Just three years ago, as Bangkok played host to the annual Asia-Pacific Economic Cooperation (APEC) summit, Thailand's booming economy was the talk of the town. Leader Thaksin Shinawatra rode a wave of popular support as his economic policies reaped growth rates higher than 6 percent, and pundits anointed him the successor to regional leaders like Malaysia's Mahathir Mohamad and Singapore's Lee Kuan Yew.
Now the military has ousted Thaksin, and the excitement has shifted a few hundred miles east to Hanoi, which hosted the annual APEC summit last month. Vietnam enjoys Asia's second-fastest growing economy behind China and is finally set to join the World Trade Organization (WTO) after eight years of negotiations.
Vietnam's rise has not gone unnoticed in Thailand, where investors look longingly eastward and wish they could be as optimistic. But while the seemingly endless political gridlock in Bangkok may scare away new investment in the short term, some say this pit stop in Thailand's economic development may simply be a normal growing pain that will clearly define the rules for foreign investors and make the country's economy stronger down the road.
"When a country grows fast, eventually it will face a setback," said Kongkiat Opaswongkarn, CEO of Asia Plus Securities, Thailand's third-largest broker. "Vietnam will face the same thing one day. When you get a flood of foreign money, you need to take a close look to see what kind of investment you really want. In the long term, that's a positive."
Thailand's economy, built around superior infrastructure that has helped facilitate a thriving export industry, is more than twice the size of Vietnam's – for now. But the political events of the past year that led to Thaksin's ouster were fueled in part by opposition to his economic liberalization policies of privatization and free-trade deals that crystallized after his family sold its stake in Shin Corp last January to Singapore's government-run Temasek Holdings in a tax-free share sale.
Now, the new military-installed government, which has recruited many liberal economic thinkers, must figure out how to make the country attractive to investors while also justifying the Sept. 19 coup. For Thailand's new leaders, throwing the book at Thaksin and his personal business deals may be the best way to ensure public confidence while maintaining the economic status quo.
At the heart of the debate is a long-ignored provision to the foreign ownership law that says foreign firms cannot own more than 49 percent of a business in certain sectors. Although exceptions exist for investors who go through the country's Board of Investment (BoI),thousands of other foreign firms, including Temasek, skirted this law by taking stakes through nominee companies – firms established for the sole purpose of holding investments on behalf of other companies.
Since the foreign ownership law does not clearly define a nominee, Temasek's investment and a host of others are now in limbo. The government said it would specify proposals on amending the law in early January – and many Thai business leaders hope that an investor-friendly compromise can be reached.
"The most important thing is to clear up the definition on foreign holdings and nominees," Patareeya Benjapolchai, president of the Stock Exchange of Thailand, said in an interview. "If there is a clear definition and it's enforced according to the law, that will be good for all parties concerned. Even so, I think the definition should allow foreign investors here to be more free."
The questions surrounding foreign investment bear themselves out in BoI statistics. Through the first 11 months of this year, the board approved $3.8 billion worth of foreign investment, down 32 percent from $2.6 billion in the same period last year.
By contrast, foreign firms poured $6 billion into Vietnam last year, and investment officials say that could jump to $8.5 billion this year, a 42 percent increase.
Last month, Intel upped its investment in the country to $1 billion from $300 million. Nike and Canon have also expanded production.
"Vietnam is quite worrisome to us," said Pornsil Patcharintanakul, deputy secretary-general of Thailand's Board of Trade, a government-affiliated industry group. "Foreign investors are looking more at Vietnam, and even Thai investors are eyeing opportunities there."
Thai investment officials say the drop this year occurred because the country came off a banner year in 2005. But others counter by noting that many sectors are operating at full capacity and are in desperate need of new investment in order to grow.
"Talk to any businessman, and they say Vietnam is the next China," said a Bangkok-based Western diplomat who monitors economic activities. "Yes, the infrastructure may not be as good as in Thailand, but they have 84 million people, they work like dogs, and they really want the investment. In Thailand, they no longer care about economic growth and they can't figure out what they want."
The business community hopes that the new government can make firm decisions on where to lead Thailand so that certainty can return to the market and foreigners can once again feel confident putting their money here. A clearer political situation would also allow policymakers to spend time fixing greater long-term worries like overhauling the country's dismal education system and easing requirements for visas and work permits.
"Vietnam is on the tip of everyone's tongue, but Thailand is still much more developed in terms of infrastructure and service industries," said Peter van Haren, chairman of the Joint Foreign Chambers of Commerce in Thailand, which represents 10,000 businesses. "Unfortunately, there will be uncertainty here until the political situation is figured out."