Thailand's bond market has grown rapidly since the May 1997 devaluation of the baht that plunged the region into economic crisis.
The first major spur for the market came in June 1998 when the government was forced to support cash-strapped financial institutions - in the form of the Financial Institution Development Fund established by the finance ministry - by resuming issuance of government bonds.
Having stopped issuing in May 1990 due to their fiscal surplus, the government put out a Bt400bn offering and has continued to issue to finance the budget deficit since. In the process, it has established a benchmark yield curve that goes out to 20 years.
"The main constraints on the development of a Thai bond market before the crisis was that the government had no deficit or need to fund itself," says Chatri Sotangkur, head of fixed income, sales and trading, at Citibank in Bangkok. "After the crisis, the government had a huge deficit which led to ample bond supply which enabled it to establish good benchmarks."
He continues: "The government started to realise that without a bond market it would be difficult to stabilise the financial sector while encouraging disintermediation of commercial banks and the establishment of a bond market as a funding alternative."
The government's plans are gradual, though: it wants to develop a yield curve slowly but surely, rather than swamp the market with supply. As a result, there is not much regular on-the-run issuance. Instead, it is looking for liquidity with a minimum Bt20bn size per issue, and the selection of a set of benchmark bonds at one, two, five, seven and 10 years.
If the Singapore government decided to foster a bond market, Thailand's government was largely forced into it. Either way, Thailand's bond market is set to become one of the more vibrant ones in Asia.
Much of the impetus for this comes from the Bank of Thailand's plans to reduce the reliance of the private sector on bank credits, from a 77% share of total funds, to 55% in the next 10 years.
"This requires that Thailand has a strong market for debt instruments and equities," explained Chatu Mongol Sonakul, former governor of the Bank of Thailand, in December 2000. "Thus the development of the bond market is among the major tasks the Bank of Thailand has undertaken during the year, as it will provide the infrastructure for the conduct of monetary policy through open market operation, as well as enhance the country's long term economic development."
On the primary market side, he says, the main achievement has been the setting up of benchmark interest rates. On the secondary market side, the Bank of Thailand in June 2000 changed the status of bank counterparties to primary dealers. "This was in order to facilitate the implementation of monetary policy, to provide liquidity in the secondary market and to participate in the bidding of government and state enterprise bonds in the primary market," he says. "Moreover, when any bonds are in high demand, there will be an issuance of the bonds to ensure adequate liquidity in the market."
"Establishing a government yield curve is one of the basic requirements for a bond market," says John Tan, fixed income strategist at Standard Chartered in Singapore, "but the endgame is to help Thai corporates access the market and find alternative means to raise cash other than bank loans or offering shares."
He continues: "The Thai government after the crisis could have raised cash via multilateral loans, but it realised that one of the causes of the domestic crisis was that banks were over reliant on short term foreign currency debt which they could not pay back, and nor could their corporate clients pay them back. That led to the rise in non-performing loans that in turn constrained their ability to lend. Even if banks could lend they had credit concerns, and capital provisions became more costly for them, which meant government bonds became an attractive alternative."
Along with falling domestic interest rates and lack of available bank credit, the size of government issuance has encouraged a stream of state enterprise and private corporate issues.
In 2000, over Bt200bn worth of corporate debentures were issued by private corporations and state enterprises, with maturities extending out to 20 years - helping to reduce the cost in mobilising long term capital.
The Thai Bond Dealing Centre (TBDC) estimates the outstanding value of total bonds increased from Bt547bn in 1996 to Bt1,390bn in 1999.
Secondary market daily average volumes have risen from Bt822m in 1996 to Bt1.76bn in 1999 to Bt6bn in June 2000.
"Thailand has regular auctions at both the short and long end and a fairly strong supply," says Paul Smith, managing director and head of debt/loan syndication at Deutsche Bank. "There is also a fair bit of demand for corporate issues, but they are competing with the sizeable and regular auction style issues from the government and state enterprises."
