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Thai Standoff Threatens Foreign Investment

By on May 27, 2010 in Property News

The Wall Street Journal, 20 May 2010, By PATRICK BARTA and ALEX FRANGOS

Thailand’s standing as a major investment destination is coming under question as its government fails to resolve the country’s bloody political crisis and economic damage mounts.

Bangkok grew calmer Thursday, a day after hard-line protesters set fire to the country’s stock exchange headquarters, a major shopping mall, a TV station, and other locations. Several people died in the clashes Wednesday.

The crisis was already causing severe damage to Thailand’s economy before the latest spasm of violence. But the chaos has added a new dimension, forcing businesses to contemplate more-drastic steps to ensure safety of their employees and causing some foreign investors to wonder if Thailand’s deep social divides can ever be repaired.

Some companies were already considering moving employees to hotels near the airport so they can escape more quickly if street violence spreads, while others are shifting their foreign direct investment, or FDI, to other countries entirely.

“Unless the crisis is resolved, law and order restored and a credible process of reconciliation begun, Thailand will probably lose out in the FDI stakes for a long time,” says Manu Bhaskaran, chief executive of Centennial Asia Advisors, an economic consulting firm in Singapore. Even longtime investors are wondering “should I be engaged at all” in Thailand, says David Fernandez, a managing director at J.P. Morgan in Singapore.

Tüv Süd, a German company that conducts product testing and industrial certification, with operations throughout Asia, was about to make an acquisition of a Thai oil-and-gas-services firm when the protests intervened.

“Because of the instability we are holding off,” says Ishan Palit, chief executive of Tüv Süd’s Asia operation. With his German bosses generally eager to expand in Asia, those resources will now go to places such as Malaysia or Indonesia, he says. “Until two weeks ago, the view was still that it was going to come back and be all right,” he says. But now, “it’s gotten more serious.”

Thailand’s problems are “a bit more fundamental” than the past, adds Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. “It makes it difficult to justify major allocations to Thailand,” he says. “I can find other countries that are more attractive without having to worry about the political situation,” he says, including stock markets such as South Korea and Taiwan.

Thailand’s conflict stems in part from tensions between Thailand’s sizable rural underclass—who make up a majority of voters—and urban elites perceived to control the country’s key economic and political institutions. The protesters are led at least in part by former prime minister Thaksin Shinawatra, a tycoon who cultivated their support through populist policies and easy credit before he was removed in a 2006 coup. He lives in self-imposed exile to avoid imprisonment on a corruption conviction, but supports the movement financially from abroad.

Thailand remains a critical part of the global supply chain and an extremely important place for investors, with 65 million consumers and far better infrastructure for manufacturing than most of its neighbors. It has survived political crises before, including violence in the 1970s and 1990s, and is still on track to post gross domestic product growth of 4% to 5% this year on the back ofstrong consumer spending and demand for exports made far outside the conflict areas. The country could rebound quickly if a resolution is found.

But Thailand was already struggling to fend off less-developed, lower-cost, neighbors such as Cambodia and Vietnam in attracting FDI in recent years. For the past two years, it received less FDI than Vietnam, even though the latter’s economy is far smaller.

The country’s intractable political issues are contributing to the problem. David Simister, chairman of the Thailand unit of real-estate services firm CB Richard Ellis, says demand for office and industrial space from multinationals has been somewhat subdued since 2005, when protests first started rocking the capital in the leadup to the 2006 coup that deposed Mr. Thaksin.

Now the situation has reached a new level of seriousness, he says. “This is unchartered and the level of tension is much higher.” The company has moved its operations from central Bangkok to a suburban office space and set up 100 employees in temporary workstations.

Other companies have been struggling to reroute product shipments and supplies around conflict areas, while some staff are having a hard time getting to work because of the lack of public transportation.

“Virtually everybody is now being touched,” says Paul Quaglia, a director at Bangkok-based security consulting firm PSA Asia. Multinational companies are “are not running for the exits—but they’re starting to look at their maps to see where the exits are,” he says.

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