Thailand's last chance to build a future

The flight from Qingdao in China’s Shandong province took off late, and landed an hour overdue at Don Mueang, which was Bangkok’s main international airport before Suvarnabhumi airport was built. From the moment the plane touched down at 3am on a steaming summer night, within minutes of several other jam-packed flights, it was bedlam.

Don Mueang was woefully ill equipped for this flood of tourists – mostly young children and their weary parents on their summer break. The air con had packed up, leaving a thousand tired and very hot people to inch toward a pair of bored immigration officers. Total time from touchdown to stamped passport via 20 metres of immigration hall: three hours and 57 minutes.

That story seemed fresh later in the day, so it was wheeled out in a meeting with a Thai investment banker, Bangkok born-and-bred. “Oh, that’s nothing,” he said, happy to engage in a bit of one-upmanship. “The last time I came in from Singapore, five hours.” Another claimed an even longer wait, after arriving from Europe at 6am with his three children.

Viewed from any level, Thailand’s tatty infrastructure is both a daily nuisance and a serious drag on the economy. “It’s the big issue here, and we talk about it endlessly,” notes Ian Gisbourne, UBS’s Bangkok-based head of Asean research. Roads in poor condition and clogged with traffic are a problem for farmers and manufacturers keen to get their fresh and finished goods to consumers or port, and for anyone struggling to get to work.

This is not a new problem, as anyone who remembers the gridlock that could swiftly descend on the capital’s boulevards in the 1990s can attest. But the chaotic events of the past few years, some tragic and natural, others wearying and all too human, have exacerbated the problem.

The devastating floods of 2011 killed more than 680 people, affected at least 13 million, and caused total damage and losses of about $46.5 billion, according to the World Bank. Seven big industrial estates shut down, with exports grinding to a halt.

GDP shrank 10.7% in the October-December period of that year, the sharpest quarter-on-quarter contraction since records began in 1993. Foreign direct investment (FDI) in the manufacturing sector, already in decline when the floods struck, has “failed to recover to the average levels seen before 2011,” notes Krystal Tan, an Asia economist at Capital Economics in Singapore.

Then there’s the compounded damage caused by years of political instability. Thailand has had 12 prime ministers this century, with five leaders in both 2006 and 2008. Nor has the return – yet again – of the military to power in a May 2014 coup d’état helped matters much. A country that once boasted some of the best infrastructure in emerging Asia now finds that the likes of Indonesia and India are catching up.

Long-planned projects, in the pipeline for years, have stalled in large part because of the frequent changes in government, notes Tan of Capital Economics. A vicious circle has emerged, she adds, with private investment held back by a paucity of public investment and the lack of a coherent political vision, leading to a “marked deterioration” in infrastructure.

Investors, unsurprisingly, have reacted by scrapping or shelving projects. Inward foreign direct investment was $1.55 billion in 2016, according to data from Unctad, down from $5.7 billion in 2015 and $4.8 billion in 2014. FDI as a share of net capital expenditure was 1.6% in 2016, against 5.8% in 2015 and 4.8% in 2014. At the same time, money is fleeing the country at a record pace, with capital flight of nearly $24 billion in 2016, according to the Bank of Thailand (BOT). 

It can be hard to view at a glance an entire nation’s ongoing development, or lack of it. Sometimes only the most reliable data will do the trick. Look at the speed with which Thailand has lost ground in the World Bank’s annual Doing Business survey, tumbling from 17th place in 2012 to 46th in 2017, placing it behind Cyprus and Moldova. The country lost ground in every important metric, slipping from 14th place to 42nd in dealing with construction permits, and from 9th to 37th place in terms of corporates’ ability to access electricity. 

To be fair the government of Prayuth Chan-ocha, an officer in the Royal Thai Army who is now prime minister, does understand the link between better infrastructure and higher economic output. Constrained by feeble domestic demand and export growth, economic output is projected by the International Monetary Fund to expand by 3% in 2017 and 3.3% in 2018, having grown at an average rate of 3% over the last two years.

In January of this year, Prayuth’s cabinet unveiled $20 billion worth of public-private partnerships (PPPs) intended to drive growth, which it aims to jump-start by the end of 2018. The list includes seven projects each with a price tag of more than $1 billion, including a $4.3 billion high-speed rail line linking Bangkok with the town of Rayong, and a $2.3 billion highway stretching from the capital to Hua Hin, another resort on the Gulf of Thailand.