"The Thai government issues regularly and there is a reasonably broad range of corporates that can tap the market," says one banker, "and there is also a market developing for subordinated debt." HSBC last November led the first such deal - a Bt1.8bn 10 year subordinated debenture for the part government owned Industrial Finance Corporation of Thailand.
He continues: "A lot of local corporates are taking advantage of lower domestic rates. Those that previously were going offshore are now arbitraging and paying down their dollar denominated debt."
Some bankers, though, are worried about the credit quality of some offerings, especially in light of increasing retail involvement in the market.
From 1999, underwriting banks began placing large portions of their own issues with their retail depositors. Corporates swiftly followed, led by Siam Cement. In 1999 the conglomerate - a household name in Thailand, but saddled with $4.2bn in short term debt in 1997 - issued Bt50bn in bonds and in 2000 issued two bonds of Bt10bn and a Bt30bn six year issue. All issues were done via private placements, with at least 75% placed to retail investors.
"These retail investors are not necessarily sophisticated investors that are capable of making investment decisions and absorbing their losses," says Kathryn Kerle, representative director at Moody's Investor Services in Singapore. "Second, the quality of the issues on offer may be much poorer than expected."
She continues: "The economic slowdown, and the currency devaluation, have left almost all major Thai corporations with significant long term financial problems, and most have been unable to service their obligations to their banks. These obligations are in the process of being rescheduled, and in some cases bond issues are being used to repay the companies' bank lenders."
For example, Siam Panich Leasing issued a Bt4bn deal early last year, using the proceeds to repay a rescheduled ¥4bn loan issued in September 1998.
Last April, however, the Securities and Exchange Commission (SEC) stepped in to insist that all bonds carry a local rating.
Up to last year, corporates did not need ratings unless they went public, which explains why the vast bulk of issuance was privately placed. Indeed, there have only ever been three public deals ever: for Shin Satellite in November 1999, Advance Info Services and Total Access Services last year.
"If any issuer wants to issue a bond, it needs to be rated, so there is not much difference in disclosure any more between private placements and public deals," says Vincent Milton, managing director at Fitch Ratings (Thailand), which in February was given approval to provide competition to Thailand's existing credit rating agency, TRIS. He adds that previously the high costs of disclosure and distribution and registration with the SEC put most issuers off unless they needed a certain size.
In April the SEC proposed that with any issue size of more than Bt3bn the transaction can only be placed among 16 types of qualified investors, thus preventing issuers from selling to retail investors without a rating. The rule is expected to come into force in June or July this year.
"The idea is that if the name is good and the fundamentals are sound, and if the issue size is within the absorption limits of institutional investors, the issue will get the tightest pricing without paying a retail premium," says one Thai banker.
Before the crisis, the institutional investor base was undeveloped, with commercial banks the most active buyers of bonds, followed some way behind by insurance firms.
"The growth of the bond market is likely to prove volatile largely because of the lack of institutional investors and the discipline they can exert on issuers," says Moody's Kerle.
But there are some positive signs. "The government has realised from the crisis that it is not just individuals it needs to encourage the capital markets, which is why it is trying to develop institutional investors," says Citibank's Sotangkur.
It is important, he says, that asset managers have been given tax incentives to invest in bonds and that the government is also building up provident funds. At the moment contributions are made on a voluntary basis, but bankers believe that they may be made compulsory later when the corporate landscape is in better shape.
The single biggest institutional investor is the government pension fund, set up just before the crisis in April 1997. The fund has around Bt200bn under management - 60% of which must be invested in low risk long term instruments.
In addition, insurance companies are slowly coming in, while banks are major investors in bonds, partly to meet liquidity requirements and partly because in the current economic climate they are reluctant to lend to customers.
"From the buyside point of view, investors are flush with cash but there is a lack of supply," says one Thai banker. "Some Thai investors don't have much choice." *