Thailand Takes Off


During 10 turbulent years in Thailand, Kittiratt NaRanong tackled jobs ranging from president of the stock ex- change to manager of the national soccer team, an underperforming outfit nicknamed the War Elephants. Now, Kittiratt, 54, has taken on a task with significant implications for fund man- agers such as Templeton Emerging Markets Group Executive Chairman Mark Mobius, for market-leading companies such as Intel Corp. and Toyota Motor Corp. and for consumers of the world’s most important staple food, rice.

As deputy prime minister and finance minister, Kittiratt says, his task is to convince investors that the government can build defenses to prevent the recurrence of floods that last year inundated thousands of factories critical to global supply chains as well as a swath of the paddies that supply 29 percent of inter- national rice shipments. “We have learned from the pain and will not let this happen again,” he says.

As the waters slowly receded, they laid bare this Southeast Asian nation’s extraordinary economic importance to the rest of the world. In a BLOOMBERG MARKETS ranking, Thailand is second only to China among the world’s best emerging markets for investors. (See “Best Bets for 2012,” page 51.) The rank- ing looks at a series of measures such as market transparency and prospects for growth over the next four years.

Thailand’s tiny, $272 billion stock market as of Jan. 20 accounts for just 0.6 percent of the market value of world equities as of mid-January. As of 2011, its gross domestic product per capita was a mere $5,281, less than half that of Mexico’s. The country is prone to disruptions ranging from coup d’etats and civil strife to tsunamis and floods. And yet Thailand has developed such successful electronics and auto industries that it now produces from 35 to 40 percent of all computer hard disk drives and, in 2010, built more light trucks than Japan.

In agriculture, besides being the world’s biggest rice exporter, Thailand ranks No. 1 in rubber and No. 2 in sugar. The country that brands itself the Land of Smiles has consistently remained one of the world’s top 20 tourism desti- nations, attracting more visitors in 2010 than Greece. “Until these floods, people had no idea how important Thai- land is in the global marketplace,” says Thiraphong Chansiri, 45, president of

Thai Union Frozen Products Pcl. Thiraphong ’s Bangkok-based company, which owns the Chicken of the Sea brand in the U.S. and John West in Eu- rope, is the world’s No. 1 producer of canned tuna.

Even as the government of Prime Minister Yingluck Shinawatra begins spending a promised 480 billion baht ($15.2 billion) on dykes and post-flood reconstruction, it’s working on a longer- term goal: the transformation of an economy heavily dependent on cheap- labor exports into a more consumption- driven model. Its populist strategy is to give 67 million Thais more spending power by raising urban wages by 40 per- cent to about $10 a day and guarantee- ing farmers they will receive a price for their rice that’s as much as 44 percent above the market rate.

Such government initiatives, on top of the chaos caused by the deluge, could inflict a big extra cost on Thai-based manufacturers, rice exporters and their customers worldwide. “The issue is the timing, coming when companies have already been hit by the floods and the global slowdown,” says Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG. While Kittiratt predicts that Thailand’s economy will grow as much as 7 percent this year, Santitarn says the rate may be only 3 or 4 percent. The Thai rice price surged 28 percent from July to mid-November, when it reached a three-year high of $663 a metric ton. Asked if government policies would push up the price of Thai rice on global markets, Kittiratt says over a breakfast of chili-laced rice soup, called khao tom, in a Bangkok hotel: “I hope they do. Why should a bowl of rice in a restaurant cost only one-third the price of a bottle of mineral water?”

Templeton’s Mobius, who oversees more than $40 billion, is making a big bet on the government strategy’s paying off—and on the Thai economy. Although Thai stocks account for less than 2 per- cent of Asia’s total market value, they comprised 22 percent of the 11.6 billion euro ($14.9 billion) Templeton Asian Growth Fund as of Nov. 30—second only to Chinese stocks.

Mobius’s calculation that the floods wouldn’t sink the Thai economy is borne out by the numbers. In the fourth quarter of 2011, despite the floods, the SET Index jumped 12 percent to be- come the world’s fourth-best performer.

“Many investors have questioned our investments in the country,” Mobius says. “However, we have found good companies that could survive down- turns and rise even stronger afterwards. Those companies have now proven their resilience.”

Mobius isn’t alone is his optimism. As Kittiratt and Yingluck, Thailand’s first female prime minister, implement their reconstruction program, Thai companies such as cement makers and banks will cash in on a construction-led boom Former Prime minister Abhisit, far left, is critical of current Prime minister yingluck, left. this year, according to Aberdeen Asset Management Plc, Scotland’s biggest fund manager. “The building-materials sector is bursting at the seams,” says Adithep Vanabriksha, who helps man- age $4.5 billion from Aberdeen’s office in Bangkok, the Thai capital. Among his picks: Siam Cement Pcl and Siam Commercial Bank Pcl, two blue chips con- trolled by the Crown Property Bureau, which manages the assets of Thai King Bhumibol Adulyadej.

