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Foreign Direct Investment (FDI), a key barometer for economic growth for developing countries, has seen a decline of about 2% in 2023, with Thailand’s share of FDI inflow declining among the highest in the world, according to latest data release by United Nations Conference on Trade & Development (UNCTAD), with ASEAN continuing to remain in the positive trajectory witnessing a 1.2% uptick in its FDI to US$ 226.3 billion.
UNCTAD, in a report released recently said that global FDI in 2023 decreased marginally, by 2%, to $1.3 trillion. This headline figure was affected by wild swings in financial flows through a small number of European conduit economies; excluding the effect of these conduits, global FDI flows were more than 10% lower than in 2022.
The global environment for international investment remains challenging in 2024. Weakening growth prospects, economic fracturing trends, trade and geopolitical tensions, industrial policies and supply chain diversification are reshaping FDI patterns, causing some multinational enterprises (MNCs) to adopt a cautious approach to overseas expansion.
However, MNC profit levels remain high, financing conditions are easing and increased greenfield project announcements in 2023 will positively affect FDI. Modest growth for the full year appears possible.
Thailand the Worst
Among ASEAN members, Singapore remained the largest FDI destination, rising 13% to nearly US$ 160 billion and Vietnam gained 3.4% to US$ 18.5 billion, while others experienced declines following the broader global trends.
Thailand saw the sharpest decline with a 59% decline in FDI from the numbers seen during 2022, the data from UNCTAD showed. During 2023 total receipt of FDI into Thailand stood at a mere US$ 4.5 billion, only US$ 500 million more than those received by Cambodia and far below those seen by Indonesia, Vietnam, Malaysia and the Philippines.
The chart below shows the details of each of the ASEAN countries receipt of FDI in 2023.
This dip comes at a time of political uncertainty seen in Thailand during 2023 as the county’s politics was in limbo for months after the May 2023 general elections that led to a hung parliament with no clear majority to any political party.
The May 2023 elections saw Move Forward party get 151 seats, while Pheu Thai party managed to get 141 seats out of the 500 seats in the lower house of the parliament. Negotiations to form a coalition eventually led Pheu Thai party to be able to form a government on August 22, 2023, but the cost of the protracted negotiations meant that the Fiscal Year 2024 budget, that was to be implemented by October 1, 2023, did not pass the parliament until February 2024.
A delay in the passage of the budget and the government policies meant that foreign investments were on hold until that time and it was only in September 2023 that the government’s policies were announced.
The Board of Investments (BoI) has come out to announce earlier this month that the number of companies that have filed for BoI privileges stood at 1,412 applications for investment promotion in Thailand during the first half of 2024, representing an increase of 64% over the same period of 2023.
During the 6-month period, the combined value of the applications came to 458.4 billion Baht (US$ 12.8 billion), up by 35%.
Investments in 5 target industrial groups registered the highest growth. They include
- Electronics and electrical appliances (139.7 billion Baht)
- Automobiles and automotive parts (39.9 billion Baht)
- Agriculture and food processing (33.1 billion Baht)
- Petrochemical and chemical industries (25.3 billion Baht)
- Digital sector (25.1 billion Baht).
As for foreign direct investment (FDI), there were a total of 889 FDI projects, an increase of 83% over the same period of the previous year. The value of FDI applications increased by 16 percent to 325.7 billion Baht.
The BoI said that Singapore was the largest group of foreign investors, with a combined investment value of 91 billion Baht, followed by China, 72.9 billion Baht; Hong Kong, 39.6 billion Baht; Japan, 30 billion Baht; and Taiwan, 29.5 billion Baht.
In terms of investment locations, the eastern region continued to attract the highest number of applications, with 211.6 billion Baht, followed by the central region, 179 billion Baht; the northern region, 33 billion Baht; the southern region, 15.7 billion Baht; the northeastern region, 14 billion Baht; and the western region, 4.7 billion Baht.
BOI Secretary General Narit Therdsteerasukdi said that, in the first half of this year, Thailand saw continued growth in terms of both the number of projects and investment value, reflecting the economic potential of Thailand and investors’ confidence in the country as a safe and resilient production base.
In the second half of the year, he said, the global investment trend is likely to continue to focus on relocation and supply chain adjustments. This is an important time for Thailand to compete for global investment. The BOI will emphasize proactive operations to attract target sectors and enhance Thailand’s competitiveness in important areas.
Suan Teck Kin, head of research at UOB in Singapore said that he sees a greater degree of cross-border coordination, deepening integration, political stability and demographic dividend in ASEAN will be supportive of positive prospects in the years ahead.
However, the ongoing global geoeconomic fragmentation, fragmenting trade networks, diverging regulatory environments and the reconfiguring of international supply chains will create both obstacles and opportunities as well as uncertainty ahead.
