Drop in FDI due to structural woes, says KKP

Drop in FDI due to structural woes, says KKP

Lack of competitiveness, innovation haunt economy

Continuous foreign net outflows from Thailand's stock market are not caused by headwinds to the economic outlook, but rather the country's lower competitiveness and structural economic problems, says KKP Research.

Foreign investors have been net sellers of Thai stocks since 2013, with a combined value of more than 800 billion baht.

Foreign investors have also gradually reduced foreign direct investment (FDI) in Thailand relative to other Asean countries.

KKP Research by Kiatnakin Phatra Financial Group reported that stock markets worldwide have sharply declined from earlier in the year because of the pandemic, especially in economies that rely on tourism and exports to a high degree such as Thailand.

Foreign investors were net sellers of local equities worth 227 billion baht on a year-to-date basis as of July 31.

The research found that foreign investors have continued their net selling of Thai stocks for more than seven years, for a total of 800 billion baht, contrary to local institutional investors, who have accumulated local equities.

The main difference between foreign investors and Thais is that foreigners have more investment options around the world, while most Thai investors stick to the domestic stock market because of limited conditions for global investment, such as a lack of knowledge about global products.

Foreign exchange is another factor: Thais mostly use the baht to trade, whereas their foreign counterparts have options in terms of foreign currencies to trade global investment products.

Southeast Asia's second-largest economy used to have a high proportion of FDI, averaging 44% during 2006-10, but the ratio has declined to 14% at present.

Investment made by foreign manufacturing operators continued to drop during 2006-10 at an average of US$10.83 billion a year to $7.26 billion a year at present.

These factors not only pressure returns of the Thai stock market, but they are also a warning that Thailand is facing economic turmoil, which may cause future returns to drop sharply in the long run or on a permanent basis, KKP Research said.

CONTINUED DECLINE

At the end of the day, long-term economic growth prospects are the key factor in attracting foreign investment inflows. Foreign investors are showing less interest in Thailand and opting to invest in countries with higher growth potential.

Thailand's economic growth has continued to decline from an average of 7% growth before the 1997 financial crisis to a 5% average during 1999-2012, according to the research.

Average GDP growth over the past seven years was 3%. GDP per capita has also seen slow development after the 1997 crisis relative to other countries, subsequently entrenching Thailand in the middle-income trap.

Economic growth potential has deteriorated as a result of prolonged low private investment, subsequently resulting in a decline in return on investment in the domestic stock market, as well as making business operators lack competitiveness and innovation, the research house said.

Ultimately, domestic political instability and the uncertainty of continued economic policies have affected the outlook and investors' decision-making.

The ratio of investment to GDP in Thailand is just 20-25%, below the average for countries at a similar development level, which show an investment ratio of 30.5% to GDP.

SET-listed firms experienced a decline in capital expenditure, from 16% a year during 2004-09 to 1.6% at present. Industries that have seen a significant decrease in capex include energy, construction, transport, IT distribution, electronics and automotive parts.

Only industries related to tourism such as hotels, restaurants, retail, healthcare and property are able to maintain investment growth in line with past performance, reflecting how Thailand's economy must rely on tourism and services while output of the real sector and manufacturing has continued to decline.

LOSS IN CONFIDENCE

Besides lower economic growth and manufacturing output, the ageing society, reduced consumer purchasing power, higher labour costs and Thai firms' ambivalence to changing global demand are other factors discouraging investment in Thailand, KKP Research said.

While big companies lack incentives for competition and investment opportunities, state policy does not promote free competition and fairness, with the government investment structure failing to motivate the private sector to increase investment.

KKP Research says foreigners' unwinding of their investments in the Thai stock market is not because of short-term market sentiment or the coronavirus pandemic, but is rather due to a loss in confidence in the potential of Thailand's economic growth, which has structural problems in many dimensions, especially at the low investment level.

Low investment will be a crucial factor causing Thailand's economic growth to stay at a weak level in the long run, with uncertainty over economic policy, recurring political conflicts and a lack of proper protection of intellectual property depressing future growth momentum, the research house said.


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