Oct 13, 2012

Thailand - Thailand's bond market gaining World-Class stature

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Today, the three pillars of the Thai capital market _ equities, loans and bonds _ are well balanced, with a similar market size of around 70% to 90% of gross domestic product each. This implies that funding sources as well as investment channels for both the private and public sectors are healthy.

The size of the Thai bond market right now is about 8.2 trillion baht, or equivalent to US$280 billion. It comprises two main parts: 75% government and central bank bonds and 25% corporate and state-owned enterprise (SOE) debt. The latter usually have terms of three to seven years. For the Bank of Thailand, the focus is on very short terms, with 95% of its bonds less than three years. In contrast, government benchmark bonds mostly range anywhere between three and 50 years.

Over the past five years, the government bond market has entered what we would call a market-deepening stage, in which we have multiple tasks to achieve.

First is the establishment of benchmark bonds and yield curve. Right now, we have eight different benchmark terms running from three years up to 50 years which we offer on a regular basis. I believe that we are the fourth country in the world, after the UK, France and China, to have issued a 50-year benchmark bond.

The second task is to develop more sophisticated products, like inflation-linked bonds and electronic retail savings bonds, which we launched last year. In the pipeline next year are amortising bonds and perhaps long-term zero-coupon bonds.

The third task is to upgrade bond market infrastructure, such as a public debt management fund to act as a pre-funding agency of large-sized benchmark bonds. Primary-dealer privileges would also be upgraded to encourage them to actively play a role as market makers. Also planned for next year is a bond-switching framework to enhance liquidity and consolidate our bond profile.

We have created a variety of government debt instruments as part of our mission to establish a sustainable funding source from the domestic market. We have set two strategies to accomplish this mission: build benchmark bonds to stabilise the yield curve, and segment the investor base to diversify dependency risk.

At a time when the government requires a large amount of funds to invest in infrastructure, the Public Debt Management Office must make sure that not only are funding needs met, but that the funding is mobilised from diversified sources, in order to minimise costs and to optimise the profile of the portfolio.

We divide our benchmark terms into two categories. First is the 10-year benchmark and below, which includes four terms of 3, 5, 7 and 10 years. It is critically important that these terms have sufficient outstanding size in order to increase liquidity in the secondary market. For seven- and 10-year benchmark bonds, the aim is to have about $3 billion [outstanding] per series, while three- and five-year terms will have up to $5 billion.

Primary dealers (PDs) are also encouraged to participate in these auctions. At present, these terms of 10 years and less have turnover ratios of 2.5 to 4.0 times, while the overall market turnover ratio is one time. The five-year benchmark bond is the most traded bond in the secondary market and is our "superstar".

The second category of benchmark bonds is those longer than 10 years. They also comprise four terms: 15, 20, 30 and 50 years. Even long benchmarks like the 15- and 20-year bonds are beginning to have liquidity as the bond series were reopened. So we are reopening all of our benchmark terms in fiscal 2013. By the end of fiscal 2013, all benchmark terms, from three to 50 years, will have at least $3 billion in outstanding size. This is indeed another milestone in the history of the Thai bond market.

Besides our benchmark bonds, two other products are groundbreaking for the Thai market: our inflation-linked bond (ILB) for sophisticated investors and the electronic retail savings bond (SB) for retail investors.

Thailand is the first country in Asean to have issued inflation-linked bonds. The issuance of the current 10-year ILB with total outstanding size of $3.5 billion is nearly complete. This ILB has a turnover ratio of 0.7 times, which is not bad at all. In the pipeline next year is an extension of the ILB yield curve, with the issue of a 15-year ILB. Of course, we will consult PDs and investors for their preference.

For the electronic retail savings bond, this product is available for retail and non-profit organisations only. What we are trying to establish is a safe haven and easy-to-access savings product for micro-savers. The minimum purchase is as low as 1,000 baht or about $30, and can be done through ATMs.

The significance of maintaining a retail market is that household savings have proven to be a substantial source of government funding. Electronic retail savings bonds are the only funding instrument that can mobilise as much as $6 billion at a time without interfering with the yield curve, as retail investors typically hold the bonds to maturity. Electronic retail savings bonds are therefore considered unique, as they serve a savings culture policy and act as a funding instrument for the government.

I must say that even with the huge government funding requirements for long-term investment projects, the Thai domestic bond market is sufficiently strong to mobilise the required amounts. We believe that, with favourable market liquidity and by using all available instruments, the government of Thailand can raise up to about $40 billion per year.

Nevertheless, raising funds abroad, through Yankee or Samurai bonds, can be conducted if necessary. Foreign investors ask about Thai paper, while domestic issuers ask about overseas government benchmarks. Our bond team monitors the market closely, and on the balance sheet side, our foreign debt is nearly zero. If the situation calls, we will be ready.

After five years of hard work and dedication to the development of the bond market, we are proud to say that all of our key performance indicators have confirmed that we are heading in the right direction. Issuance of 30- to 50-year bonds has lengthened out average time to maturity (ATM) from around five years in 2007 to nearly nine years now, which I believe is very healthy by international standards.

The maturity profile has also improved significantly. Only 50% of total government debt will mature in the next five years, while 30% will mature in the next 10 years. In terms of risk management, I believe this maturity profile is well distributed, with nearly no risk of "bunching".

Also, thanks to our commitment to bond supply, we have been able to auction benchmark bond at very reasonable rates. Over the last four years, regardless of changing government funding needs, we have managed to stabilise the annual benchmark bond supply at near the pre-announced levels. As a result, the government yield curve has been stable and so have costs.

At this point, I am proud to say that we have achieved multiple tasks of meeting our funding requirements, deepening bond market development as well as enhancing the government debt portfolio. Now, our mission is to develop the domestic bond market to an international standard. I am quite certain that the Thai bond market will take a leading role among Asean countries.

Chakkrit Parapuntakul

Chakkrit Parapuntakul, appointed this month as deputy permanent secretary of the Finance Ministry, served as director-general of the Public Debt Management Office from 2009 to September 2012.

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