Thailand – the country with the world’s highest number of recorded reigns – is experiencing the dawn of yet another political revolution.
In the aftermath of violent antigovernment protests between yellow shirts and the reds, the winning of Thailand’s first female Prime Minister Yingluck Shinawatra heralded just the beginning of a quest for political stability. “There is a saying among the old timers in this country: ‘Thailand succeeds in spite of its governments,’” Bangkok-based law firm Tilleke & Gibbins’ chairman and chief values officer David Lyman said.
According to Lyman, Thailand is a stumbling but functioning multi-party democracy with real politics on district, local, regional and national levels. “The road to democracy in any country, which Thailand continues to follow, is fraught with potholes, diversions, blockades, reversals and dead-ends. Democracy does not just happen—it is a long, painful process— never completed, never totally satisfying. It is certainly not the ideal form of government, but over the ages, [it] has been deemed the most acceptable until mankind can develop and adhere to a better form,” he said.
Respondents to ALB have echoed what seems to be the running sentiment of the day: Although the Thai political body with some of their parties, and local and national politicians are motivated by greed and self-interest rather than sound nation building, it is still democratic progress in the country. “If the political infighting is repressed and those now in the seats of power on all sides of the political spectrum finally begin to look outside themselves to what is in the best interests of the nation, then Thailand can and will focus on reinvigorating its unfettered non-stop development and address the short- and long-term social welfare of its citizens,” Lyman said.
Jackson Pek, vice president and general counsel, Asia-Pacific of global travel IT company Amadeus, noted that the lack of political stability has made it difficult for his company to attract top talent to their Asia Pacific headquarters. “Bangkok already lags Singapore, Hong Kong, Shanghai and other cities in terms of infrastructure and overall business environment.
When instability led to violence in 2010, it became even harder to attract people with the necessary skills to run our regional business,” Pek said. When questioned about the impact of unrest on business sentiment and on legal work, Pek qualifies that the vast majority of the legal work his team performs in the region takes place outside of Thailand, with airlines and companies in countries throughout the Asia-Pacific, and so his legal department has not particularly affected.
Like its people, the Thai economy’s resilience in adversity is demonstrated with strong economic growth. In 2010, Thailand's economy expanded 7.6 percent—its fastest pace since 1995, as exports were raised from their reduced 2009 level. GDP grew from US$109.6 billion ending 31 Dec 2009 to US$117.9 billion by Dec 2010.
Last year, ALB reported a fledging Thai capital market industry, struggling to get on its feet. In June 2010, only one company—petrochemicals firm Indorama Ventures—managed to list on the Stock Exchange of Thailand (SET). Juxtaposed against a total of six IPOs in 2009, the future looked bleak, though things picked up in the latter half of the year, with the stock exchange ending the year with a total of seven listings. Business and investor sentiment remained buoyant as Thailand's stock market grew almost 5 percent during the final quarter of 2010. The promising end results are encouraging. In 2011, automotive parts manufacturer Asia Precision filed a listing application for 75 million shares; while developer Zeer Property was also listed. “So far it has been very slow. But hopefully this year, there will be more; there certainly is room to expand,” Baker & McKenzie’s Bangkok office chairman Kitipong Urapeepatanapong said. “Thailand has good market infrastructure. The only concern is the political situation
which hopefully will abate as the government’s plan provides more stability. Then the market will pick up because there is so much liquidity here in Thailand,” he said.
The much delayed implementation of the SET’s five-year Capital Market Development Plan has faced many obstacles in its fruition. Not dissimilar to a number of policies in other sectors that need active management and attention from the government, the volatile political climate thwarted change, with many still in the pipeline waiting to be implemented by the newly formed government. The five-year development objectives stipulated by the SET include abolishing monopoly and improving the competitiveness of the bourse; liberalising its securities to promote market efficiency; reforming the legal framework related to the Thai capital markets; streamlining its tax system; developing new financial products; establishing a national savings fund to develop a culture of savings and investment; and developing a domestic bond market. A government report released in 2009 found that inadequate development of capital markets will impact Thailand’s ability to raise, channel and monitor resources efficiently, leading to a loss of growth opportunities, standard of living and prosperity. The trajectory predicted a stagnating market, stemmed from the loss of business confidence that needs to be reversed—a trend that the newly elected Shinawatra government is set to turn around. The capital market development master plan, developed by the ousted Thaksin government in 2008, was carried out by the new government in 2009, to mitigate the risk of those predictions becoming a reality. Market observers will observe further developments with interest as the Shinawatra government concentrates on repairing the economy.