Three integrated light-rail PPP projects in the capital, costing $9.1 billion, will expand the scope of the Bangkok Metro, with the construction of a new east-west line, and a branch line linking the centre with the northwest suburbs. Another public-private partnership, costing $1.2 billion, will expand the rail link to Bangkok’s main Suvarnabhumi airport. And in July 2017, the government awarded a $332 million contract to Bangkok-based Power Line Engineering and China Construction Engineering, to expand the main concourse at Suvarnabhumi, part of a long-term plan to boost throughput capacity to 60 million people in 2019, from 46 million actual passenger arrivals in 2016.

Then there are three blockbuster non-PPP projects. In July, the cabinet approved a high-speed rail line linking Bangkok with the southern Chinese province of Yunnan via landlocked Laos. The first, $5.5 billion phase of the project will stretch 250 kilometres north from the capital to the north-eastern province of Nakhon Ratchasima, and is scheduled for completion by 2021. The line, viewed in Beijing as part of the Belt and Road Initiative, an attempt to redraw globalization in China’s image, will then extend south from Bangkok through Malaysia, culminating in Singapore. This line should also benefit the manufacturing sector, with Thailand’s transport ministry aiming to transport 5% of all cargo by rail by 2022, from 2% at present.

Many here view the project as further evidence of a country drifting away from Tokyo, and being absorbed into Beijing’s sphere of influence. To be sure, Thailand remains strongly dependent on Japanese investment. Sony Corp, Honda Motor Co and Toyota Motor Corp have major manufacturing facilities here, while Bank of Tokyo-Mitsubishi has a controlling stake in Bank of Ayudhya, the fifth-largest local lender.

According to the Board of Investment, Japan accounted for 22.2% of FDI in 2016, more than next three countries – the Netherlands, the US, and Singapore – combined.

But few refute the perception that Bangkok’s swing toward Beijing has deepened since the military came to power in 2014. “China’s the big player here in 10 years’ time, no question,” says a Thai fund manager. The China-Singapore line will be built by one mainland enterprise, China Railway Construction, and operated by another, China Railway Corporation, with Beijing providing the high-speed trains that zip along its route. More than a quarter of all tourist arrivals in 2016, 8.87 million out of a total of 32.6 million, came from China, according to data from the Tourism Ministry.

And few doubt that bigger and more efficient airports will be an added boon to the country’s sole powerhouse industry. Only eight countries processed more tourists in 2016 than Thailand, according to the World Tourism Organization, and only two – the US and Spain – generated more by catering to holidaymakers. “The tourism sector is huge, but if they get infrastructure right, it could double in size over the next decade,” says UBS’s Gisbourne.

“Tourism always saves Thailand’s economy when it runs into trouble,” says Brook Tellwright, who manages the Waverton Southeast Asian Fund, a $303 million stock-picking fund based out of Bangkok: “It is an extraordinarily strong revenue-generating mechanism – but in terms of its potential, it’s still just scratching the surface.”

The second big non-PPP project involves the long-planned $5.7 billion upgrade-and-expansion of U-Tapao, a joint civil-military airport south of Bangkok that serves the resort city of Pattaya as well as Rayong, the centre of Thailand’s auto and chemical industries. Thailand’s long-term goal is to usurp Singapore as the largest regional player for the maintenance, repair and overhaul of aircraft, with US aerospace giant Lockheed Martin and Europe’s Airbus keen to set up such facilities at the Vietnam War-era airport. It’s all very impressive in theory, though many of these landmark projects have yet to get off the ground. Successive Thai governments, both civilian and military, have shown a tendency to fall short of their promises. All of these infrastructure projects, PPP and non-PPP, are part of a far larger plan to plough Bt1.5 trillion ($45 billion) into the full-scale development of the nation’s eastern seaboard in the five years to the end of 2021.

This includes $4.5 billion worth of investment into high-speed rail, $11.5 billion for new cities, and $14 billion to expand the industrial base. The projects will be financed, notes Capital Economics, with a mix of state spending, PPP-sourced capital, government borrowing of Bt576 billion, and a much-delayed Bt100 billion infrastructure Future Fund, which was first announced in 2015.

