Panelists:
Christian de Guzman, senior analyst, sovereign risk group, Moody’s Investors Service
Boo Hock Khoo, vice-president, operations, Credit Guarantee Investment Facility
Chu Kok Wei, group head, treasury and markets, CIMB
Alisara Mahasandana, senior director, international department, Bank of Thailand
Sutee Losoponkul, head, treasury group, CIMB Thai Bank
Vasu Suthiphongchai, director, fixed income, Manulife Asset Management (Thailand)
Ariya Tiranaprakij, deputy managing director, Thai Bond Market Association (ThaiBMA)
Moderator: Matthew Thomas, contributing editor, Asiamoney
The participants (left to right): Boo Hock Khoo, vice-president, operations, Credit Guarantee Investment Facility; Christian de Guzman, senior analyst, sovereign risk group, Moody’s Investors Service; Sutee Losoponkul, head, treasury group, CIMB Thai Bank; Chu Kok Wei, group head, treasury and markets, CIM; Matthew Thomas, Asiamoney; Alisara Mahasandana, senior director, international department, Bank of Thailand; Ariya Tiranaprakij, deputy managing director, Thai Bond Market Association (ThaiBMA); Vasu Suthiphongchai, director, fixed income, Manulife Asset Management (Thailand).
Asiamoney (AM): The Bank of Thailand announced in April this year that it will loosen the rules on Thai investors moving into offshore markets, investing into foreign currency deposits and buying structured products, as well as loosening the regulations restricting foreign investors coming into the Thai baht market. How soon will this be implemented and how will it impact two-way capital flows?
Alisara Mahasandana, Bank of Thailand: The Bank of Thailand has been gradually relaxing the rules on cross-border investment for several years already. We want to allow Thai residents to invest more abroad, and bring more foreign residents into the corporate bond markets in this country. The main purpose of this is to create a more balanced capital flow in this country, and to facilitate the business activities of Thai corporations in the overseas market. But it is also helping to improve liquidity in the domestic market, too, and that is certainly an important outcome.
We have seen a noticeable increase in terms of two-way flows, meaning foreign issuers coming to the Thai baht market and Thai issuers selling foreign currency bonds abroad. Thai issuers also start to issue foreign currency bonds within Thailand, which shows how much these measures are helping to develop a diverse pool of liquidity in this market.
The latest development, which will be effective next year, applies to retail investors. We will allow high net worth retail investors, those that have at least Bt100m, to invest directly abroad without going through intermediaries.
Many people may feel it is not the perfect timing for us to make these moves, since there is a possibility of capital reversal given the anticipated Fed hike later this year. But we think it is important, in this context, to at least give Thai investors the option of diversifying their portfolio. The gradual nature of these liberalisation measures should help mitigate the side effects of the outflows, and the availability of hedging instruments should also provide a venue for businesses and investors to cushion the outflow consequences somewhat. In addition, the growth measures we are taking in the local market as well as home-bias behavior of investors should incentivise investors to continue to keep much of their portfolio invested in the onshore market.
