The Securities and Exchange Commission (SEC) is pushing forward legal amendments to further liberalise the capital market, as Thailand risks falling out of foreign investors’ radar due to relatively higher transaction costs.

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SEC catches up with global trend

Changes are unavoidable, as Thailand and other Asean countries are establishing a link under the Asian Development Bank’s roadmap. The electronic trading link will boost Asean companies’ attraction and trading liquidity. He envisioned the similar success as what Nordic countries experienced from its electronic link, which helped facilitate higher volume to small markets. With arbitrage possibility, the markets will draw more investment. This will encourage the entry of new products. While top products in each country will draw more foreign investment, the rest will be local plays.

The first link, between Thailand and Malaysia, will start in 2011, followed by the link between Singapore and the Philippines. Eventually, it will entail six founding nations.

Public investment will expand only slightly next year as the Thai Kem Kaeng Program will just about compensate for the reduction in the government’s on-budget investment in 2010.

The government has sought to improve efficiency and competition within the sector through the first phase of its Financial Sector Master Plan, launched in 2005. Banks can choose to be either commercial banks offering a full range of financial services (minimum capital of $125 million) or retail banks serving mainly smaller companies and low-income consumers (minimum capital of $6.25 million).

Recognising the potential within the Thai market, an increasing number of international banking and private equity groups are acquiring strategic minority stakes in domestic institutions. For new entrants, acquisition may be a more viable route than organic development as while there is no defined limit on the issuance of new licences, it is unclear how many new licences the government is likely to sanction at a time when it is seeking to rationalise the market.
The government has sought to improve efficiency andcompetition within the sector through the first phase of itsFinancial Sector Master Plan, launched in 2005. Banks canchoose to be either commercial banks offering a full range offinancial services (minimum capital of $125 million) or retailbanks serving mainly smaller companies and low-incomeconsumers (minimum capital of $6.25 million). The Plan alsoincludes the ‘single presence’ rule, which requires financialconglomerates to either merge their holdings into one entityand/or sell group companies. The deadline is the end of 2008.

The medium-term outlook is sobering, with growth expected at 3.5 percent in 2010 and likely remaining below potential for the next three years. Because the Thai economy is largely dependent on final demand in advanced economies, a return to pre-crisis rates of economic growth (a full recovery vs. a rebound to pre-crisis levels) will require a combination of (a recovery of demand from advanced economies and a rebalancing of the sources of growth to reduce Thailand’s dependence on demand from advanced economies. Neither process is likely to be swift. Recovery from a financial crisis is a lengthy process that involves the rebuilding of balance sheets, and the IMF estimates that half of the losses in the financial system in advanced economies are yet to be recognized.

It is no secret that Thailand’s stock market is dominated by local individual speculators. Local individuals regularly account for some 65-75% of total trading volume in recent years, according to the SET Investor Guide. Short term trading is an engrained way among Thai investors whom view the SET more like a casino, than a savings intermediary. These dominant local investors like to day-trade the most liquid or odd shares. These local participants are liked by the Thai brokers, who encourage such a trading mentality, so to generate higher commissions. The Thai “equity culture” for the most part has not had enough time to evolve into more rational & balanced ways.

Long-term growth will require improving productivity and greater focus on distributional issues. Imbalances present before the crisis remain, but the crisis has increased the urgency of reforms to improve productivity, enhance competitiveness, and promote more equitable growth. Openness to trade and investment have been – and will continue to be – essential to Thailand’s long-term growth. However, a return to high growth will require boosting domestic consumption and developing additional sources of external demand.

The market’s views on export performance in 2010 of Thailand have improved

The key risk to the global recovery lies in the need to get the timing of withdrawing fiscal and monetary stimulus just right. Withdrawal of fiscal stimulus too early may lead to another negative demand shock and a negative expectations spiral, whereas withdrawing the stimulus too late may lead to high inflation, further weakening of the US dollar, and possible asset price bubbles. In Thailand, for example, more than ten years since the 1997/1998 financial crisis banks still have bad loans in their books and the government still holds a large amount of debt related to the recapitalization of financial institutions. Given the expected length of recovery, it is important not to withdraw stimulus programs too soon, before the recovery is on a firm footing. On the other hand, macroeconomic imbalances are accumulating and eventually fiscal and monetary authorities, especially in the US, must consolidate their fiscal position and withdraw liquidity.

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