The Thai Ministry of Finance (MoF) has gone overboard in its latest attempt to protect onshore bond investors from the perils of the outside world.
On May 10, the finance ministry vetoed all applications from Korean banks to issue in the domestic bond market, due to concerns that conflicts between the two Koreas could escalate, with negative repercussions for the Korean financial system.
If this was to happen – the reasoning presumably goes – it is possible that Korean lenders may be unable to repay their Thai bondholders. As such, Thai investors should not be given the choice over whether or not they want exposure to the sector. Just in case.
To an extent, the MoF’s concerns are valid. North Korea announced in late March that it was at war with South Korea, in an escalation of hostilities that have since eased a little after the North appeared to back off on preparations for a test missile launch. Because of this, South Korean bonds – whether sovereign, financial or corporate – are exposed to geopolitical risk.
But geopolitical risk is one of a number of risks that both bond sellers and buyers have to take into account when participating in international markets. Equally, changes in risk perception tend to be reflected in bond prices.
This means that if the market is working properly, investors are adequately compensated for the risks they are taking. This is basic bond market stuff and data shows that the market is not pricing in a full-on war between the two Koreas any time soon.
Foreign holdings of South Korean bonds increased for the third month in a row in April, according to the Financial Supervisory Service (FSS). Total international holdings of won-denominated debt reached KRW97.39 trillion (US$87.15 billion) at the end of April.
Interestingly, Thailand was the most active net buyer of Korean bonds in April, with holdings rising by KRW781 billion. The second most active net buyer was China, which took on KRW479 billion, according to Reuters, which said that the Thai central bank was a key participant in the buying spree.
If the central bank remains happy to buy Korean bonds, the MoF should have a little more confidence in investors’ risk assessment capabilities. In addition, if Thailand is unwilling to practice what it preaches, it should ease up on market intervention, if it doesn’t want to risk hurting relations with South Korea and stunting the development of its own onshore market.
For the past three years, Korean banks have consistently been the most frequent offshore group to issue in the Thai market, second only to Thai domestic names and accounting for more than 50% of foreign issuance, according to Dealogic. By contrast, issuers from other countries only use the market intermittently.
This is partly because the finance ministry generally only approves issuers with an international rating of ‘A-‘ or above. And many highly rated sectors that are granted quotas – such as Australian banks or multilaterals – do not use them, as they can achieve cheaper funding elsewhere.
To further the problem, not even issuers with the highest ratings are guaranteed a quota. In September last year, for example, the committee decided not to accept any requests to issue Thai baht bonds.
Time for change
All this meddling and indecision could severely restrict issuer diversification in the onshore Thai market. This in turn could have a negative impact on pricing competition and could add to the risks of bonds originating from the country.
The finance ministry needs to ease up on protectionism and start becoming more inclusive and more reliable in terms of who it gives the permission to issue onshore.
In September last year, it looked as if things were headed this way. The MoF waived a regulation which only allowed investment grade sovereign or quasi-sovereign entities to issue debt in Thailand. This followed the withdrawal of a Securities and Exchange Commission (SEC) law that international issuers had to be rated to issue a bond in Thailand.
These measures were taken so that the Laos sovereign (the Ministry of Finance of the Lao People’s Democratic Republic) would be able to issue a Thai-baht denominated bond – the government’s debut international bond, and it looked as if Thailand could open its doors to other sovereigns and sovereign-related entities. Laos has yet to issue the bond.
Thailand should pursue this sort of progressive and inclusive approach, if it wants to develop its bond market. Now is the time to be welcoming international participants, not repelling them.
Thailand’s onshore yield curve continues to be pushed lower as the baht strengthens and the 10-year sovereign yield has fallen by 20.8 basis points (bp) year-to-date, to reach 3.302%.
This means that for offshore names, after-swap pricing is becoming more attractive. According to bankers, this has resulted in an increase in requests from banks and corporates in Southeast Asia, East Asia and Australia, to issue in the Thai currency.
If the MoF took heed of this positive international interest in its bond market, it could help to deepen the market and mitigate issuer concentration risk, as well as encouraging a livelier and deeper bond market where investors are encouraged to think for themselves.