Capital markets

Thailand’s top regulators going full bore on capital market reform

Both the central bank and securities watchdog are offering investors, from VC to institutional, wider-ranging freedoms to invest both abroad and domestically

Thailand faces two serious challenges that are an impediment to growth: the country’s small to medium-sized companies are struggling to raise finance, and the very strong currency is hurting exports.

In a bid to overcome these two issues, the country’s top regulators – the Bank of Thailand (BoT) and the Securities Exchange Commission (SEC) – are adopting reforms that offer greater freedoms for the country’s investor class.

The BoT first. As of the time of writing, the baht had reached its strongest level against the dollar since 2013. It is important to stress how negative this is for Thailand’s trade competitiveness – every 1% the baht strengthens, export prices increase in dollar terms by 0.3%, according to research compiled by DBS.  

THAI INVESTORS GO FORTH
To relieve the pressure, the BoT issued a series of measures in November to relax capital outflows. These measures promise to increase the aggregate foreign investment limit for domestic institutional investors to $150 billion, while at the same time allow them to retain the allocated limit for investment over a longer period than before.  

Although the finer details are sketchy (the BoT failed to provide further details of its plans by press deadline), the move is in line with the country’s broader reforms to allow domestic investors and large corporations to expand their overseas portfolio investments. A major historical driver for this shift is to allow investors to spread risk through diversification.

While the most recent BoT development is positive it may not result in permanent change. The central bank could roll back on any fresh investment freedoms should the currency finally hit levels with which it is more comfortable. If this is the case, some investors, especially those with long-term investment horizons, may refuse to take advantage of the new measures fearful that they’ll end up carrying assets of which they will soon have to dispose.

BRING IN THE PE MONEY
Thailand’s SEC, on the other hand, has broader priorities. The securities watchdog needs to find alternative sources of financing for the country’s smaller companies: the Thai government recently committed to increasing contributions by the country’s small and medium enterprises to 60% by 2037, 20 percentage points higher than the average Southeast Asian nation today, according to IMF data. Access to finance is a chronic constraint to SME growth, especially in emerging markets and developing countries. 

As such, the SEC recently announced a slew of draft regulations to support SMEs. At the time of writing, the SEC is gathering feedback for its plans to allow them to raise funds from stocks and convertible debentures. Under the proposed scheme, SMEs “would be able to offer stocks and CDs to institutional investors, venture capital and private equity as well as to their executives and employees without limitation”.

Bringing in venture capital (VC) and private equity (PE) money should have a positive effect, at least for Thailand’s most promising young companies, but a deal with these investors comes with notable downsides. VCs and PEs can make life quite difficult for company owners if the business isn’t growing at levels that suit their own voracious financial appetites.

But Thailand is not alone is making it easier for VC and PE money to be put to work. In 2019 Malaysia’s government allocated RM2 billion ($450 million) in matching grants for VC and PE investors to spur greater investment in strategic sectors. The grants are only given to those who have already secured private investment. Additionally, a Co-investment Fund of RM50 million was set up for the government to invest with the private sector on crowdfunding and peer-to-peer lending platforms.

As Asia’s emerging markets set out to find more innovative solutions to their domestic economic problems, expect to see more policy shifts towards open capital markets and greater freedoms for investors of all shapes and sizes.

 

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