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Stock market too small for foreign investors

Opening the stock trade to foreign investors premature due to size, trading volume, liquidity of the market and lack of adequate trading infrastructures

Dechen Dolkar
from Thimphu

The country’s stock market, which is growing at a snail pace, as of now won’t be open for foreign investors.
With total market capitalization of Nu 21bn, which is around 19% of the Gross Domestic Product (GDP), the stock exchange market is too small for foreign investors. Currently, there are 21 listed companies with Royal Securities Exchange of Bhutan Limited (RSEBL).
Speaking to Business Bhutan, Economic Affairs Minister Lekey Dorji said opening the stock exchange market to foreign investors at this stage of the country’s development would be premature given the size, trading volume, liquidity of the market and lack of adequate trading infrastructures.“While foreign investments are important, we need to strategically promote investments that enhance our productive capacity and create employment,” said Lyonpo.
The economic affairs minister also questioned whether it would be prudent to promote investments that have been observed to be volatile as the financial markets globally are sensitive to any policy changes.
And in the absence of adequate regulatory oversight, it would be difficult to oversee and monitor detrimental speculative activities, added Lyonpo Lekey Dorji. “Many countries in their initial stages of development did not open their capital markets.”
The Chief Executive Officer (CEO) of RSEBL, Dorji Phuntsho, said the economic structure and capital market scenario have not reached a stage where foreign investors can participate in the country’s stock exchange trading. “If we do allow foreign investors to participate, there should be some regulations in place,” said the CEO. “It is a policy issue for the government to address.”
Allowing foreign investors to come in would also impact the country’s foreign currency reserves since they may buy shares at low price and sell them at high value, draining out the country’s forex reserve, according to Dorji Phuntsho.
In a case where foreigners are allowed to participate, the probable advantage is that there would be inflow of capital in the primary market. The disadvantage is that when the stock exchange market does not do well, foreign investors could pull out their investments, and the stock market could collapse.
However, there are also modalities where foreign investors can be exclusively allowed to trade among themselves, which would not hamper the capital account. “For that the laws have to change and entire regulatory framework need to change, which is very difficult,” said RSEBL CEO.

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