Exclusive Interview: Thirachai Phuvanatnaranubala, former Thai Minister of Finance

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Thirachai PhuvanatnaranubalaConfidence in the first place

Thailand’s fiscal policy is a strong pillar for the country’s economy. To ensure stable future fundamentals, the Ministry of Finance is currently working on strategies to further raise productivity and competitiveness, and a major tax reform aims to keep the country attractive to investors.

During the last decades, Thailand’s economy has made impressive steps forward. The country, now labeled as a upper middle-income emerging economy, has a lot to offer for investors and is confident to overcome all difficulties caused by extraordinary circumstances – be it the current global economic worries or the latest flood –, which are only temporary setbacks, Thailand’s Ex-Finance Minister, wo left the government after a reshuffle of the cabinet in January 2012, says .

Q: The financial turmoil in Europe has indeed had an adverse effect on South East Asia’s economies and also a negative impact on the regional stock markets, including Thailand’s. However, you lately emphasized that this not caused by a negative perception of the Thai economy as such, as the country’s fundamentals and attractiveness remain strong. What are your reasons  for being so confident?

A: The current impact on Thailand is more from Mother Nature than from Europe with the flood. However, Europe has been on our radar screen for quite some time, and we had anticipated that it will always have difficulties, because on the political side the Union is too loose, but on the economic side it is too advanced. This is a contradiction that needs to be resolved, but Europe takes a long time to do things. We had anticipated the problems of Europe for the past two years, but it is not going to affect us very much. Our export to Europe is only less than ten per cent of the total exports, and even though there is some indirect impact through other Asian countries, the impact of the crisis itself will not be too strong. The only disturbance that we expect is through the financial market, whether it is the stock market or the bond market. But it will be only temporary, because the fundamentals in Asia are so well defined. What we are worried about most is that the attention in Europe at first was on sovereign debts, and too little attention has been paid to the state of the commercial banks that invest in sovereign bonds. If they don’t manage this, they could end up with a sudden loss of confidence within the bank market. Banks outside Europe may get a sudden fear in dealing with banks in Europe, and this would cause the emerging markets disturbance, especially for those that borrow heavily from abroad. But luckily, Thailand has very little exposure to banks from abroad and from Europe in particular.

Q: However, the Ministry has just cut the growth forecast for this year in the wake of the global economic turmoil and the floods. When do you expect the economic conditions to improve? What measures are being taken by the Ministry?

A: This was done mostly because of the flood. In fact, we may suffer a loss in GDP growth this year, it could be down as much as 1.5 to 1.7 per cent. This is a big shock. However, I would say the flood was a blessing in disguise, it will force the whole country to rethink how to manage the water, it seems like the whole of South East Asia will need to cope with global warming that result in more rain water that we experienced in the past, and we need to manage that. This will be a huge investment that we need, and it will be an investment to maneuver the water. I am looking at how we can try to change the crop pattern, such that in the last few months during the peak of the rainy season there will be no crop left in the fields, all the rice will be harvested and we have empty rice fields to store water, so that the water flowing its way down to the Gulf will be more manageable. But at the same time we will also have to strengthen the industrial estates to make them workable islands, and also lift up the roads to keep Thailand’s logistic operational in case of flood.

Q: Are you actively looking for partners who have expertise in managing water?

A: I think we will certainly seek expertise in terms of water management all over the world, and also, at the same time, this will be a good investment opportunity that we will open up to various investors. We are planning to spend a lot of money on water management, this can partly be taken over by private investors.

Q: Let’s talk about inflation. There are two major factors that have an impact on inflation, one is the new minimum wage – which is expected to cause a hike in wages of up to 40 per cent in certain sectors of the economy –, and the second is the subsidization of rice and other staples. How does the Ministry handle this?

A: Inflation will go up, but both of these factors will be a one-time adjustment. This is not a situation of excess demand leading to more inflation in later years, this is a matter of adjusting the costs.

Q: But raising the minimum wage, isn’t this sending the wrong message to investors in terms of competitiveness among other countries in the region?

A: If we would raise the minimum wage without doing anything else, it would certainly make us less competitive. What we plan to do also is to gear up the country, challenge the workforce to improve productivity and value-adding processes, to make goods more desirable, more marketable, and more efficient in terms of the production.

