With the Belt and Road initiative, more and more Chinese enterprises are seeking investment opportunities in Thailand, which is one of the pivot countries on the outbound waterway. Recent statistics published by the Board of Investment of Thailand (BOI) show that total foreign direct investment in Thailand amounted to 141 billion baht (about US$4.2 billion) in the first six months of 2017, representing a 24% increase compared to last year, and China ranks as the third-largest investor. Facing such unprecedented opportunities, Chinese entrepreneurs should also realize the existence of various risks and understand their characteristics, which will lead to better prevention and mitigation of risk.
The Report on Analysis of Country Risks, published by China Export & Credit Insurance Corporation (Sinosure Country Risk Report), evaluates investment risk factors in different countries and gives out grades from one to nine. Both the 2015 and 2016 versions of Sinosure Country Risk Report rated Thailand as fifth grade, which means “moderate political and economic conditions, business environment relatively unstable, moderate risk level for international environment”. In general, the political and legal risks of investment in Thailand include the following major aspects.
Political stability. The attitude towards foreign investors changes with the ruling parties and officials of a host country. It is not rare to see foreign-invested projects that have been properly approved being questioned or even rejected by newly formed governments.
Therefore, entrepreneurs’ ability to seize the right opportunities for negotiation of contracts, closing of deals and implementation of projects is very important. The military is very influential in Thailand and plays a major role on the political scene. Compared to the frequent changes of government before the military coup in 2014, the national order in Thailand has become relatively stable, but foreign investors should always stay alert and cautious when investing in projects or undertaking EPC [engineering, procurement and construction] works in Thailand.
It is strongly advised that Chinese enterprises should conduct extensive due diligence investigation on the local legal environment before making investment decisions, and ensure completeness and legal compliance of contracts, approvals and all other project-related documents in order to minimize the risks of being halted by a newly formed government for compliance defects.
Security. Muslim separatist activities have existed in the southern part of Thailand for a long time, with armed militants launching bombings, shootings, kidnappings and other terrorist attacks. Since the military came into power in 2014, terrorist forces have been suppressed to a certain extent, but there still have been several serious attacks, including the August 2015 Bangkok attack that caused more than 140 casualties. Implementing strict security measures to ensure the safety of personnel and property is not to be ignored by foreign investors in Thailand.
Governmental interference. The law of Thailand allows the government to carry out expropriation for the purpose of promoting public interest, with reasonable compensation being offered to the expropriated private party. The foreign exchanges system is relatively liberated in Thailand and all investment, profits, principal and interests of loans can be remitted back to the investor’s home country after tax payment.
International relations. Diplomatic relations between Thailand and its neighbours are friendly and there is not any obvious external security hazard.
Change of law. The overall legal system in Thailand is stable; from time to time the legislature authority issues new laws and regulations and the judiciary authority issues new interpretations of laws and regulations. It is advised that foreign investors in Thailand should, with the assistance of their legal counsel, follow up on newly promulgated or amended laws and regulations, and accordingly adjust their local strategies, to enjoy preferential terms and prevent non-compliance risks. For long-term projects (such as BOT and PPP projects), an appropriate change-of-law clause may be a game-changer and should be taken seriously during the drafting and negotiation phases.
Cost of law enforcement. According to Doing Business 2017, published by the World Bank, the convenience of “enforcing contracts” in Thailand ranks at 51st in the world’s 190 economies, while economies in the Asia-Pacific region rank 53rd on average. The “enforcing contracts” indicator compares among economies the time and cost to resolve a commercial dispute and the quality of judicial processes. One can see that the ranking of Thailand is relatively high, but foreign investors, whichever host country they are in, should always pay attention to creation and preservation of evidence to prepare for a rainy day.
Wang Jihong is a partner and Xu Yibai is an associate at Zhong Lun Law Firm
Zhong Lun Law Firm
33, 36, 37/F, SK Tower, 6A Jianguomenwai Avenue
Chaoyang district, Beijing 100022, China