“If this to-be government could form a government, I believe there will be more laws that will come into place because they need to pass the laws – the objective of creating order in a number of areas, for example, changing the tax regime, fixing the minimum wage, and assisting the agricultural industry and foreign investments – laws need to be passed to achieve that goal,” Kitipong said. According to Kitipong, Thailand’s small share in the IPO market has left plenty of room to expand. “There is an abundance of opportunities for many companies, but so far they don’t see the benefit of being listed and therefore don’t. To turn around this perception, he says there is a need for growth in investments where companies will raise capital, before going public. “Once the political situation stabilises, investors who are currently in wait-and-see mode will enter the market. This has been a problem in Thailand for a few years now, though I believe there will be greater investor confidence going forward,” he said. Although the progress of the capital market revamp master plan was stalled and interrupted by yet another bout of political unrest, many lawyers remain cautiously optimistic that stability will return and changes that are longoverdue will soon come into effect.
Legislation sparking change
Each year, one of the most notable research projects encouraging competition between countries is the annual Global Competitiveness Report by the World Economic Forum (WEF). The report has ranked Thailand as the 38th most competitive nation in 2010—a decline from 36th place a year ago due to recent political uncertainty. According to the report, Thailand fell two places this year and 10 ranks since 2006, finishing in the 38th position last year. Tilleke & Gibbins’ partner Cynthia Pornavalai said Thailand needs to enact reforms in foreign shareholder limitations if the country is serious about boosting foreign investment. “We still have laws from the 1970s, notably the Foreign Business Act (FBA) that restricts foreigners from certain industries under three categories. [Some of] these have not changed since the 1970s, but times have. Changing these laws, however, is frustrated by the perceived potential cost to Thai people and businesses,” Pornavalai said. “New laws have trickled through the Board of Investment and special laws like Regional Operating Headquarters, but ultimately the FBA is the oundation of all these laws. If we do not have a basic amendment of this, at least in the number of the lists and what is included therein, we are still going to face the same challenges in the future.”
Kitipong believed there will be more laws that will come into effect based on the sheer necessity of legislative reform. “The objective of creating order in a number of areas include: changing the tax regime, fixing the minimum wage, and assisting the agricultural industry and foreign investments,” he said.
DFDL Mekong’s David Doran agreed and noted uncertainty in the political arena won’t attract foreign investors. “The new government will need to live up to its commitment in the campaign during the general election,” Doran said. “The increase of minimum wages to 300 THB per day, has become a controversial issue in the business. It is speculated that this policy if implemented would result in the relocation of labor intensive business to other neighbouring countries who offer low costs of labor. SME will be hardest hit as most of them are labor intensive industries. This may result in business consolidations. M&A of small and medium-sized businesses will be prevalent.”
Pek provided an insight on legislative changes in Thailand from an in-house perspective. “For Amadeus, the most significant legislative change was with the Regional Operating Headquarters (ROH) program. About 10 years ago, Thailand introduced a number of tax and commercial benefits to companies that use the country as a regional operating base, in order to compete with Singapore, Hong Kong and other countries in Asia. Last year, the revenue department reviewed and improved the structure and benefits of the program. Amadeus has been an ROH company since 2006 and intends to continue to base its Asia-Pacific operations from Bangkok if incentives such as the ROH program remain.”
Amadeus, a European company with its Asia-Pacific headquarters in Bangkok, represents the view of other Western and foreign companies with offices there. “The greatest obstacle to Thailand's further development is widespread corruption,” Pek said. “Some commentators even go as far as saying that corruption is a primary cause of political instability, inadequate infrastructure and negative business sentiment. Thus, until the issue is taken seriously, Thailand will likely not advance at the same pace as neighbor cities vying for foreign investment.”
Private sector involvement
Strong performance in M&A activity and growth in the power industry, with a special focus on renewable, looks set to continue through the next 12 months in Thailand. Although a number of ALB respondents hold the view that the majority of deal value amounts are too small and the time taken to close a project takes too long, most believe the country has come to realise the importance of foreign investment with economic growth. Thailand has through the years relaxed in its restrictive investment laws and regulations, favourably positioning Thailand as a prime market for crossborder M&A activity. “Continuing the trend toward investment liberalisation, the Bank of Thailand and the Ministry of Finance will implement the second phase of the Financial Sector Master Plan over the course of 2010 to 2014, which will grant waivers on income tax, specific business tax, and stamp duty for earnings on merger and acquisition activities,” Pornavalai said. “However, these waivers, coupled with the driving force of increased competition, have also pressured local enterprises to consider merging with each other in order to strengthen and prevent takeovers by foreign firms.” Though reservations aside, Pornavalai believed that Thailand remains a highly-viable option for foreign investment, and M&A activity is expected to play a prominent role in the Thai marketplace.
