VZCZCXRO7246
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #4753/01 2470923
ZNR UUUUU ZZH
R 040923Z SEP 07
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 9391
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/USDOC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 9751

UNCLAS SECTION 01 OF 02 BANGKOK 004753 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EAP/MLS 
STATE PASS USTR 
USDOC FOR 4430/EAP/MAC/OKSA 
SINGAPORE FOR TREASURY ATTACHE BAKER 
 
E.O. 12958:N/A 
TAGS: ECON EINV ETRD TH
 
SUBJECT:  IS FOREIGN INVESTMENT UP OR DOWN? 
 
REFTEL:  BANGKOK 4442 
 
¶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 
Singapore. 
 
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 
 
BANGKOK 00004753  002 OF 002 
 
 
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 
Thailand. 
 
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 
elections. 
 
¶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. 
BOYCE