Political uncertainty over planned reforms and public infrastructure projects are perceived as the top concerns for investors considering doing business in the country, according to the World Bank's latest Thailand economic monitor.
The World Bank projects that large Southeast Asian economies will grow an average of 5.1% in 2017, up from 4.9% in 2016. Even as its GDP growth is revised upward, however, Thailand still lags China, Vietnam, Malaysia, Indonesia and the Philippines.
Thailand's GDP is being dragged down by a slowdown in private investments. In August, "private investment as a share of GDP declined to a five-year low of 17.8% of GDP from already low levels", according to World Bank's August Economic Monitor.
Low levels of private investment have been a mainstay of the country since the 1997 Asian crisis and have never recovered, unlike in other countries in the region like Malaysia, Indonesia and Philippines.
As Thai companies spend less at home, they are shifting to invest in opportunities elsewhere in the region. The companies are increasingly looking to capitalise on cheaper labour in neighbouring countries and technology in developing markets. Eight Thai companies were included in the most recent ranking of top emerging multinational firms compiled by the Boston Consulting Group. Malaysia, Indonesia, and Philippines registered a combined five.
Thailand's outward foreign direct investment grew from US$500 million (16.7 billion baht) in 2005 to close to $12 billion in 2012, according to the World Bank.
"Thailand is well positioned [to take advantage of global growth] in terms of how well connected it is to markets, and its success on various export categories," said Sudhir Shetty, chief Asia-Pacific economist at the World Bank.
However, the country has been unable to get domestic investors excited about its prospects, he added.
The shift of Thai investors towards foreign investments will be an enduring trend as these investors continue to capitalise on opportunities in the CLMV region, particularly Cambodia, Laos, and Myanmar, said Mr Shetty.
"While the government is doing a lot to increase private investment on the regulatory side, making sure it does the right things on public investment can go a long way towards addressing it," he said.
Public investment will have a fundamental role in promoting a shift towards the domestic market, as they can promote or "crowd in" private investment in government projects.
Government investment grew 9.9% in 2016, but has remained lower than projected, partly due to challenges in implementing large infrastructure projects, according to the World Bank's August report.
The government has outlined 36 infrastructure projects representing a total investment of 896 billion baht, according to its transport action plan. Five major projects began construction in the first half of the year, according to the World Bank's October report, "Asia-Pacific Economic Update".
Keeping investments on track for the rest of the year, including in the recently approved Chinese high-speed rail projects, would go a long way to increasing investor confidence.
Infrastructure investment also has the capacity to address bottlenecks in productivity growth, which in turn could refocus investment from low wage countries like Myanmar and Laos into Thailand.
Productivity growth Thailand has fallen from 6.8% (1986-96) to 2.6% (2004-14), according to the World Bank. At the same time, regional players like Myanmar and Vietnam are catching up in terms of both education and infrastructure.
Chinese productivity growth stood at 10.5% in 2005, and 6.49% in 2016. Vietnam topped 26.5% in 2008, and 6.42% in 2016. Myanmar stood at 6.56% in 2016, and 11.8% in 2004.
"We can certainly do something about decreasing productivity growth. Good public infrastructure can help, but the Thai workers' skills gap needs to improve to ensure long-term growth, Mr Shetty said. "What seems to be true is that productivity is growing very rapidly among large firms, but is a problem for mid-sized firms. Why this is the case still a bit of a puzzle we are attempting to study."
Private investment levels are unlikely to turn around in the rest of the year, but are likely to do so in 2018, once public investment starts to crowd in private investment, said Mr Shetty.