Q: How do you plan to increase productivity?

A: First, we will encourage companies to invest in new machinery, and grant them tax incentives to expand their capacities. We will also make loans available. In addition,  loan applications will require the borrowers to think how they can improve their productivity. We will also require that they take consultation to improve their management skills along the way.

Q: The government plans to cut the 30% corporate income tax rate to 23% in 2012 and to 20% by 2013. Can this also be understood as a signal to foreign investors?

A: Yes. That’s on track and is very aggressive.

Q: But this will also cause an income gap for the government.

A: Yes, this is why we have to rethink, especially after the flood. We are hoping – by making the corporate income tax more competitive – to attract more companies to invest in Thailand. But now, with the flood, we have also to convince them that we can manage water and drainage better from next year onwards. However, by having lower corporate income tax we expect more companies to set up shop here.

Q: What are your comments on the current monetary policy of the Bank of Thailand?

A: The Bank of Thailand is quite conservative and tends to slap on the break a little bit too much. But lately, throughout a discussion with the governor, they had relented by amending the framework for inflation bracketing. Previously, it was a band from 0.5 to 3 per cent, and they use core inflation, tracking it every quarter. I said that this is too inflexible, and they are now going to use 3 per cent as the midpoint and plus/minus 1.5 per cent. The average will be measured over 12 months rather than three months. This will give them more room and make them less jumpy. They had a meeting last monthand everybody expected them to cut the rate, but they didn’t.

Q: The Thai government has announced a major tax overhaul and is planning, among other things, to reduce incentives for personal investment. Critics have said this could hurt the financial and insurance sectors. Do you agree?

A: No, what we are doing is that we are going through a major tax reform. We are reviewing the incentives the Board of Investment gives, for example tax holidays for foreign direct investment and so on, because, as I said, we have reduced the corporate tax rate to be very competitive, and the need for tax holiday in the future may be less important. But also we are looking at all facets of taxation to ensure a comprehensive reform, we are looking at the regime of personal income tax, to be sure that we follow international practices. I am convinced that, at the end, people will see that personal income tax in Thailand is competitive as anywhere else in Asia. The reform will be completed within the next twelve months.

Q: Are the rising food prices favorable for Thailand or not? They are giving farmers more income, but, on the other hand, food imports are becoming more expensive.

A: I think we are not worried about higher prices for agricultural products, because there is a benefit: higher income for the farmers. We welcome agricultural prices being high, reflecting true costs and being fair to the farmers.

Q: But why is there subsidization for rice?

A: Right now, we are using a scheme of pledging, meaning that farmers pledge the rice, but they can also take the rice back. I admit the government is setting the price for pledging a little bit higher than the current market price, but it was for the aim of plugging the market price up, it was supposed to be part of the scheme to make sure that rice prices continue to be at a good level.

Q: Oil is a major part in Thailand’s energy mix. Are there any strategies to become less dependent on oil?

A: Well, what we are doing is that the government has set up a master plan for energy usage, and the aim is to make sure that renewable energy such as solar, wind, and biogas, becomes a bigger part of our use, as well as energy from garbage. Renewable energy will become a large part of our lives.

Q: The subsidies for renewable energy are indeed very competitive in Thailand. But I was told that this is meant to go down. So will there be lower subsidies?

A: The subsidies will continue to slide down because the cost of production will go down. That’s the whole idea of giving subsidies, to make sure that the businesses start and pass over the hurdle of high costs and then drive down the costs with more experience.

Q: Do you currently see any other major investment opportunities in Thailand?

A: I am trying to organize – and I hope this will be of interest for investors in the Middle East – to set up grain silos after international standards that will store rice. The rice stored in these huge concrete silos will have hot air circulation and can be kept as long as three years. This will be a way for us to manage our rice stock when we do international trade, and this could also be offered to governments in the Middle East as a food security measure. A part of these [rice) silos could be owned by investors from the Middle East, because I don’t think we are worried about foreigners owning rice silos as we would when they own land. This would be an investment opportunity. And we are also thinking of granting subsidies for this, similar as we do for solar power.

