FINANCE

Building a better market

STOCKS: More needs to be done to turn the capital market into a more level playing field

NUNTAWUN POLKUAMDEE and CHIRATAS NIVATPUMIN

From being among the world's top gainers last year, the SET has become one of the worst performers since the start of this year.

Given the business background of many top leaders of the Thai Rak Thai Party, it should come as little surprise that capital market development has been one of the key priorities for the Thaksin Shinawatra government over its term in office.

Within days of taking office in 2001, Finance Minister Somkid Jatusripitak convened a high-level conference in Hua Hin to brainstorm different strategies to deepen and broaden the local capital market.

Among the key initiatives taken were strategies to expand the investor base, particularly through mutual funds, draw new companies to the stock market and improve the corporate governance of listed firms.

For Mr Thaksin, one of Thailand's most successful businessmen, and his deputy, Dr Somkid, a management and marketing academic and long-time SET adviser, a vibrant capital market is crucial for achieving long-term prosperity and flexibility.

Economists have long pointed to the relatively underdeveloped capital market as a key risk factor, where capital funding for local companies has been overwhelmingly sourced from the banking sector. One of the key lessons of the 1997 crisis was the need, at both a corporate level as well as a macroeconomic one, for balance in funding among short-term credit, equity and long-term debt.

Over the past several years, the government has pushed a number of tax incentives to encourage new market listings, looked toward selected privatisation of profitable state enterprises to help enlarge the SET and eased restrictions and procedures deemed to have impeded market operations.

Indeed, the government's hands-on approach has raised questions about whether its decidedly interventionist approach has been excessive, particularly in programmes such as the 100-billion-baht, state-supported Vayupak Fund or in Mr Thaksin's occasional pronouncements setting price targets for the SET index or selected blue-chip stocks.

Critics have said the government has looked to the SET as little more than a political barometer, a measure of the acceptance of investors and the market in its economic policies. Others more darkly raise the spectre of personal interests as driving capital market policy, noting that many prominent members of the cabinet reportedly boast large holdings of listed stocks.

More advanced technology has been adopted to serve booming interest in stock investment, including mobile transactions.

Yet it is undeniable that a healthy, vibrant capital market is crucial for a healthy, vibrant economy. Purists may argue that the state would be well advised to steer clear of any interference in the market mechanism or the principles of supply and demand. But the relative illiquidity and small size of the Thai market and the abnormal fickleness of the Thai investor cries out for the need for an occasional guiding hand, one that is ready to push through bureaucratic inertia and inter-agency infighting to move the agenda of capital market development forward.

The capital market master plan, as drafted in 2001, outlines a number of measures to help boost investor demand, supplement the supply of quality securities and improve the efficiency of the market infrastructure to best serve the needs of investors, companies and the economy.

The results have been promising, if somewhat more muted than hoped. Yes, market capitalisation and the SET index have both roughly doubled since the government took office. But hopes of significantly broadening the investor base have fallen short, with the 300,000 accounts held at local brokerages still a pittance compared with the population of 63 million. Of greater concern, the Thai market continues to be dominated by short-term speculative players, resulting in volatility and boom-and-bust cycles that undermines the goal of presenting equities to the public as a long-term investment opportunity.

Information disclosure and corporate governance, while improved, remain short of best global practices, at least as judged by participants such as the ratings agency Standard & Poor's or Calpers, the largest investment fund in the US. The perception of the Thai market remains as one where insider information and trading continues unchecked and regulatory enforcement lacking, raising the risks for investors operating outside of privileged cliques.

Yet these are problems that have long plagued the SET. While authorities and policymakers can hardly claim victory in completely purging the market of distortions and abuses, at the least, participants are more focused than ever in improving the quality of listed securities, ensuring equality for investors and efficiency within the system as a whole.

The results from initiatives such as the SET's investor education programmes could well take a generation before materialising. Millions of baht have been spent in reaching out to students and provincial residents to highlight the opportunities available from the SET through investor fairs, seminars and conferences.

The asset management market has seen growth well outstripping that of the overall market, and has enjoyed greater success than local brokers in attracting new investors, part of broader strategies aimed at increasing the role played by institutional investors in the market. Institutional investors such as pension funds, insurers and mutual funds, represent less than 10% of daily turnover on the SET, compared with up to 70% by retail investors, a reversal of the proportions typically seen in western markets.

Tax incentives and state support through initiatives such as the Vayupak Fund and allowing Thais to invest in foreign securities have helped boost investor interest in mutual funds. Earlier this year, the cabinet approved new tax incentives for investors in long-term equity funds, a measure aimed at boosting long-term savings as well as shifting assets out of personal investment accounts into institutional ones. Considering the country's ageing demographics and the need to boost personal long-term savings, such initiatives are sorely needed.

On the supply side, authorities have taken a number of steps to offer new instruments for investors and issuers alike, including the establishment of a new bond exchange in November 2003. While liquidity remains thin on the market, regulators say the new bond exchange offers investors greater flexibility in managing their portfolios across the different asset classes.

Derivative trading also began this year with the launch of the Agricultural Futures Exchange of Thailand on May 28. Contracts on the new futures exchange, currently limited to rubber sheets, will eventually be expanded to include rice, tapioca and other key commodities.