Suan Teck Kin said that to top off UNCTAD, the ASEANstats, also updated its database of FDI concurrently with UNCTAD’s report release. The latest data from ASEANstats show that the United States remained the largest contributor of FDI inflows to ASEAN, since at least 2019.
The US accounted for 32% share of total inflows to ASEAN in 2023, more than doubled from the 13% share in 2022 and the average value of 12% in 2010-2019, suggesting that rising US-China tensions, the shifting of supply chains and derisking / ‘friend-shoring’ continue to be the main motivating factors.
Similar to the US but at a much smaller scale, inflows from Europe have increased significantly compared to historical average. For example, inflows from Switzerland and Germany saw multiple times of increases compared to the 2010-2019 period.
In contrast, flows arising from China and HK SAR did not show significant deviations from its past growth trends. This suggests that in the boardrooms of these MNCs head offices, decisions are made to increase investments in locations such as ASEAN, while inflows to China and HK SAR saw a steady deceleration especially over the past few years.
Like in the past years, FDI inflows to financial services and manufacturing remained the top two sectors in 2023, accounting for 42% and 23%, respectively, of the total (2022: 27% and 33%). Of note is that professional/technical services saw its share of FDI rising to 9.5% from 0.1% in 2022, a trend that is also highlighted by UNCTAD.
Outlook for ASEAN
Suan Teck Kin added that FDI inflows to ASEAN could be sustainable in the years ahead and may not see a decline in key ASEAN markets (Indonesia, Malaysia and Thailand) if the following factors are there to support the positive outlook in the next 3-5 years.
- Greater cross-border policy coordination and cooperation: A truly groundbreaking development is the signing of the MOU between the Singapore and Malaysia governments in January 2024 to implement Johor-Singapore Special Economic Zone (JS-SEZ). An agreement could be signed in September, according to a Malaysian minister. This enlightened approach of economic cooperation reflects the progressive and pragmatic approach in these governments’ business and investment policy.
- Prevalence of the ASEAN spirit and the deepening integration of regional economies: In addition to the JS-SEZ, increased integration of the region are reflected in some recent developments, including the entering into force of the Regional Comprehensive Economic Partnership (RCEP) in 2022, the sizeable intra-ASEAN flows of trade and FDI, and increased adoption of cross border payments via QR and digital channels, among others.
- Domestic political stability – Power transitions after recent elections in Indonesia, Malaysia and Thailand have been smooth and uneventful, demonstrating the increased maturity of these countries, which ensure policy continuity and stability in these key ASEAN members at least in the next 3-5 years.
- Population – Demographic dividend will be unfolding in the years ahead as income rises and wealth increases for the large pool of young population.
He added that from the standpoint of an investor, a place with greater degree of economic integration and coordination, political stability and lower frictions (such as smoother movements of people, goods and services) would certainly be conducive and reassuring to deployment of tens or even hundreds of millions of dollars’ worth of investment projects.
Specifically, UNCTAD has identified some major trends of FDI investment that are worthy of note in a April 2024 study.
- Increasing FDI flows to services (increase towards more service-centric and asset light investment cross-border investment).
- Deglobalization of manufacturing (increase localization of production by shrinking international component and reduced trade in intermediate inputs with the fragmentation of global value chain).
- Diminishing role of FDI in China (declining share of China in global FDI suggests transition from globally integrated production networks to more domestically focused ones)
- Fracturing trend in FDI along geopolitical lines (i.e. reduction in investment between “geopolitically distant” countries)
- The sustainability imperative driving new FDI sectors (FDI in environmental technologies stands out as the main pocket of growth outside services)
- The increasing concentration of FDI and marginalization of developing countries (FDI is increasingly concentrated in developed and emerging economies)
UOB’s Suan Teck Kin said that the trends highlighted above by UNCTAD mirror that of UOB’s clients’ investment and business activities across the region. For instance, there is a trend towards services-oriented activities such as logistics, warehousing and distribution, coupled with a heightened focus on sustainability practices. Additionally, there is a heightened awareness and strategic planning regarding the potential repercussions of escalating US-China tensions, which may extend to third countries. Overall, ASEAN remains a unique location for companies which are progressively able to localize their production capability and contents as supply chains evolve to become more robust and extensive, particularly in the areas of intermediate inputs within the electronics sector.
Nonetheless, the world investment report cautioned that the global environment for international investment “remains challenging” in 2024, due to weakening growth prospects, economic fracturing trends, trade and geopolitical tensions, industrial policies and supply chain diversification that are reshaping FDI patterns, causing some MNCs to adopt a cautious approach to overseas expansion.