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Reading Time: 7 minutes

 

Reading Time: 7 minutes

 

Thirachai PhuvanatnaranubalaConfidence in the first place

Thailand’s fiscal policy is a strong pillar for the country’s economy. To ensure stable future fundamentals, the Ministry of Finance is currently working on strategies to further raise productivity and competitiveness, and a major tax reform aims to keep the country attractive to investors.

During the last decades, Thailand’s economy has made impressive steps forward. The country, now labeled as a upper middle-income emerging economy, has a lot to offer for investors and is confident to overcome all difficulties caused by extraordinary circumstances – be it the current global economic worries or the latest flood –, which are only temporary setbacks, Thailand’s Ex-Finance Minister, wo left the government after a reshuffle of the cabinet in January 2012, says .

Q: The financial turmoil in Europe has indeed had an adverse effect on South East Asia’s economies and also a negative impact on the regional stock markets, including Thailand’s. However, you lately emphasized that this not caused by a negative perception of the Thai economy as such, as the country’s fundamentals and attractiveness remain strong. What are your reasons  for being so confident?

A: The current impact on Thailand is more from Mother Nature than from Europe with the flood. However, Europe has been on our radar screen for quite some time, and we had anticipated that it will always have difficulties, because on the political side the Union is too loose, but on the economic side it is too advanced. This is a contradiction that needs to be resolved, but Europe takes a long time to do things. We had anticipated the problems of Europe for the past two years, but it is not going to affect us very much. Our export to Europe is only less than ten per cent of the total exports, and even though there is some indirect impact through other Asian countries, the impact of the crisis itself will not be too strong. The only disturbance that we expect is through the financial market, whether it is the stock market or the bond market. But it will be only temporary, because the fundamentals in Asia are so well defined. What we are worried about most is that the attention in Europe at first was on sovereign debts, and too little attention has been paid to the state of the commercial banks that invest in sovereign bonds. If they don’t manage this, they could end up with a sudden loss of confidence within the bank market. Banks outside Europe may get a sudden fear in dealing with banks in Europe, and this would cause the emerging markets disturbance, especially for those that borrow heavily from abroad. But luckily, Thailand has very little exposure to banks from abroad and from Europe in particular.

Q: However, the Ministry has just cut the growth forecast for this year in the wake of the global economic turmoil and the floods. When do you expect the economic conditions to improve? What measures are being taken by the Ministry?

A: This was done mostly because of the flood. In fact, we may suffer a loss in GDP growth this year, it could be down as much as 1.5 to 1.7 per cent. This is a big shock. However, I would say the flood was a blessing in disguise, it will force the whole country to rethink how to manage the water, it seems like the whole of South East Asia will need to cope with global warming that result in more rain water that we experienced in the past, and we need to manage that. This will be a huge investment that we need, and it will be an investment to maneuver the water. I am looking at how we can try to change the crop pattern, such that in the last few months during the peak of the rainy season there will be no crop left in the fields, all the rice will be harvested and we have empty rice fields to store water, so that the water flowing its way down to the Gulf will be more manageable. But at the same time we will also have to strengthen the industrial estates to make them workable islands, and also lift up the roads to keep Thailand’s logistic operational in case of flood.

Q: Are you actively looking for partners who have expertise in managing water?

A: I think we will certainly seek expertise in terms of water management all over the world, and also, at the same time, this will be a good investment opportunity that we will open up to various investors. We are planning to spend a lot of money on water management, this can partly be taken over by private investors.

Q: Let’s talk about inflation. There are two major factors that have an impact on inflation, one is the new minimum wage – which is expected to cause a hike in wages of up to 40 per cent in certain sectors of the economy –, and the second is the subsidization of rice and other staples. How does the Ministry handle this?

A: Inflation will go up, but both of these factors will be a one-time adjustment. This is not a situation of excess demand leading to more inflation in later years, this is a matter of adjusting the costs.

Q: But raising the minimum wage, isn’t this sending the wrong message to investors in terms of competitiveness among other countries in the region?

A: If we would raise the minimum wage without doing anything else, it would certainly make us less competitive. What we plan to do also is to gear up the country, challenge the workforce to improve productivity and value-adding processes, to make goods more desirable, more marketable, and more efficient in terms of the production.

