Rethinking the wealth of nations

This two-part report aims to provide concepts of national balance-sheet consolidation with regard to the external-sector positions of Thai and foreign entities: outward and inward direct investments. The first part covers portfolio investment, loans and trade credits. The inclusion of net international claims on non-residents represents “the Wealth of Nations”.

Conventional wisdom in economics has been based on a narrow sense of a country’s external assets and liabilities. For instance, on the asset side, it mainly counts international reserves, and on the liability side, external debt gets most of the attention. It follows naturally that some significant items have been disregarded. To tackle such misconceptions, the International Monetary Fund (IMF) has issued some guidelines which have dynamically evolved to meet changing circumstances from the 1st (1948) to the 6th edition (2009), known as the “Balance of Payments and International Investment Position Manual” (BPM6), with the International Investment Position (IIP) being more highlighted.

According to the BPM6, external assets should also include Thai direct investment (TDI), portfolio investments abroad, lending to non-residents, export trade credits and others. External liabilities should also encapsulate foreign direct investment (FDI), foreign investors’ investment in stocks, debt securities, borrowing from abroad, trade credits and others. Behaviourally, it has been observed in recent years that profits have been reinvested in businesses. These so-called “reinvested earnings” have played an increasing role as an internal source of funds.

To consolidate its external balance sheet, the Bank of Thailand has conducted External Debt (ED) and IIP surveys in 1998 and 2001, respectively. On the one hand, data obtained from the surveys have been used to support policy decision-making processes; ie, exchange control and foreign-exchange policies. On the other hand, the public can also utilise published data – for instance, to have a more comprehensive insight into inward and outward investment or to assess the extent of interconnectedness between Thailand and other international economic communities or trading blocks. Lately the Asean Economic Community (AEC) has become the centre of interest.

Taking flows of TDI as an example, the data reveals that net TDI flows, mainly in the corporate sector, have accelerated their investment to capture an opportunity to thrive internationally. It is anticipated that this trend will gain greater momentum. The business sector has made a strategic move regionally and globally by investing outbound to expand production bases, explore natural resources, establish networks and capture new markets. In accounting, this is booked on the asset side of the country’s balance sheet.

On the contrary, Thailand has been one of the preferred investment destination countries for decades. Foreign investors have relocated their production lines to Thailand. These transactions reflect foreign investors’ claims on residents; in other words, Thailand, as a country, is liable to those non-resident investors or shareholders. In a similar vein, those transactions are recorded on the liability side of the national balance sheet.

The net direct investment, the difference between FDI and TDI, indicates whether Thailand is a net investing country abroad or vice versa. This has an implication in itself since it has been evident that conglomerates in more maturing economies have long drawn up international expansion plans to capture new markets. Later, they gain the status of multinational corporations.

In the meantime, a small group of Thai companies in certain sectors can be categorised as transnational corporations (TNCs). If the pace of outward Thai investment is maintained, in foreseeable future, more Thai conglomerates will become TNCs. Perhaps it is the right moment for Thai corporates to proactively travel across the region to seek growth and partnerships. In the modern wealth of nations, a net outward investment position could reshape Thailand to become a net creditor country.

 

Krit Chalermdumrichai is team executive in the External Sector Survey and Processing Team Statistics and Information Systems Department at the Bank of Thailand. The views expressed in this column are the writer’s own.