Regional Focus

Thailand: bouncing back

Published: Mar 2014

Key facts

Land area:
510,890 sq. km1
67,448,120* (July 2013)
GDP (2012):
$336.0 billion2
Labour Force:
39.41 million1
Gross National Savings:
30.4% of GDP1

Dubbed the East Asian miracle in the early 1990s, due to its substantial economic growth, Thailand was considered one of the success stories of the region. During this period, the economy took great strides from its humble agricultural background as Thai society relocated to work in the newly developed industry and service sectors. In the late 1990s, however, cracks began to appear in the economy as the Asian financial crisis hit. This resulted in the virtual collapse of the Thai economy, brought on in part by the very policies that facilitated Thailand’s growth.

Current economy

Since the 1997 financial crisis, Thailand has undergone a transformation and now boasts a pro-investment, free-enterprise economy built on a solid infrastructure. Driven by a strong export market, which in 2012 accounted for 75% of its GDP, the Thai economy has recovered well. Manufacturing and agriculture provide the bulk of Thai exports, with the nation’s key trading partners including Japan, China, the United States and Malaysia.

Nevertheless, over the past year there has been a slowdown, which saw the Thai economy enter a recession in the first half of 2013. This was due in large part to tough global economic conditions which led to a decline in demand. Although this trend reversed in the second half of 2013, with increased demand leading to positive growth – and further growth is predicted to continue in 2014 by the Bank of Thailand (BoT) – Thailand’s economy remains heavily reliant on exports, which may pose a challenge to sustainable long-term growth.

An additional challenge facing the Thai economy is political instability – which has blighted the country since a military coup in 2006. Tensions reached the fore during the country’s political crisis of 2008-2010 and both consumer and investor confidence were badly affected. Political tensions surged again in 2013 and have spilled over into 2014, with mass demonstrations and protests on the streets of Bangkok. Jim Foley, Managing Director, Citi Treasury and Trade Solutions, Thailand, believes that “the current wave of political uncertainty again poses a danger because it affects the confidence of both local Thai corporates and offshore investors.” The overriding concern is that a continuation of political instability may ultimately deter potential investors and existing businesses may relocate.

Elsewhere, a report by The Economist Intelligence Unit points out that the “shortage of labour – both skilled and unskilled – has been a chronic issue for businesses in Thailand”. Despite a low unemployment rate, the report highlights the onset of an ageing population as a key reason for this shortage. Foley recognises this is a challenge, however is keen to put forward a more tempered view: “it is not at a point of crisis,” he says. “Companies can still get workers, but it is becoming more of an issue.” A solution to this may come with the further integration of the ASEAN region and the free flow of labour into Thailand. That said, Foley warns that “this could heighten the problem if members of the workforce choose to leave Thailand for other ASEAN destinations.”

Environmental risk is another challenge that faces corporates operating in Thailand as demonstrated by the floods of 2011. The economic loss caused by the disaster was vast: the World Bank reported it to be $45.7 billion between July and December 2011, with the biggest hit being taken in the manufacturing industry. Since the event the Thai government has invested in water management and flood preparation projects as a means to alleviate the issue, however, in 2013, 17 factories again had to be closed in the industrial zone due to flooding.

ASEAN overview

Thailand is the second largest economy in the Association of South East Asian Nations (ASEAN) and is on course to become a key part of the ASEAN Economic Community (AEC). Looking ahead it is likely that the further integration of the region will prove increasingly important for corporates operating in Thailand. For example, The 2014 American Chamber of Commerce ASEAN Business Outlook Survey stated 70% of companies operating in Thailand see ASEAN integration as helping their company do business in the region. A further 73% said that ASEAN will become more important to their companies’ worldwide revenues over the next two years.

A 2013 Study by the Economist Corporate Network cites economic growth rates, the size and spending power of the consumer population and the growing presence of business customers in the region, as the most attractive points of ASEAN integration. Furthermore, ASEAN will benefit more than just foreign MNC’s looking to invest in the region, many local Thai companies are keen to take advantage of the integration as they believe they have reached their growth limit in the domestic market.

Financial sector reform

A review of the Thai financial sector following the 1997 crisis concluded that it was weak and poorly regulated, and that this had assisted in deepening the crisis. The Thai government has since moved to resolve this issue, launching a three-phase final sector master plan (FSMP) with the aim of making the sector more efficient, competitive and transparent. Here follows a brief outline of each phase:

Phase I

Designed to overhaul the commercial banking licence system, phase I was completed in 2009 replacing the legacy system with a streamlined four licence structure. As a result of the changes a number of institutions surrendered their licence, having to either reapply or merge with another bank in order to re-obtain a licence. The reforms have led to “the significant consolidation of the Thai banking sector,” says Foley. To illustrate this, 83 financial institutions operated in Thailand in 2003, which by 2010 was reduced to just 38. “The reforms have made the banks stronger,” says Foley, “and can now benefit larger corporates by offering more operations and greater branch coverage.”

