As public spending is pumped up, capital flees from Thailand

As Thailand’s military government pumps up public spending, including big capital outlays on trains, roadways and other mega projects, Thai companies and individuals are increasingly sending their funds overseas. The capital flight threatens to limit the effectiveness of the junta’s fiscal push and signals to some analysts a lack of local confidence in the country’s economic direction under Prime Minister Prayuth Chan-ocha’s military rule.

Bank of Thailand data shows a clear rising trend of resident capital flight in 2016, with total outflows of nearly US$24 billion. Over US$20 billion of that amount was characterized by the central bank as direct or other investment overseas.

The outflows, which accelerated to over US$7.2 billion in December, dwarfed the US$5.4 billion recorded in 2015 and tipped the country’s balance of payments into deficit. Non-resident capital flows last year were comparatively negligible with a net US$200 million inflow.

There are competing theories about what is mainly driving Thais to allocate their funds overseas rather than invest at home. With factory usage rates stuck in the doldrums at around 63.3%, a reflection of the country’s sluggish export industries and slack domestic consumption hamstrung by high household debts of nearly 90% of GDP, analysts say there is little incentive for manufacturers to invest in new production.

Nearly half of Thailand’s industrial capacity is export-oriented. It is unclear how much of Thailand’s sagging shipments can be attributed to lackluster global trade and how much to flagging competitiveness.

While Prayuth’s junta has announced various schemes to diversify the economy and incentivize new investment, including a much ballyhooed but vague “Thailand 4.0” digital economy initiative and an executive order issued last January to clear environmental and regulatory hurdles for new special economic zones (SEZs) and power plants, few have translated into economic action.

Neither has the government’s promotion of “cluster” industrial development, a scheme which aims to lure pioneer investments in top tier industries like nanotechnology, robotics, and aerospace where it is not clear Thai labor has sufficient skill or knowledge.

Deputy Prime Minister Somkid Jatusripitak, a marketing guru and chief architect of the government’s “cluster” plan, recently rebranded as “super clusters,” hinted at a shift towards Thailand’s more obvious comparative advantage in a 400 billion baht (US$11.4 billion) “bioeconomy” state initiative that will aim to add value to cassava, tapioca and sugar cane crops through the production of biofuel, biochemicals and biopharamaceuticals.

The plan, to be implemented over a decade, envisions the creation of “bio-cities” in provincial areas to attract private investment to the farm sector.

With those fiscal schemes still largely unimplemented, the economy, officially estimated to have grown 3.2% last year and projected to hit 3.6% in 2017, has been sustained until now mostly by tourism, tax incentives and state handouts for the rural sector.

That has included a rice price support scheme that Prayuth’s economic lieutenants have strained to differentiate from the populist program initiated by coup-ousted ex-Prime Minister Yingluck Shinawatra. Yingluck now faces malfeasance charges for state losses estimated as high as US$15 billion. Prayuth’s subsidy scheme is equivalent to nearly 1% of GDP.

The government hopes such stop-gap measures will maintain enough economic momentum until large-scale infrastructure spending, including for modern railways in and around Greater Bangkok, comes online in the second half of this year.

While public investment surged in 2015, rising by 40% year on year, disbursements stagnated last year as many infrastructure projects failed to break ground due to regulatory tangles. Finance Minister Apisak Tantivorawong said on February 3 that the government expects this year to spend 240 billion baht (US$6.85 billion) on 20 existing and 28 new infrastructure projects.

The junta’s fiscal spending has been notable so far for its lack of “crowding in,” with many private Thai companies opting to invest overseas rather than in support of government ventures.

Major Thai corporations, including property developer Central Group, agro-giant Charoen Pokphand Foods and beer producer Thai Beverage, among others, have recently made major investments in neighboring regional countries rather than substantially expand their Thailand operations.

It’s unclear, however, how much of those investments are in pursuit of higher returns overseas and how much a hedge against perceived poor prospects at home.

This week’s surprise revelation that the Ministry of Finance’s treasury reserves plunged from 386 billion (US$10.9 billion) to 74.9 billion baht (US$2.1 billion) year on year in December points to the need for less state-led and more private-funded investment, while raising new concerns circulated on social media about the government’s underlying fiscal health. Thai public debt is officially low at 43% of GDP.

Apisak said reserves were cut to save on interest expenses, but the fall caused jitters so soon after graft watchdog Transparency International said in a report last month that Thailand’s global corruption perception ranking had slipped appreciably from 2015 to 2016.

Other private Thai funds likely fled perceived political risks related to the royal succession from recently deceased King Bhumibol Adulyadej to new King Vajiralongkorn Bodindradebayavarangkun. Prayuth’s management of the royal transition has been smooth, with no outbreaks of instability or military infighting, but there are still risks ahead as the new king consolidates his reign.

While Prayuth’s junta spends to revitalize the economy, it is clear many Thais see greener pastures and safer destinations for their capital abroad than at home under an uncertain new royal order and nearly three years of military rule.