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Making another crisis impossible

12 May 2005

The domestic bond market in Thailand has won a high profile outside the financial community thanks to prime minister Thaksin Shinawatra's campaign to develop the market as a symbol of Thailand's financial independence, and as a platform for the establishment of a regional bond market. Nick Parsons reports.

The absence of a domestic bond market was cited as the major reason for the financial meltdown that followed Thailand's devaluation of the baht on July 2, 1997.

"The biggest challenge to us all must be how the crisis could have been avoided," Chatu Mongol Sonakul, governor of the Bank of Thailand, told assorted regional financial leaders at an Asian Development Bank (ADB) meeting in March 2000. "If I can turn back the clock and have a wish, my list may be long. But high in its ranking would be a well functioning Thai baht bond market."

He then went on to outline the three essential components needed to establish one: "First, there must be a deep and liquid government bond market to serve as benchmarks against which corporate paper can be priced. Second, there must be adequate infrastructure, both legal and operational, to support the trade and transfer of instruments and funds. Third, there must a pool of market participants comprising both intermediaries such as dealers or inter-brokers as well as end users such as mutual funds, provident and pension funds and insurance companies."

So, five years on, how have the authorities done? And how has the private sector — issuer and investor alike — contributed to the development of a genuine market of financial disintermediation.

Have the wishes been granted?
The bond market has certainly grown. From 1997 to 2003, the local government bond market grew by 116% — the highest rate in Asia — while the corporate market increased by 13.5%, according to ADB figures published in November last year.

The government has established a yield curve with a regular programme of bond issues up to 10 years. It has also said that it will issue a 15 year securitised bond this year that will be exempt from withholding tax for international investors. The transaction will be launched under the umbrella of the Asian Bond Fund and is designed to tap the offshore — mainly Asian — investor base.

Thailand is likely to return to budget surplus this year, which means that the net issuance of government bonds is forecast to decline in the future. But Thailand remains committed to the development of its bond markets and will continue to adhere to a regular issuance programme.

"Although in Thailand's case the redemption profile of outstanding government debt is not as severely skewed as elsewhere in the region, Thailand is likely to continue to witness a shift in its issuance pattern towards longer maturities and in benchmark securities," says Siddharth Mathur at JP Morgan in Mumbai. "This will also contribute to the development of Thailand's fixed income market."

One factor that has held back the Thai market, believe bankers, has been the lack of a single regulator that has a clear mandate to develop the market. The Bank of Thailand, Ministry of Finance, the Thai Bond Dealers Club and the Securities and Exchange Commission (SEC) have all had their bit to say on the subject at different times.

The list of issues that need to be tackled encroach across various areas of responsibility. "The biggest problem is that it spans across several government agencies, making it difficult to co-ordinate the work," said Thirachai Phuvanat Naranubala, secretary general of the SEC, in a speech in May 2004.

A dodgy year or two
"The Thai bond market has been more volatile than most over the last few years," says Stephen Williams, head of Asian debt finance advisory at HSBC in Hong Kong. "That is partly because the government has changed regulations to strengthen the market's infrastructure, which has caused incidences when there has not been a lot of supply. The Thai market has also been impacted by US interest rates much more directly than other markets.

"But having said that, it is a perfectly flourishing market, especially with many local subsidiaries of multinational corporations issuing bonds, and rumours that surpranationals will come to the market."

Several subsidiaries of the international car manufacturers, as well as corporates like Nestlé, have issued in the last 18 months and that dealflow is likely to continue.

"The Thai bond market has gone through considerable volatility since June 2003, but with the market stabilising we are expecting a number of deals to come out," says Brad Levitt, head of Asian fixed income at Standard Chartered in Singapore.

He highlights a deal for Siam Panich Leasing that was five times oversubscribed. "It was one of the first for years and one of the first in the last couple of years that was more than one or two times oversubscribed," he says. "It showed that with the right transaction and right structure — whether ordinary or asset backed — there is appetite, and we see the market gathering steam."

International outlook
Looking further ahead, international issuers may add to the supply line.

The government has decided to follow Hong Kong and Singapore in allowing foreign institutions to issue bonds in Thai baht. Last year it approved the plans of the World Bank, the ADB, International Finance Corporation and Japan Bank for International Cooperation to issue bonds of up to Bt4bn with a maturity of not less than five years.

None of the transactions has yet come to the market, since there are several obstacles that need to be ironed out. But just allowing foreign institutions to issue in the local market is a step forward for a country unlikely to forget the havoc wrought by currency speculators back in 1997. 

12 May 2005