Why Thailand needs market reform: Khun Smith Jingkaojai

An insider gives the Thai economy a health check and sees the need for treatment

Smith Jingkaojai is a senior member of the international business community who has the ear of the Thai government. In a career stretching over 15 years he has worked across the globe for Morgan Stanley, Bankers Trust and Credit Suisse First Boston. Currently head of Corporate Finance at Asia Plus Securities, he serves as an honorary advisor to the Thai parliament’s financing and banking committee, the only member from the financial services sector. He is also an advisor to the Board of Trade, the Thai Chamber of Commerce and the Federation of Thai Industries.

Khun Smith is a free market capitalist in a country that he feels has yet to fully embrace the rigours and benefits of a free market economy. Meeting with Business Report Thailand at the Sukhothai Hotel in the heart of Bangkok’s financial district he is keen to share his analysis of the Thai economy. In a wide-ranging conversation he touches on topics as diverse as the legislative framework under which businesses operate here and how it can drive away foreign capital. He also looks at the surge of the baht against the dollar and what that means for exporters and questions why there is THB1.7 trillion languishing in Thai bank vaults. 

All views expressed herein are his own and do not necessarily represent those held by affiliated companies or institutions. 

Business Report Thailand (BRT)

Despite widespread and almost unprecedented political unrest this spring, Thailand’s economy continues to prosper. Some call it the Teflon economy – how do you account for it?

Khun Smith

It shows the resilience and strength of the Thai private sector. Capitalism is often at its best when sailing amid stormy waters.

 We inhabit a country of 65 million people many of whom are very well educated and who fully understand that we are part of the international, global community. In many ways the people are ahead of the politicians - many see the need to engage with the markets and for reform. The weaknesses of our legal framework are constantly being exposed.  Two areas are of particular concern to me – the legal framework under which business is conducted and the enforcement of the rule of law. Where things are not up to par, changes must be made.

We have to maximise our potential. We live in turbulent times yet our economy grows so we are forced to ask ‘what could our full potential be?’ At this time our glass is partially full, yet the potential of the empty half is huge. This has been recognized by foreigners and now ever more so by many Thai people. This potential can only be realized if, and only if, we live by the rule of law, democracy and the drive of capitalism.

BRT

And what about the political strife?

Khun Smith

That’s been a real wake up call and clearly the issues involved are not easy to solve. Don’t forget foreign business is always very well informed and in tune with what’s taking place. The worry for them is the situation has not been resolved and there is little light at the end of the tunnel. The government has done as much as it perceives it can to deliver and clarify concerns. Whether or not that is enough remains to be seen. In many ways the main problem is beyond government. In financial terms it is the systemic risk we are facing, but business will tackle the issues and take strategic decisions. Capitalism, the ultimate example of ‘the survival of the fittest’, will prevail. The only sadness is the lost opportunities and the feeling that we are doing well, but that we could be doing so much better.

BRT

How can Thailand best compete with its neighbours and against giants like China?

Khun Smith

We need to get back in the game – the international game. This involves trade obviously, but also, and most importantly for me, the capital markets and the financial service sector. By that I’m really talking Wall Street – the equity and fixed income markets. We need to get back into that international circle. If you’re not a member of that club you can’t compete. A case in point - when was the last time you saw the SET mentioned on CNBC? It never is.

The cost of capital is reflected right the way down to the cost of goods and services. We need legal reform that opens up Thailand to the global business community. Business hates uncertainty and tries to price the cost of risk. The existing legal environment poses and reveals uncertainty, which I believe deters new business, particularly from overseas. 

BRT

The Stock Exchange of Thailand (SET) has been criticised for not helping capital markets achieve their full potential. Do you share that view?

Khun Smith

The SET is an essential part of the capital market, but accessing this market needs to be made quicker and easier, without compromising the integrity of the system. The new administration is well aware of this and has a very hands-on attitude. 