Q: How do you plan to increase productivity?

A: First, we will encourage companies to invest in new machinery, and grant them tax incentives to expand their capacities. We will also make loans available. In addition,  loan applications will require the borrowers to think how they can improve their productivity. We will also require that they take consultation to improve their management skills along the way.

Q: The government plans to cut the 30% corporate income tax rate to 23% in 2012 and to 20% by 2013. Can this also be understood as a signal to foreign investors?

A: Yes. That’s on track and is very aggressive.

Q: But this will also cause an income gap for the government.

A: Yes, this is why we have to rethink, especially after the flood. We are hoping – by making the corporate income tax more competitive – to attract more companies to invest in Thailand. But now, with the flood, we have also to convince them that we can manage water and drainage better from next year onwards. However, by having lower corporate income tax we expect more companies to set up shop here.

Q: What are your comments on the current monetary policy of the Bank of Thailand?

A: The Bank of Thailand is quite conservative and tends to slap on the break a little bit too much. But lately, throughout a discussion with the governor, they had relented by amending the framework for inflation bracketing. Previously, it was a band from 0.5 to 3 per cent, and they use core inflation, tracking it every quarter. I said that this is too inflexible, and they are now going to use 3 per cent as the midpoint and plus/minus 1.5 per cent. The average will be measured over 12 months rather than three months. This will give them more room and make them less jumpy. They had a meeting last monthand everybody expected them to cut the rate, but they didn’t.

Q: The Thai government has announced a major tax overhaul and is planning, among other things, to reduce incentives for personal investment. Critics have said this could hurt the financial and insurance sectors. Do you agree?

A: No, what we are doing is that we are going through a major tax reform. We are reviewing the incentives the Board of Investment gives, for example tax holidays for foreign direct investment and so on, because, as I said, we have reduced the corporate tax rate to be very competitive, and the need for tax holiday in the future may be less important. But also we are looking at all facets of taxation to ensure a comprehensive reform, we are looking at the regime of personal income tax, to be sure that we follow international practices. I am convinced that, at the end, people will see that personal income tax in Thailand is competitive as anywhere else in Asia. The reform will be completed within the next twelve months.

Q: Are the rising food prices favorable for Thailand or not? They are giving farmers more income, but, on the other hand, food imports are becoming more expensive.

A: I think we are not worried about higher prices for agricultural products, because there is a benefit: higher income for the farmers. We welcome agricultural prices being high, reflecting true costs and being fair to the farmers.

Q: But why is there subsidization for rice?

A: Right now, we are using a scheme of pledging, meaning that farmers pledge the rice, but they can also take the rice back. I admit the government is setting the price for pledging a little bit higher than the current market price, but it was for the aim of plugging the market price up, it was supposed to be part of the scheme to make sure that rice prices continue to be at a good level.

Q: Oil is a major part in Thailand’s energy mix. Are there any strategies to become less dependent on oil?

A: Well, what we are doing is that the government has set up a master plan for energy usage, and the aim is to make sure that renewable energy such as solar, wind, and biogas, becomes a bigger part of our use, as well as energy from garbage. Renewable energy will become a large part of our lives.

Q: The subsidies for renewable energy are indeed very competitive in Thailand. But I was told that this is meant to go down. So will there be lower subsidies?

A: The subsidies will continue to slide down because the cost of production will go down. That’s the whole idea of giving subsidies, to make sure that the businesses start and pass over the hurdle of high costs and then drive down the costs with more experience.

Q: Do you currently see any other major investment opportunities in Thailand?

A: I am trying to organize – and I hope this will be of interest for investors in the Middle East – to set up grain silos after international standards that will store rice. The rice stored in these huge concrete silos will have hot air circulation and can be kept as long as three years. This will be a way for us to manage our rice stock when we do international trade, and this could also be offered to governments in the Middle East as a food security measure. A part of these [rice) silos could be owned by investors from the Middle East, because I don’t think we are worried about foreigners owning rice silos as we would when they own land. This would be an investment opportunity. And we are also thinking of granting subsidies for this, similar as we do for solar power.

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