Improving Thailand’s Capital Market Competitiveness and Efficiency

Thailand’s capital markets are poised to transform into an arena that empowers the country’s growth, development and innovation. A joint paper by Thailand Capital Market Development Fund and McKinsey gathers a range of ideas that can facilitate the transition, with the potential to reach deeply into ten key areas.

Capital markets play a vital role at the heart of the world’s most advanced economies. Through their ability to channel funding to where it is needed they drive economic growth and support value creation at scale. In Thailand, the capital markets are established at the core of the financial system, helping thousands of people and organisations achieve their ambitions and plans for the future. Over the coming years, the role of markets will become even more critical, as the country pursues ever-higher levels of development, expands its infrastructure and continues to grow its influence in the region and around the globe.

Thai capital markets are among Asia's deepest and most liquid, with relatively strong bond and equity penetration, alongside growing offerings in alternative asset classes. Against this background, the coming period offers the chance for a new era of opportunity. That will mean creating deeper, more efficient markets, and pursuing ambitions in areas such as data analytics, and financial participation. Market participants and the wider stakeholder community now have a chance to deliver on that promise while creating more diverse and inclusive investment opportunities.

The Stock Exchange of Thailand (SET), the country's operator of capital market exchanges and one of the leading exchanges in the region, has been the main engine behind the development of an equity market in Thailand. This is an achievement built over a long period of time, and one that arose from overcoming a number of challenges in its path including a short-lived Bangkok Stock Exchange which operated for about a decade, from 1962 to the early 1970s. Following that a study of a capital market in Thailand was commissioned which ended up informing the revival of a stock exchange in 1975. That evolved into today’s SET, a capital market that has gone on to build a reputation as a reliable, secure, and innovative service provider, and is among the top 25 exchanges in cash equities globally. The exchange has seen strong long-term growth (cash equities trading volumes grew 14 percent annually between 2015 and 2021), deep liquidity, and an increasing play on environmental, social, and governance (ESG) themes. It has played host to more than 100 Initial Public Offerings (IPOs) since 2019, a notable achievement against the challenging background of the global pandemic. The exchange welcomes a wide range of investors, with retail and foreign participants accounting for significant activity levels. Through its Market for Alternative Investment (MAI), it has become an essential destination for SMEs to raise funds. Although SET's Thailand Bond Exchange (TBX) has been discontinued since 2021, other bond markets have created a listing and trading venue for fixed-income instruments in lieu.

Looking to the future, Thailand’s capital markets have an opportunity to serve the country under four pillars. These are to: firstly, fund a sustainable future for Thailand, secondly, fuel economic growth and innovation, thirdly, expand access and knowledge around wealth creation, and finally, foster long-term capital deployment. Across these pillars, the markets can play a critical role in promoting a culture of innovation and supporting the country’s economic development. They can help Thai citizens save for the future and lay a solid foundation for retirement: a vital contribution given the country’s aging population. These goals can be enabled by a supportive regulatory backdrop and a focus on innovation and derisking.

Looking ahead, there are opportunities for Thai capital markets to expand their services, increase investor participation, and build new ecosystems in private equity, venture capital, and beyond. Through initiatives such as carbon exchanges and a national green taxonomy, they can continue to support Thailand’s national commitment to sustainability. And by fostering a more supportive environment for startups, they can help SMEs grow to become economic powerhouses of the future. Although, Thailand’s capital markets are competitive in some areas on costs, efficiency can improve in other areas such as equity trading (Thailand's 30 basis points is second highest in ASEAN, even before the potential introduction of Financial Transaction Tax) and mutual funds (driven by expense ratio for fixed income and mixed allocation funds). With capital markets in Thailand set to embrace transformative change, this paper gathers a range of ideas - set out as ten key building blocks, which aim to support the markets’ growth:

  1. Fostering sustainable financing to help Thailand move towards net-zero carbon emissions
  2. Providing opportunities for pension funds to create the capital required to support an aging population
  3. Nurturing SMEs/start-ups with capital and capability support
  4. Expanding digital assets
  5. Improving financial literacy
  6. Simplifying retail investors’ journeys
  7. Attracting long-term foreign institutional capital
  8. Deepening domestic institutional investors
  9. Unlocking data analytics
  10. Attracting and nurturing talent

Through the ten building blocks, Thai capital markets participants can facilitate drivers that will shape the country’s economic future. At the forefront of priorities is an intention to transition to a more sustainable economy. To achieve Thailand’s net-zero ambitions, there is an opportunity for capital markets to push the frontiers of green finance. This will require financing tailored to both the decarbonisation of existing technologies and the development of new green solutions.

With more than 32 percent of the population set to be 60 years or older by 2040, pension provision presents a significant challenge. However, there is an opportunity for progress through the creation of a new national pension fund. Thailand's capital markets can play a pivotal role in supporting the development of national pension funds.

SMEs are the backbone of the Thai economy and the capital markets could do more to support their growth. Potential initiatives would include enhancing capital/financial support, for example, through investing in talent and advisory, and creating new platforms and deal-making venues to funnel capital to promising ideas.

Central banks world-wide are exploring digital currencies, while distributed ledger technologies have matured from early applications in cryptocurrencies to activities across securities issuance, post trade, and asset servicing. SET plans to launch the Thai Digital Exchange in 2022, and is well placed to explore a range of use cases while ensuring adequate risk management.

To ensure that the positive impacts of the markets' development are shared across society, there is a need to boost financial literacy. Progress will be best achieved through collaboration between the public and private sectors, new programme funding, and a commitment to promoting investment awareness from an early age. Although retail investors accounted for 47 percent of cash equities trading volume in 2021, Thailand only has approximately two million investors trading via SET. It is necessary to simplify retail investor journeys, including addressing pain points and promoting digital solutions to increase the number of retail investors in the Thai capital markets.

In the institutional space, there is an opportunity to strengthen markets of fixed income asset classes in Thailand by building a robust bond ecosystem to diversify institution investments to other asset classes beyond fixed income, and to encourage different types of institutional investors beyond pension funds and insurance companies to invest in capital markets. Thailand is considering reintroducing the Financial Transaction Tax (FTT) on equities trading. There are lessons available from the experiences of other markets. For example, India introduced a similar tax through increased tax earnings, with minimal impact on trading volumes while Spain’s experience was lower tax revenue combined with lower trading volumes.

To attract long-term foreign investment, Thai capital markets can seek to create a more open environment, putting the country on a par with leading regional peers and enabling the new economy to be served across market infrastructures.

Many exchanges around the world have built substantial businesses on data and analytics. Thailand could take a similar path, investing in standardised and aggregated data sources to enable investment at scale.

Finally, the key to building the capital market of the future will be to attract the best and brightest talent. This will mean attracting new types of in-demand talent and focusing on upskilling current and prospective employees.

Thailand does have a few key challenges it needs to tackle, including cost competitiveness compared to regional peers. However, in order to stay competitive and efficient, Thailand can look to these ten building blocks, to both build on the successes of the past and shape markets that will cater to the needs of the next generation. The goal should be for the private and public sectors to come together, make bold decisions and embrace the opportunity to build the markets of the future.

Read the full paper here