Phase II

Designed to build on the improvements made during phase I, phase II has looked to reduce system-wide operating costs while increasing competition and allowing for greater financial access. New providers have been permitted to enter the market and current banks have been allowed to expand their services. Investment is also being made in the technological infrastructure and in risk management which aims to further strengthen the sector.

Phase III

Scheduled to begin in the next few years, phase III will evaluate the results of phase II and build recommendations based on this.

Although the process is still ongoing, the FSMP has already achieved a number of its objectives including improving the infrastructure of the financial sector. Since 2010, Moody’s has declared the system stable, stating that “Thai banks are well positioned to withstand potential asset-quality challenges because of their strong capitalisation levels and increasing provisioning coverage.” “Thailand now has an efficient financial system,” agrees K. Wanida, Vice President Finance at PTT Group, “with good risk management and corporate governance, which is strong and not burdensome for the country and supportive of economic development in both normal and crisis scenarios.”

The strengthening of the financial sector has improved the operating environment for corporates in Thailand. Local banks now have an extensive branch network, which is important for day-to-day processes and “their increasing strength has allowed companies in Thailand to grow locally and offshore like never before,” says Foley.

The entrance of foreign banks into the Thai market has also given corporates greater choice in terms of relationship, solutions and technologies. Thai energy company PTT now uses both international and local banks depending on the services required. “Companies operating in Thailand now have a greater access to diversified financial services appropriate to demand,” says PTT’s Wanida. “There has also been a reduction in the costs of financial services.”

The single lending limit employed by the BoT, which caps commercial banks’ lending to 25% of their risk capital, still remains an issue for companies who require large amounts of funding, however. The PTT Group for example, which has 300 firms operating under its umbrella which require large capital investment each year has faced issues regarding this. To solve this issue, in 2013 PTT set up an in-house bank to secure financing. The in-house bank, which is located in Singapore, due to its greater regulatory flexibility, will not only solve this issue but also benefit in terms of financial costs and returns on investments.

Trapped cash

Like many countries in South East Asia, Thailand has capital controls regulating the inflow and outflow of investment in the country. The nature of these controls makes trapped cash an issue for corporates operating in the country. This was highlighted in a recent EuroFinance Corporate Treasury Network Survey where Thailand was ranked sixth globally, and first in South East Asia, among geographies where trapped cash is a concern.

“The primary reason for this,” says Gourang Shah, Managing Director, Citi Treasury and Trade Solutions, Singapore “is that corporates are unable to freely carry out cross-border inter-company lending in Thailand. Treasurers are therefore unable to include Thailand as part of their global cash pooling structure, making it difficult to move funds in and out of the country on a daily basis.”

Inter-company lending is not the only issue regarding trapped cash in Thailand. “Corporates need a large amount of documentation, which can include approval from the BoT before they can remove any significant amount of cash out of the country,” says Foley. “For example, any payment over $50,000 in and out of Thailand needs not only full documentation surrounding the payment but also a physical affidavit signed by the company.” Furthermore, profits made offshore have to be repatriated within 360 days.

Over the past year, a number of Asian nations have begun to relax their capital controls relieving the issue of trapped cash. “Thailand is lagging behind the pack on this front,” says Shah, “and unlike some of the other markets, Thailand has not yet been fully opened up and special approval is still needed to move funds out of Thailand.”

“The problem for Thailand,” explains Foley, “is that the majority of these measures were brought into law due to the 1997 crisis and although the BoT wants to change these and bring in new investors, it requires an act of parliament, which slows the process.”

Escaping the cash trap in Thailand is therefore a difficult job for any corporate operating in the country. There are, however, some simple steps that can be taken to assist. “Ensure open dialogue with your bank, legal/accountancy advisors and potentially the BoT and be transparent about your proposed operations,” advises Foley. “If you are a newcomer to the market, start these conversations very early and ensure that you create a structure which will allow you to release your money easily in the future.”

“Paying dividends more frequently is another way to alleviate some of the trapped cash issues in Thailand,” advises Shah. “Although this may not be something a company wishes to do regularly it is becoming an increasingly popular method of escaping the cash trap.”