Thailand, the only Southeast Asian country never to be colonized, has come a long way in recent decades. A feudal absolute monarchy until 1932, it had a per capita income of just $200 as recently as the late 1950s, according to United Nations figures.

As the Vietnam War raged in the 1960s, the U.S., an ally of Thailand, built military bases, roads and ports. Successive Thai governments offered incentives, including tax breaks, to foreign investors who were also lured by a combination of cheap labor and, more recently, Thailand’s strategic location in a region of 575 million consumers. Toyota opened its first factory in 1962, and other Japanese titans, such as Canon Inc. and Sony Corp., followed.

In 1983, Cupertino, California–based Seagate Technology Plc, the world’s biggest maker of hard disk drives, began production in Bangkok. Western Digital Corp., its Irvine, California–based rival, followed suit, as did U.S. automakers Ford Motor Co. and General Motors Co. Hundreds of Thai companies sprang up to supply parts. From 1971 through 2010, Thailand’s annual GDP growth averaged 6 percent despite being buffeted by coups and financial crises.

As buoyant as the Thai economy is, the human and economic cost of last year’s floods has been immense. Some 800 people died, economic growth in 2011 probably plunged to 1.5 percent from a forecast 4.5 percent and total damage to the $355 billion economy could reach $41.5 billion, according to government estimates.

Thailand has a history of pulling itself back from the brink. In 1998, in the wake of the Asian financial crisis, its economy contracted 10.5 percent before rebound- ing to grow 4.4 percent the following year. Since then, the country has staged spectacular comebacks from a 2004 tsunami and a 2006 coup—and the debilitating political protests that followed.

While Kittiratt says the recent flood- related damage will be short-term, Thailand will always be threatened by inundation: After all, much of the Thai economic miracle takes place on flood plains that are just 2 meters (61⁄2 feet) above sea level.

Bangkok is at the best of times a watery place. The broad, brimming Chao Phraya River laps against many of the capital’s luxury hotels, sacred Buddhist temples, the gold-spired Grand Palace and even Siriraj Hospital, where King Bhumibol, 84, has spent the past two years receiving treatment for spinal and other ailments. The city and surround- ing areas are also crisscrossed by a net- work of man-made canals.

In July, torrential rains started fall- ing in northern Thailand. By October, reservoirs north of Bangkok became so full that authorities decided to release 9 billion cubic meters (318 billion cubic feet) of water into the Chao Phraya basin, the Thai heartland. An area larger than Greece became a world of water. Factories operated by companies such as Honda Motor Co. and Canon were swamped. Even those companies that stayed dry, such as Toyota, couldn’t escape the impact as their partsmakers went under.

The effect on companies’ bottom lines continues. On Dec. 12, Santa Clara, California–based Intel, the world’s biggest chipmaker, reduced its fourth- quarter revenue forecast by $1 billion, saying a shortage of hard disk drives as a result of the floods was cutting production of personal computers. On Jan. 10, Ford said its Asia-Pacific and Africa operations would post a loss for the same reason.

Japanese companies are faring even worse. Japan is the biggest foreign investor in Thailand; it pumped $3.15 billion into the country in 2010. In December, Toyota said the Thai floods would cost it $1.53 billion as the auto- maker slashed its profit forecast for the year ending in March by 54 percent. Nonetheless, Toyota Chief Executive Officer Akio Toyoda said in November the company wasn’t considering reducing investment in Thailand.

Other major Japanese companies are unlikely to leave either, says Setsuo Iuchi, president of the Japan External Trade Organization (Jetro) in Thailand. What they may do, though, is spread the risk by also looking at neighboring countries such as Indonesia and Vietnam for future expansion. “Many companies are now reviewing the lo- cation of resources,” Iuchi says. “They want to see a proper water-management plan from the Thai government.”

‘Thailand has a habit of bouncing back,’ says Bill Heinecke, who owns resorts and restaurants there.

On Jan. 10, the government an- nounced its plan. It approved 350 bil- lion baht for flood defenses.

Kittiratt, the man selling the plan, worked as a banker, stockbroker and as- set manager, overseeing $500 million, before founding his own company, zinc oxide maker Univentures Pcl. From 2001 to 2006, he served as president of the Stock Exchange of Thailand during a period when the market capitalization tripled, though he quit after failing to se- cure what might have been the country’s biggest-ever listing: Thai Beverage Pcl, a beer and whiskey maker that sold $865 million of shares in Singapore.

Kittiratt then spent a year managing the national soccer team. On his watch, the War Elephants’ global ranking im- proved to 98th from 122nd. Kittiratt left after Thailand failed to qualify for the 2010 World Cup. In dealing with the floods, he says, there’s no room for fail- ure. “Any administration that lets this happen again cannot survive,” he says.