Southeast Asia’s second-largest economy also faces a host of other, equally pressing issues. One of the more overlooked is the growing skills gap. Thailand ranked 54th of 70 countries for science education under the OECD’s latest Programme for International Student Assessment, or PISA, survey, which gauges national education standards. By contrast Singapore ranked first and Vietnam eighth. Bangkok has pledged to devote an additional Bt619 billion to bolstering vocational training, despite already spending Bt2.73 billion, or a fifth of its annual budget, on education.

Thailand’s main economic weaknesses “lie in supply-side issues such as the long-term competitiveness of the country, a skills mismatch, and underinvestment in R&D,” says Chantavarn Sucharitakul, assistant governor at the central bank. These “are challenges that do not have quick fixes, but require perseverance and stewardship in the pursuit of the much-needed reforms,” she adds.

Then there’s the banking sector. Cast your mind back 20 years and you find a country, and a set of financial institutions, brimming with confidence until Thailand’s shock currency devaluation, which triggered the Asian financial crisis and all but stopped the sovereign and its best lenders in their tracks. Singapore and Malaysia now boast banks with genuine regional ambitions, while Chinese lenders are pushing hard into south-east Asia, along with institutions from Japan and Korea. But Thai lenders are all but invisible across the region.

A stodgy economy and a weak lending market is hardly doing the industry any favours. In the past five years, Thailand had faced both cyclical and structural problems, says Noriaki Goto, president and chief executive of Bank of Ayudhya. 

“As exports play a big role in the economy, the sluggish global growth had substantial effects on the Thai economy, which translates to depressing manufacturing activities, low capacity utilization and slow private investment,” Goto says, adding that with one third of the labour force working in agriculture, low commodity prices a couple of years back also pulled down private consumption.

Non-performing loans (NPLs) comprised 2.94% of total outstanding lending in Thailand at the end of March 2017, up from 2.64% a year ago, and 2.55% at the end of 2015, according to BOT data. 

In particular, Thailand’s small and medium-sized companies (SMEs) are struggling, notes Moody’s Investors Service in a recent report on the Thai banking sector.

“We believe restructured loans in Thailand are mostly for this group of borrowers, and the buildup of restructured loans in the system is likely to continue at the current pace,” the ratings agency adds, flagging its concerns about asset quality. 

And even though Fitch Ratings expects NPLs to peak toward the end of 2017, the need to provision against rising losses is eating into earnings, as shown by the first-half results at both Bangkok Bank and Siam Commercial Bank, the biggest and second-largest lenders by assets.

Deep within the financial services sector meanwhile sits a ticking bomb, largely unobserved outside the country. Thai households, thanks to a consumer splurge on cars, houses and electronics goods, are more indebted than any of their regional peers, with household debt amounting to around 80% of GDP at the end of 2016, according to central bank data. That’s a boon for consumer loan collectors like Bangkok-listed JMT Network Services, whose shares jumped 150% through the first eight months of 2017, against a 4.9% rise for the Stock Exchange of Thailand. But it’s a potential nightmare for mainstream lenders and the central bank.

Two final problems stand out. The first involves that hoary old issue: democracy. Thailand’s military has talked of a possible general election in 2018, but it has yet to set a date, announce any preconditions for a poll, or to flesh out the role of the army under a future civilian government.

And the second is demographics. Most current and future problems stem from past decisions, often made by well-meaning politicians. In 2001 a new and fresh-faced prime minister, Thaksin Shinawatra, rolled out the high-minded Universal Coverage Scheme, offering healthcare to all. By 2011, the programme covered 98% of the population and had become so popular that to mess with it in any way would be political suicide.

Yet the government clearly did not foresee a brace of interconnected problems: rising costs, accelerated by a rapidly ageing population. The annual cost of the scheme has risen from Bt55.3 billion in 2003 to Bt165 billion in 2017; but it is on track to more than quadruple to Bt680 billion – equivalent to 3% of GDP – by 2024, and increase to Bt1.4 trillion by 2028. 

A cursory look at the data shows why: the number of Thai citizens aged 60 or over is set to rise to a quarter of the population by 2025, against 14% in 2016, and 6% in 1985, according to UN projections.

“Although the Thai economy improves cyclically, its structural issues remain – in particular, competitiveness and ageing society,” says Goto of Bank of Ayudhya. 

“Demographics is a huge issue in Thailand – people really don’t realise how big,” says UBS’s Gisbourne. “A lot of people have in recent decades postulated that China will grow old before it grows rich. Well, I’m afraid Thailand is going to beat them to it.”