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Extracted from the Bangkok Post: Bangkok Post


FDI likely to fall as investors ready to flee




Foreigners yesterday poured scorn on moves by the Thai government to regulate foreign businesses by dismantling the widely used practice of using local nominee shareholders. ''If this government's aim is to scare away foreign investors, then I think they are doing a very good job here; they have the perfect strategy in place to do this,'' said Lance Depew, the portfolio manager of Quest Capital, a $250-million fund management company that has been very positive about Thailand even at the peak of the economic crisis in 1997.


''They are wreaking havoc on foreign investors, and investors are going to vote with their money on where they want to invest,'' he said.


The military-backed government's attempt to place restrictions on foreign ownership by clarifying the poorly understood 1999 Foreign Business Act has been bitterly opposed by most foreign investors. They claim restrictions would only exclude Thailand from the booming foreign direct investment flowing into the region.


''In the face of competition from so many other countries, this is nothing but negative for Thailand, and we may have to do more research on what the impact of these measures would be before deciding on the sovereign ratings,'' said Kim Eng Tan, an associate director for sovereign and international public finance ratings at Standard & Poor's.


''I have a feeling that things are not going to be very rosy from here on,'' he said, noting that S&P was studying the country's rating and there was a ''strong chance'' that the outlook could be lowered.


Under the changes that have made markets jittery, foreign investors will be given one year to sell down their holdings and up to two years to reduce voting rights to less than 50%.


The laws redefined alien business classifications, and gave a 90-day deadline for firms that use Thai nominees to disclose their holdings. A one-year deadline was set for them to comply with revised limits.


This move comes as the country's investment climate is already suffering from political instability, foreign ownership probes and recent capital controls.


Mr Tan said many previous investments in Thailand would have to be restructured. Some investors will leave altogether, even if the majority stick around.


Peter Van Haren, the chairman of the Joint Foreign Chambers of Commerce, said: ''We are very disappointed with the moves, but we still have a ray of hope that things will be amended when it goes through the various processes before it becomes a law.''


The cabinet will refer the changes to the Council of State, the government's legal advisory body, and it could be months before the law is formally enacted.


But the moves are seen as a step backward at a time when competition is intense for foreign direct investment. Thailand, which is already facing a protracted political crisis, saw investment applications in the first nine months of 2006 halved to $5.4 billion from the same period in 2005.


''What is Thailand doing? Countries like Vietnam are looking to relax foreign limits, and we are looking to tighten them?'' Mr Depew asked.


Other analysts were more vocal, saying that the interim government's poor understanding of business could have long-term implications.


''The main problem with this army-sponsored government represented largely by retired army generals is lack of experience in politics. ... Ministers are using a 'learn on the job' method. The result is simple _ confusing policies exposing their inexperience and hurting foreign investment, investor confidence, domestic consumption and the country's image [further],'' Vikas Kawatra, head of institutional sales at Kim Eng Securities, said in a note to clients.


''Imposing restrictions on FDI is simply wrong _ even though the intention behind the move is to punish the deposed PM Thaksin Shinawatra. I think these two steps aren't the last silly moves expected from this government.''


Citicorp Securities said hopes of a possible compromise were shattered, and called the moves the ''worst-case scenario''. It recommended its clients remain underweight in the Thai equity market.


Mr Tan of S&P agreed. ''Even in the best-case scenario I would say it is negative news for Thailand.


''In the short term people are going to pull out of Thailand and you will see less interest from foreign investors into Thailand,'' he said, adding that most foreign investors were looking for majority stakes to increase the efficiency of the companies in which they invest.

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