Lawyers have also called for urgent action to improve the existing framework for infrastructure models and legislation. “Another change that is long-overdue is projects done in the PPP model – a law needs to be passed for the private sector to participate with the government,” Kitipong said. “If the government wants to implement a big infrastructure project, it has to create certain laws to allow them to move quickly. They have to also adopt the Capital Market Development Plan, where they have to demutualise the stock exchange, enact a new law to enhance the stability of the market, M&A and so forth. If they want to adopt these, they will have to pass many laws. These laws are in the pipeline, waiting for endorsement from the government.”
“I think the new government will push through the proposed PPP law to facilitate major infrastructure,” DFDL Mekong’s head of the corporate and commercial group Rashane Leerabandhu said. The firm believes the new government will push through major infrastructure projects, including the Dawei project and logistics infrastructure, including the muchheralded rail project. According to Leerabandhu, project works in the area of infrastructure and M&A will dominate the market in the years to come – contingent on a stable political environment going forward. “A lot of uncertainty in political arena will make obtaining foreign investors attraction more difficult. Despite the fact that the new government has the support from the overwhelming majority, there is potential resistance from various groups in Bangkok,” Leerabandhu said. “Businessmen feared that yellow shirt will stage a protest against the government.”
An optimistic outlook
Development across a myriad of sectors have seen improvement, primarily in coal and hydro projects, with a flood of financings waiting completion within the next one to two years. Industry and export for food, power and infrastructure and property have remained strong and are predicted to continue their upward trajectory. Although the performance of the stock market has been slow, many are hopeful that things will pick up. FDI trends have followed suit with the rest of Thailand’s neighbours , with greater levels of inbound commitments from ASEAN, China and the Middle East with fewer coming from Western nations. These have come in droves in the form of M&A instructions for law firms based in Thailand. Although Thailand has a number of major international players in the market working through alliances with local firms – namely Norton Rose, Linklaters, Allen & Overy, Baker & McKenzie and Clifford Chance – it seems unlikely that Thailand will open up its legal services market further to foreign firms in the near future.
In February 2011, Thailand announced lifting its state of emergency restrictions. As it’s an active member of ASEAN currently preparing to align with regional counterparts targeting for the upcoming ASEAN 2015 Economic Integration, Thailand is eager to come to the party. These positive steps are reinforced by the growing number of bilateral and multilateral free trade agreements. Despite the political rumblings that have transpired over the past three years, there are many positives that can be drawn from the experience. Law firms are kept busy and unemployment is almost unheard of. “There is a labor shortage of both skilled and unskilled people and foreign law firms are increasingly looking to capture a slice of the pie, as instructions for Thailand gain momentum. The Thai Baht is strong; exports are up and were not affected by the political events of 2010. The financial coffers of the nation are managed conservatively with large foreign exchange reserves. Inflation is moderate and under control, subject to the global economies,” Lyman said.
“Amazing Thailand” is no longer just an outpost—there are improvements in national multi-lane highway networks, expanding electricity grids, irrigation systems, modern seaports and airports, expansive hospitality industry infrastructure, cell phone users and networks, computer user’s internet and social network coverage. Bangkok’s expressways, Skytrains, underground subway systems and the skyscraper skyline of this capital city shows the Bangkok today—a city of about 14 million inhabitants, and a number of upcountry provincial capitals have transformed themselves far beyond imaginations of a few decades ago. The country is a tourist Mecca, where they arrive at international airports across the land, at record levels. “So just because the Thai political body and some of their parties and local and national politicians are motivated more by greed and self-interest than sound nation-building, is no reason to give up on the democratic progress in this country,” Lyman said. “If the political infighting is repressed and those in the seats of power, on all sides of the political spectrum, finally begin to look outside themselves to what is in the best interests of the nation, then Thailand can and will focus on reinvigorating its unfettered non-stop development, addressing the short- and long-term social welfare of its citizens.”
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