You have two main markets in the financial world – the bank and capital markets. As Thailand’s economy started to grow the bank market was invaluable at accessing capital from savers and, bridging the gap between saver and investor - becoming in effect an intermediary. The banks have performed well, are generally of a recognised international standard and hopefully, as time goes on, their transaction costs should fall.

The capital markets both equity and fixed income are a different story. The fixed income market consists of the debt market, the foreign exchange and commodity markets and is way larger than the equity market – perhaps by 20 or 30 times. In Thailand we have an active and successful equity market, but the fixed income market is yet to mature.

In theory, both markets - the equity and the fixed income markets - run parallel, in tandem. In a mature and efficient capital market like Wall Street, when one is up, the other is down. If the equity market is up, capital will move from fixed income to stocks and the fixed market will decline. And of course when equities are down money will race back to the fixed income market. 

The problem for Thailand is that our markets are not balanced. 

When equities are down the money has no place to go other than back to the banks. The result is we now have THB 1.7 trillion sitting in cash doing very little. Like everybody else money needs to work for a living and not take an extended holiday in a bank vault!

BRT

The baht has continued to climb steadily against the dollar much to the alarm of exporters. Is the currency overvalued?

Khun Smith

It’s not for me to say what the appropriate level of the baht should be. What I will say is that the true cost of goods and services in any country will ultimately be reflected in its currency. It’s like being at school. If a student is working hard and passing exams with good grades then that will be reflected in their scorecard. The currency is Thailand’s scorecard.

But that’s not the whole story. The relevant authority here is the Bank of Thailand (BOT) and they have taken what they believe to be the correct course of action in respect of the currency. But is the authority in step with the markets and the private sector? This then raises the issue of accountability. Ultimately the result of all this is felt by you and me, the private citizen and consumer – we suffer or prosper and who is responsible for that? Never underestimate the importance of accountability in the capitalist system.

BRT

Inflation is above 3%. Are you happy with that figure?

Khun Smith

Well the short answer is no. The saving rate is currently 1% and if as you say inflation is at 3% then we are all poorer by 2% year on year. One of the problems, as I mentioned earlier, is that we are out of touch with the international markets and often don’t price things fairly here. The result being that some goods and services don’t reflect their real worth when set in the context of the wider world.

BRT

Looking ahead to 2015 and the start of the ASEAN Economic Community, do you expect there to be free trade and free movement of labour in the region, or will countries resort to protectionism?

Khun Smith

The movement of labour is already happening. The ASEAN EC will give it a legal stamp. Look at workers in the fishing sector here; some say that up to 98 per cent are not Thai. Whatever the true figure, that is the reality on the ground. It’s nothing new. As a country’s labour force moves up the salary ladder a vacuum is created and then filled by people from elsewhere. We just need to recognise this issue formally - whether we like it or not. Systemise the way the labour market works, tax it and then it can contribute to the economy. For me it’s capitalism at its best. Market forces will dictate and prices fall.

BRT

What are the prospects for the Thai economy in the coming year? Where do the greatest challenges lie?

Khun Smith

Capitalism, which is sometimes called the ‘least worst economic system,’ tends to thrive in a true democratic environment. The implementation and respect for the rule of law is the most critical issue for this country. 

When a country is at risk of defaulting on interest and principal payments it’s know as ‘Sovereign Risk’ in the fixed income markets. In some circles this term has already been applied to Thailand because of its political-economic circumstances and that is clearly a worrying development. As it happens, a government seminar will be held on this matter shortly.

In many ways this is a young country, with an energetic young population who are keen to take the country to the next level. Older generations need to understand that it’s time for them to move on and let market forces take their course. Democracy and capitalism working together can steer this country to a bright future. But if the country forsakes these ideals, a swift punishment will ensue and I would genuinely fear for my children’s future and that of my beloved country.

This interview was first published in Business Report Thailand, Issue 1, October 2010.