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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