Individuals considering taking their chances in Thailand’s tempting but troubled economy are facing several major risks, according to a former senior state attorney with the Office of the Attorney General of Thailand

Bangkok-based managing partner at Herbert Smith Freehills Chinnawat Thongpakdee (pictured) has told StrategicRISK that the most “uncontrollable” risk in Thailand is clearly political risk.

“This risk affects overall investment in Thailand and confidence of foreign investors towards the Thai government,” he said.

“Many key projects or policies have been put on hold because the current government in caretaker mode is restricted from making commitments or decisions which will be binding on the next government.”

Thongpakdee said that political risk was particularly dangerous for businesses that did not have appropriate risk-management plans.

“The investors engaging in mega projects with the Thai government (such as the country’s railway network, roads and water management that was pronounced unconstitutional by Thailand’s high court) could face some difficulties in managing their potential risks in several areas, including financial management, and asset/non-asset management,” he said.

Performance risk was also a major issue, Thongpakdee said.

“Many business operators in Thailand are faced with cost-push scenarios, which are caused by the increasing of costs and expenses in several factors such as manpower (from an increasing of the minimum wages), exchange rate fluctuation and so on,” he said.

The key regulatory change affecting most business sectors in Thailand was a large increase to the minimum wage in 2013, Thongpakdee told SR.

“This regulation was part of the populist policies of the Yingluck Shinnawatra government aimed to curry votes amongst grass-root labourers and workmen,” he said.

“This policy has not only affected the cost of doing business in Thailand but also the country’s inflation rate and international competitiveness.

“At the end of 2013, the Thai government issued the regulation to reduce personal income tax with a retroactive effect to the early of 2013. The government reasons that the regulation will enhance economic stability and fairness as well as domestic competition.

“This followed a reduction of corporate income tax in 2012, which allows investors to enjoy more of their profit and incomes. However, the change in the minimum wage rate to 300 baht [per day] affects all employers in Thailand since every employer must bear increasing costs for its manpower.”

Falling confidence

A reduction of consumer confidence with a corresponding dip in consumer spending was also problematic, Thongpakdee said.

“This could be a potential risk for investors in the consumer products sector and related sectors,” he said. “The National Economic and Social Development Board (NESDB) reported that in the face of uncertainty, private consumption contracted by 4.5% in the fourth quarter followed by a further reduction of 1.5% in January. In February 2014, consumer confidence hit a 12-year low.”

Thongpakdee cites information released by the Thai Chamber of Commerce that states that political instability has struck a heavy blow to the tourism and hospitality sector, with a 50% drop in Chinese tourist arrivals and a 20-30% drop in hotel occupancy rates.

“The businesses that felt medium impacts are property and air transportation,” he said. “The agriculture and food industries, particularly rice, tapioca, rubber and fisheries, have been indirectly impacted by the government’s policies, such as the rice-pledging scheme, and the falling prices of agricultural produces.”

Investors fleeing

A former member of the disciplinary committee of the Stock Exchange of Thailand, Thongpakdee observes that international banks have pulled millions of dollars’ worth of stocks out of Thailand.

“International investors have fled because of the political risk from the continued political instability in Thailand and lower return from business slowdown,” he said.

Indeed, the NESDB has cut its forecast for this year’s economic growth to 3-4%, mainly due to the prolonged political impasse, and Thongpakdee believes that this slowdown might prompt employers to downsize their operations, leading to disputes between employers and employees.

“Furthermore, if operators cannot keep their businesses afloat, defaults or breaches of business contract may ensue,” he said.

“In an employment dispute, there are several processes that need to be considered before dismissal of employees, otherwise there is a high possibility of being sued for unfair termination.”

Legal advice

Thongpakdee says that Thailand-based legal advisors are being kept busy providing legal advice on how to do business “in today’s even more challenging context”. They are also advising on “relevant law and regulations to foreign investors and other foreigners who do not have a clear image of the current situation in Thailand”.

“Some foreigners might only hear the news in their countries and might have been misled by the news,” he said.

“Legal advisors could assist them if they wanted to invest in Thailand right now on what they should do and which laws and regulations would be applied.

“Legal advisors could also be contacted by investors whose businesses have been affected by the situation already.

“Some of them might require legal advice on labour and employment issues due to manpower reductions and contracts executed in any government projects.”