Increasing supply: The government likely to introduce more bonds to the market

The expansion and development of Thailand’s bond market continued in 2012 with an increased variety of sovereign debt instruments and longer maturities. The government’s plans for 2012 will further boost supply, and a wider range of sub-sovereign and commercial bonds are also expected to hit the market. That puts Thailand at the head of a regional trend.

BY THE NUMBERS: Like its equities market, the bond market has a strong local flavour. Foreigners hold less than 10% of government bonds, the largest offering within the debt market. The government issues roughly 82% of all debt, and 98% of the total is investment grade, according to data compiled by the Public Debt Management Office (PDMO), the government’s coordinating agency for bonds, for use during road shows. As of 2011 foreigners held BT420.68bn ($13.42bn) of all outstanding bonds, which totalled BT7.11trn ($226.81bn) at year-end, according to the Bond Market Association. That accounts for 6% of the whole.

Thailand’s bond market stands out in a regional context for its size, but that has not been the case for long. The bond market gained heft after the 1997-98 Asian financial crisis. The crash put a temporary stop to bank lending, which caused corporations in need of financing to consider bonds. The size of the bond market tripled from 1996 to 2001, and secondary market trading rose more than seven-fold, albeit from a small base. Growth rates have tapered off but remain significant. As of the end of the first quarter of 2011, for example, the local-currency bond market had reached a value of $229bn, up 8.7% from the same point in 2010, according to the Asia Bond Monitor. Within those totals government issuance rose 8.9%, to BT5.8trn ($185.02bn) and corporate bonds 8.1%, to BT1.3trn ($41.47bn).

HOLDERS: Banks, insurance firms and structured investment vehicles such as pension funds are the largest holders of Thai government bonds. Public sector debt accounts for about 82% of the bond market, according to the PDMO. Each of those three collectively held about 20% each of the outstanding debt, as of the end of the third quarter of 2011, while local investors held about 14%, according to Asia Bond Monitor. The share of government bonds owned by foreigners was some 10% as of June 2011. PDMO data show the country’s bond market has a greater share of local ownership than some of its peers in the region, such as Malaysia, where non-Malaysians own a quarter of the bonds. Thailand benchmarks itself against more developed Asian countries, including Japan, where foreign ownership is 6%, and South Korea, where the total is 11%.

In a regional context, the Thai bond market is a comparatively domestic affair: buyers are overwhelmingly Thai, and the banks and brokers with the biggest market shares in bond trading and underwriting are of Thai origin as well. Thai investors are generally considered conservative in approach, favouring bank deposits and bonds over equities. In April 2011 a plan was announced that would allow retail investors the option of trading in bonds at automated teller machines.

ALTERNATIVE FUNDING: The ATM plan also fits into a wider trend in Thailand: the desire to diversify funding sources away from bank loans. Ever minded to preserve stability after the 1997-98 financial crisis, the Bank of Thailand (BOT), the country’s central bank, wants to promote equities, bonds and other vehicles as alternatives to bank loans for corporations and to deposits for retail customers. According to the PDMO, bank loans totalled some 98% of GDP in the third quarter of 2011. The amount invested in equities was at 75%, and the corresponding ratio for bonds was 65%. Whilst the government wants a higher number, the figure also serves to underscore the growth and maturity of the bond market since the financial crisis: in 1997 bonds accounted for 12% of GDP. The size of the bond market tripled from 1996 to 2001, and growth has continued from there.

Breaking the recent past into four stages, the PDMO notes that in the pre-crisis stage, the bond market was illiquid and dominated by state-owned enterprises, and owners were mostly hold-to-maturity retail investors. From the crisis to 2007, the market saw an expansion in volume, and from 2007 to 2011 the theme was developing the width and breadth of the debt market. In this period benchmark bonds emerged and provided a basic yield curve, and a greater variety of bonds were also introduced. From 2012, the outset of the fourth stage of maturation, the PDMO envisions steps towards an increasingly sophisticated market, including more benchmark bonds, an internationally offered baht-denominated bond and more secondary trading.

GOVERNMENT DEBT: Thailand’s government sells four kinds of bonds: treasury bills, government bonds, BOT bonds and those of state-owned enterprises. The difference between the first two categories is maturity. Treasuries mature within a year or less whereas government bonds are medium- to long-term securities. They are used to finance the budget deficit and are a popular savings method for conservative retail investors. The central bank’s bonds comprised 43.5% of the total outstanding bonds at the end of the third quarter of 2011. BOT bonds are issued by the central bank and used for its own purposes, such as liquidity management. The BOT has said that it wants to sell a greater number of bonds, but using fewer sales.

The debt of state-owned enterprises is considered a part of the public debt. Common issuers include PTT, the state energy firm and also Thailand’s biggest corporate concern. It has successfully sold a 100-year bond, and several issues are generally the most frequently traded in what is still a relatively illiquid secondary market. Other issuers of note include the Krung Thai Bank, the second-largest bank in the country, the Export-Import Bank of Thailand, the Electricity Generating Authority of Thailand and Thai Airways.

As a gauge of expected bond issuance in the coming quarters, the PDMO has projected that about BT740bn ($23.61bn) in funding will need to be raised in the fiscal year 2012, which began at the end of the third quarter of 2011. The estimated budget deficit is BT400bn ($12.76bn), and refinancing needs are expected to be BT340bn ($10.85bn).

In 2011 the government sold its first inflation-linked bonds, billed by the PDMO as the first among developing Asian countries. They were sold with a maturity of 10 years and a coupon of 1.2%. A total of BT40bn ($1.28bn) was issued – the high end of the announced range of BT20bn ($638m) to BT40bn ($1.28bn). Institutional investors bought more than expected, as retail buyers did not participate up to the cap of BT13bn ($414.7m) set aside for that investor class. The programme was set to continue with regular options, and the PDMO has said it plans a total of BT60bn ($1.91bn) in inflation-linked debt in 2012. Another milestone in 2011 was the sale of a 50-year government bond, making Thailand the fourth country to sell debt with a maturation period of that length. The others are the UK, France and China. Bonds sold by provinces and municipalities may emerge as another option in 2012.

CORPORATES: The Thai Bond Market Association is predicting issuance between BT250m ($7.98m) and BT300m ($9.57m) in 2012, which would be an increase on 2011’s BT212m ($6.76m). The group had earlier forecast issuance of at least BT200bn ($6.38bn) and up to BT350bn ($11.17bn) in 2011, however, flooding pushed off some demand until 2012. November 2011 sales plummeted 91%, according to Bloomberg data, in part because PTT put off a BT20bn ($638m) sale.

Expectations for 2012 were that Thai debt would see an increase in foreign interest, partly due to the uncertainty and economic malaise that has engulfed the developed world, which has resulted in bond investors looking elsewhere for more attractive opportunities.