Corporate treasury in Thailand

Large multinational companies that operate in Thailand generally employ a similar structure to those in other markets. They typically operate from a regional treasury centre which is based outside of Thailand, in countries such as Singapore or Hong Kong. “Thailand currently doesn’t offer the right incentives for corporate treasurers,” says Shah. The capital controls on cross-border inter-company lending and the limited liquidity in foreign currencies locally inhibit corporates to operate their regional treasury out of Thailand. I therefore don’t foresee Thailand becoming a big treasury centre for multinationals in the near future.”

Broadly speaking, local Thai companies base their treasury operations inside the country and manage operations from there. However large Thai companies are increasingly looking to move their treasury operations outside the country. “The capital controls and regulations in Thailand are driving this trend,” says Shah. “The move to an open market will allow companies to create and utilise a global cash concentration centre, which they would find challenging to do in Thailand.”

“This however isn’t for everybody,” he adds. “What is being discussed is how Thailand can become a viable cash concentration and treasury centre itself.” Thailand currently employs a withholding tax of 10% on dividends paid to non-residents and 15% on royalties and interest paid to non-residents which Shah believes is “one of the big deterrents to establishing a global cash centre in Thailand and is something which needs to be reviewed by local regulators.”

Payment methods and settlement systems

Paper is still king when it comes to business-to-consumer and business-to-business payments in Thailand. Although electronic payments are becoming increasingly popular in the country, there are still challenges. For instance, “you have to give beneficiary advice separately – the clearing systems for GIRO or ACH have no facility for exchange of name or reference details,” says Foley. In other words, the infrastructure for paperless payments exists – it just hasn’t been properly turned on yet.

“It still takes two days to get value across electronically, bank-to-bank,” continues Foley. “Because of this, many companies have an account with the majority of banks in Thailand. Customers are therefore able to make payments into an account of the same bank and sweep the funds from there.”

Bank of Thailand automated high value transfer network (BAHTNET)

BAHTNET is Thailand’s real-time gross settlement system (RTGS) for transferring high value amounts. Established by the BoT in 1995 the system is designed to reduce cost and systematic risk. Operated using SWIFT or the BoT’s own web portal, BAHTNET allows both domestic and cross-border payments. By design, high levels of liquidity are needed to operate the system. “It is reasonably expensive to use,” advises Foley, “but it does work and is part of the core payment infrastructure.”

Imaged cheque clearing and archiving system (ICAS)

The Thai government has recently revamped the country’s cheque payment and clearing system. Replacing the legacy cheque clearing system ICAS is a centralised cheque clearing system implemented nationwide in 2013. The system was built to shorten the cheque clearing cycle to one day nationwide and to enhance the efficacy of the process overall and meet international standards. “This is a fantastic system,” says Foley, “however they have not yet changed the legacy environment of having 71 clearing zones. This means that for any payments issued outside of the same clearing zone there is a 0.1% charge on the face value of the cheque presented.”

Bulk payment system

Operated by the national transaction management and exchange (NITMX), the bulk payment system allows for preauthorised inter-bank transactions that are large in volume and have a recurring payment period, such as wage payments. Membership of the NITMX is not restricted to local banks, allowing foreign banks, who are often preferred by large multinationals operating in Thailand, to gain a large share of the payments market, despite the restrictions they operate under.

Payment systems roadmap 2012-2016

A payments systems roadmap for 2012-2016 was created by the BoT following an evaluation of the strengths and weaknesses of the Thai payment systems alongside a comparative study of other countries’ systems to establish a framework for future development. Its vision is to ensure that Thailand provides payment mechanisms which facilitate efficient, stable and safe economic activities in both the public and private sphere domestically and internationally.

Comprised of three key objectives, the roadmap seeks to enhance the efficiency of the Thai payment systems, firstly seeks through development and promotion of access to the electronic payment systems to ensure that these are prepared for the integration of the AEC. Secondly, the roadmap seeks to reduce the risk associated with foreign exchange settlements and when using BAHTNET. Finally there will be a focus on increased consumer protection and the overall building up of confidence in the payment systems.

In October 2013, as part of the roadmap, ISO20022, the most advanced financial messaging standard, was adopted allowing for faster payments and better cash visibility for corporates in Thailand. Last year also saw a cross-border payment versus payment (PvP) link between BAHTNET and Hong Kong’s US dollar real-time gross settlement system announced. Set to launch in 2014, the link will allow for reduced risk in foreign exchange transactions and promotes safer and more efficient payment flows. Furthermore, Thailand is also monitoring global trends and is preparing its payment system to handle the use of the renminbi for international trade in the future.

  1. CIA World Fact Book
  2. World Bank

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