australians visited Thailand, which is an extraordinarily high number. Thailand has done a tremendous job selling its beaches, temples and services as a tourist hot-spot for Australians. But, that has not translated into investment by Australian companies into Thailand. The reason for this is that a lot of the investment the BOI has tried to attract has been in the manufacturing sector, while Australia’s economy is largely focussed on the mining, services, and education sectors.

From a foreign investor’s point of view, the Thai government ought to be focussing on three major areas.

1)      Enforcement of Law: In the past decade, enforcement of law at the street level has deteriorated. This is simply a reflection of what is happening throughout the whole political and social system. Members of the Australian, United States and Canadian Chambers of Commerce believe that at the street level it is essential the rule of law is enforced, respected and durable. Without enforcement at the street level, the entire system from the bottom-up descends to anarchy. The military have focussed on returning the rule-of-law at the street level, but they must uphold this continually.

How do we get back to an effective rule of law at the top? Thailand is famous for is ‘work arounds,’ ways to bypass certain rules and regulations. To close down this ‘work around’ culture, the bureaucratic system must improve, laws (such as banking, investment and immigration) must be reformed and the rule of law enforced.

2)      Minimal transaction interference: In a bureaucracy, many of the government departments are given a wide berth when it comes to developing and enforcing their own rules and regulations (Customs, for instance). This eventually leads to higher transaction costs for businesses. When a business is in contravention of these rules and regulations, Mr. Scott-Kemmis explained that the bureaucracy is often the prosecutor, judge and jury which makes it very challenging for companies. The solution to this could be an Independent tribunal or ombudsman where businesses can appeal bureaucracy decisions and hopefully have a chance for a fair and positive outcome.

3)      Quality of skilled labour and infrastructure: Thailand has not been able to develop an effective vocational or educational training programme and now is paying the price. Australia, having a very strong education system, is particularly frustrated with this. Australian universities and TAFE colleges have a very difficult time opening campuses in Thailand despite a strong desire to do so.

The work permit system is also another area which needs to be looked at. If a company has an employee visiting from overseas, they technically require a work permit. They generally end up arriving on a 30-day tourist visa which in breach of the law. A 30-day business visa might be an appropriate solution to this issue. 

Thailand has one of the freest economies in the world, but unfortunately this hasn’t resulted in continual productivity growth. Mr. Scott-Kemmis believes the reason for this is the inability for Thailand to make changes in the law. The current government, with its ability to enact reform efficiently and decisively, can make a major contribution by focussing on fixing the rule of law, ensuring minimal transaction interference and improving the quality of skilled labour and infrastructure.

 

Dr. Supavud Saicheua:

The public and investors have greeted the coup with optimism on four grounds:

1)      It has averted political paralysis and unrest.

2)      There is an expectation that budget spending will be on time and focus on public-investment driven growth.

3)      Improvement in public confidence, translating into pent up consumption and investment confidence.

4)      Strong GDP growth in 2015. The Bank of Thailand expects growth of 5.5%, so we are anticipating a V-shaped recovery. There is a sense that 2015 will be a very easy and strong year for Thailand to recover.

However, Dr. Supavud does not agree with all of these points. While the military intervention has reduced unrest, how the process of reconciliation goes forward remains unseen. Will there be genuine political reconciliation and stability, or will there be another cycle of unrest? What will the Constitution look like? What will elections look like and who will win? These questions cannot be answered. In August 2015, these questions will be increasingly pertinent.

Public investment in transportation and other projects is expected to add up to 600 billion baht. Many of these projects are expected to be approved in the coming weeks. However, looking at the data in the past 15 years, there has been no evidence of public investment having ever led economic growth. The reason is:

1)      That both public and state enterprise investment add up to less than 6% of GDP.

2)      Investment has been very volatile.

3)      Public investment has grown less than 0.5% per year in those 15 years .

For these reasons, it cannot be an engine of growth. The successful case for public investment came in the 1980s when General Prem’s government made successful investments in Thailand’s eastern seaboard. Thailand is still enjoying the fruits of that inheritance now, but that inherence is starting to exhaust itself.

 

Dr. Supavud observed that in the early days after the intervention, the military government has focussed on a few major issues:

1.       Optimistic forecasts about GDP growth. This is good as it increases confidence. But it must also be followed by more solid action and a more precise plan to make it sustainable.

2.       The NCPO has distinguished itself from elected politicians who are perceived to be seen as corrupt and appear to waste money on populist policies.

a.       They have a zero tolerance of corrupt practises. Dealing with motorcycle taxis and other regularities are evidence of this.

b.      Scrutinising closely all procurement projects worth 100 million baht or more.