Survival is a historical challenge for Thai governments. Since 1946, Thailand has been rocked by 15 successful or at- tempted coups and 28 changes of prime minister. The last coup, in 2006, over- threw the elected government of Thak- sin Shinawatra, Yingluck’s brother, for what the military claimed was corrup- tion. He fled the country in 2008 and is living in exile in Dubai.

Since then, Thai society has split, pit- ting the minority urban elite against the pro-Thaksin rural poor. Tensions culmi- nated in 2010 in violent street protests in which 92 people died. Yingluck, a 44-year-old rookie politician, assumed office in August. Her victory, which drew on support for her brother, made her the sixth prime minister in as many years.

Any new bout of revolving-door lead- ership could threaten flood-prevention efforts, Aberdeen’s Adithep says. “Such large projects require a lot of will and continuity, and there’s a risk that gov- ernment instability could be a con- straint,” he says.

A bigger risk to Thailand’s stability could be the royal succession. King Bhumibol is the world’s longest-reign- ing monarch, having ascended the lotus throne in 1946. As military and civilian strongmen came and went, Bhumibol remained Thailand’s sole stabilizing presence. Though his powers are limited by the constitution, he wields much influence, and many Thais regard him as semidivine. By comparison, his heir, twice-divorced Crown Prince Maha Vajiralongkorn, 59, has had to fight off unwelcome publicity about his personal life.

A more immediate concern is the per- formance of the present government. For Yingluck, who has a master’s degree in public administration from Kentucky State University, the floods were a baptism of fire. Seventeen years younger than Thaksin, she entered politics only last year after a career as an executive in the family’s property and telecommunications companies.

Abhisit Vejjajiva, opposition Demo- crat party leader and a former prime minister, questions Yingluck’s qualifications as a head of government. “It’s not a job you should learn on the job,” says Abhisit, 47, who’s a career politician.

Jetro’s Iuchi says his meetings with Yingluck gave him some confidence in her abilities. “She doesn’t have much experience politically, but I think she’s smart,” he says. Yingluck declined to be interviewed for this article.

Along the Chao Phraya River, hulking black barges wait to have their holds filled with Thai rice. In 2010, Thailand was by far the biggest rice exporter, shipping 9 million tons. During the same period, its nearest rival, Vietnam, shipped 6.7 million tons.

At a waterfront warehouse, veteran rice exporter Chookiat Ophaswongse says he’s worried. He predicts that in 2012, Thailand’s rice exports will plunge by 30 percent and may be overtaken by Vietnam. The reason: Apart from the disruption caused by the floods, the government’s willingness to pay above- market rates to farmers is making Thai rice noncompetitive, says Chookiat, 57, whose family-owned Huay Chuan Rice Co. has been trading the grain for 50 years. “Thailand will be in a very bad position,” he says. Prices had fallen 18 per- cent by Jan. 18 from the November peak.

Investor Marc Faber is more optimistic. He says he doesn’t expect the floods to have any impact on Thailand’s long- term prospects. In 2000, Swiss-born Faber, who oversees $300 million at Hong Kong–based Marc Faber Ltd., moved his family home to Chiang Mai, a 1,000-year-old walled city 700 kilometers (435 miles) north of Bangkok. In October, floods seeped into the teak house he built on the banks of the Ping River. Faber, 66, publisher of the Gloom, Boom & Doom report, says he’ll continue to invest in Thailand. “Some companies will have second thoughts about expanding their Thailand operations, but the majority will continue to operate here,” he says.

Similarly, U.S.-born Bill Heinecke, who owns hotels managed by Four Seasons Hotels Inc. and Marriott International Inc. in Thailand as well as his own Anantara-brand resorts, has made a bigger bet on the country than most. The son of a Voice of America correspondent, Heinecke, 62, gave up his U.S. citizenship in 1992 to take Thai nationality. Since then, his Minor International Pcl has been rattled by the Asian financial crisis, the tsunami and a political protest in 2007 that closed Bangkok’s two airports for a week, stranding 400,000 travelers.

During the worst times, Heinecke’s hotel occupancy rates plunged to less than 20 percent, he says. And yet his business has grown from a single hotel to 70 resorts; 1,200 restaurants, including a Burger King franchise; and 200 re- tail stores, including Gap Inc. outlets. Shares of Minor International, in which King Bhumibol owns a 2.2 percent stake, rose 12-fold in the 10 years ended on Jan. 20—five times the increase in the benchmark index.

In November, Heinecke went ahead with the opening of his latest, riverside Anantara hotel. This was at the height of the floods, with the swollen Chao Phraya reaching the edge of the hotel’s lawns. “We weren’t going to change the plan,” Heinecke says. “Thailand has a habit of bouncing back.”

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