There is a delicate trade-off between ‘zero corruption’ and ‘scrutiny of spending’ which the military will need to balance carefully.

3.       Thailand has a conservative budget:

a.       2015 budget is only 2% more than that of 2014, which in real terms means it is smaller because inflation is running at 2.5%.

b.      The budget is deficit is smaller as a percentage of GDP which is a signal that there is a slight contraction.

c.       The investment budget is only a small increase in monetary terms, but probably a fall in real terms.

So, what the NCPO actually done in the past month? Expectations have been high, but on the ground it seems that their strategy seems to be more fragmented than orchestrated. It seems that the NCPO does not have an economic growth roadmap. How does Thailand make a living in the next 10 years?   

Finally, Dr. Supavud made some observations about the Interim Constitution. This is an important issue for investors:

1)      Number of days to get the Final Constitution approved: Maximum of 325 days, assuming the national reform council is established by December. That means that elections are unlikely to take place before December 2015.

2)      Article 44 gives wide ranging power to the NCPO chief. This power can change the course of events which increases the perception of uncertainty or risk.

3)      Article 35, provides a guideline on writing the new Constitution, which includes provisions for the private sector.

4)      The National Reform Committee has a much wider agenda than the Constitution Drafting Committee in 2006.

 

Question and Answer

Dr. Narongchai: For clarification, I will also outline the NCPO timeline. Now we have the interim Constitution, names of the members of the National Legislative Assembly will most likely be announced within two weeks. Government will be formed after that. As mentioned by General Prayuth, the government with military participation will be in place by September. The National Reform Council process will begin in August. The eleven Selection Committees, each with seven members, will be appointed by the end of August. The National Reform Council will begin in October, with a view of holding election by October 2015. The purpose of the NRC is to provide a forum for people to intensely argue all of these issues.

There is talk of governance and action by the NCPO, but there are still problems that seem to stand out. The NCPO are currently unaccountable and have not declared any of their assets whatsoever. This is surprising. Surely it would be a good idea for the NCPO to go down that route to gain people’s trust.  

Dr. Narongchai: That I cannot answer. At present there is no law that NCPO members must declare their assets. After the new Constitution this might change, as members of the government and NLA will have to declare their assets. This might be something that is coming.

Thailand has survived the three previous coups because the eastern seaboard has been such an engine of growth. If that is waning, what will drive that growth in the next 10-20 years? Does the NCPO recognise that as a priority?

Dr. Narongchai: Based on what the head of the NCPO has been saying you can read between the lines. The best guide is that he seems to follow the strategy and outlined in the 11th NESBD Development Plan which they will use as a foundation for the budget and parliamentary statements.

The new engine of growth will be regional development in the north and north-east, and improving their connexions with neighbouring countries, the GMS and other parts of the region. The 11th Plan has connectivity as a priority. Around the country now there are many cities growing fast; they are no longer seen as “north of Bangkok,” but rather are now central to the GMS.

The second engine of growth outlined in the 11th Plan is the emergence of a knowledge-based economy in Thailand. The crucial factor affecting this emergence is the digitalisation of society. At present, Thailand’s digital management system is in a mess. The recent decision to postpone the 4G auction was to leave time to put in place a comprehensive digital and ICT system. I am very serious about this particular matter. Looking back at history, Thailand missed industrialisation; almost 100 years after Japan, 40 years after Korea. I do not want Thailand to miss this digitalisation.

Energy and pricing, the labour and migrant sectors, and the fiscal and tax systems are also set for reform.

Mr. Scott-Kemmis: One of the issues which concerns the business community is that the memories from 2006 are still fresh. The coup-makers and the government following were clearly anti-foreign business. This did a lot of damage. So there is a real fear that this could happen again. So far, we haven’t seen any signs of that, but the fear still exists and may hold back investment.

Dr. Supavud: How do we make a living in the next 10 years? This should be something that we work together to crystallise a strategy that we all agree on. At the moment the BOI is working on some strategies, but not everyone knows about or agrees with these ideas. Should we continue to allow foreign multinationals easy access to Thailand, relying on them establishing industries, deciding what we should produce and sell to the world, further increasing Thailand’s export-to-GDP ratio further subjecting Thailand to global rather than domestic demand? Or should we set about creating strong and innovative domestic industries?

Another focus should be on how to ensure there are sufficient resources to sustain an industry, and also how to achieve the resource-environment balance.        We are running out of gas in 10 years, so should we work with the Cambodians in the joint-development area. Do we look towards nuclear power or alternative sources? Do we switch to a focus towards medical tourism?

Thailand’s future is not immediat

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