Keynote: Bringing Thai companies home
• When asked to speak on the resilience of the Thai financial markets, I would be remiss if I did not take a moment to look back at how far we have come. Through years of reform and restructuring, our banking system is in a stronger position today than in the late 1990s. Our financial markets have also become deeper and more liquid, and proved resilient in the face of external shocks. • Of course one cannot be complacent in the face of the great uncertainty that overhangs both advanced and emerging economies. As the BOT continues to press on with the reform and liberalisation of our capital accounts, we are often challenged – 'why liberalise when the Fed is about to normalise and emerging markets are likely to face outflows?' Our reply has always been that the relaxed rules have enabled private participants to manage their risks more flexibly through hedging and unwinding their FX positions. At the same time, residents' increased holding of foreign assets will also help improve the country's international investment position. • The recent relaxation on the setting up of Treasury Centres in Thailand provides greater flexibility to corporates to manage their FX transactions through Thailand. Treasury Centres have been in operation in Thailand for more than 10 years. They were initially set up at the request of multilateral companies that operate in multi-jurisdictions with Thailand as one of their centres … [but we have] discovered that firms that are availing themselves of the broadened TC license are no longer multinational companies operating out of Thailand. Thai companies that have ventured overseas have found it useful to explore a Treasury Centre in Thailand where their headquarters are located, and where they can be serviced by local financial institutions who know their business and with whom they have had longstanding banking relationships. In a way, it is like bringing Thai companies home. • Other developmental works that are being pursued include the promotion of direct quotation between Thai baht and the currencies of our major trading partners that are not G3 currencies such as renminbi and ringgit. A transparent and regulator quotation … will enhance visibility and encourage customers to consider quoting their trade in the currencies of our trading. • With the uncertain environment and possible new normal of low rates and slow growth growth globally, our time and effort are probably best spent on continuing reform work and institution building, and looking for improvement opportunities. Such works will ensure that the Thai financial markets will become more competitive [as well as] able to capitalise and better service the domestic economy when the global economy resumes its normal growth path. |
The following is a series of highlights from a keynote speech made by Chantavarn Sucharitakul, assistant governor, financial markets operations group, Bank of Thailand (BOT).Sutee Losoponkul, CIMB Thai Bank: This move opens the opportunity for investors to go out and explore new names, so the problem investors are facing in terms of a lack of supply will go away. But investors will certainly need to put some work in: they will have to work with the banks to start to understand overseas credits, and they will have to put hedging policies in place. Investors will need to decide which risks they want to keep. They may decide that, often, they actually would rather concentrate on credit risk rather than currency and rate risk in the overseas markets.
Greater liberalisation is going to be exciting for the Thai market going forward, especially when you consider the impact it can have on domestic pricing. By allowing investors to move overseas and get access to a much larger pool of issuers, this move should put some pricing pressure on domestic high-grade issuers. That is probably a good thing for the long-term development of this market.
AM: What is the rate outlook in Thailand at the moment, and how does that compare to other countries in the ASEAN region?
Chu Kok Wei, CIMB: The Bank of Thailand is very proactive in managing monetary policy in this country, and the current level of short-end rates reflects the economic environment at the moment. There is some correlation between political and economic factors in Thailand, but that connection is on a low-basis compared to many other countries in the region. That puts Thailand in a less volatile positon than other countries within the ASEAN region, predominantly Malaysia and Indonesia.
The yield curve is at a very steep level at the moment, but I don't take that as being an expectation of a rate hike. Whenever we see short rate cuts to spur economic activity the long-end tends to come down a lot more slowly, mainly because investors take some time to adjust to the new normal. There is some unwillingness, for a while, to accept the new levels that they should earn on long-dated bonds.
Given the relatively small level of foreign investors in this market, the volatility is not likely to be as large as other ASEAN countries. This is a country that does not need to worry about the foreign flight of capital, because there is not much to start with. That is why we should not make too much of the timing of the capital account liberalisation the central bank has announced; it is a positive that the country is acting from a position of strength.
Christian de Guzman, Moody’s: I agree with that assertion. One thing that countries across the region have learned from the Asian financial crisis is that greater exchange rate flexibility helps with the macro adjustment. Capital account liberalisation is in line with greater exchange rate flexibility.
The aim of this programme, which started in 2012, was to work towards the goal of the ASEAN Economic Community. Thailand has actually been at the forefront of that transition. There has been a limited enthusiasm among some ASEAN countries for more integration within the region, but Thailand has always shown it wants the process to go further. The capital account liberalisation is just an example of that.
The move also helps Thailand with regards to how a rating agency regards currency convertibility and transfer risk. Local investors are now going to be able to look at credits that specifically meet their needs — whether it’s exposure to a particular country or currency, or even simply to diversify away from Thailand — without worrying too much about convertibility. That has to be considered a good thing.
AM: What are the major issues that the ThaiBMA feels should be prioritised in this market, both in terms of regulations and broader market development?
Ariya Tiranaprakij, ThaiBMA: The Thai baht bond market has grown impressively during the past decade. But if you look closely at the dynamics of the market, demand has grown much more quickly than supply. The average growth of demand in this market is around Bt1.1tr per year over the last five years. But net issuance, including government bonds and corporate bonds, is growing at only around Bt550bn per year. There is a huge gap, and its only growing bigger.
For this reason, our priority at the moment is on the supply, not just in terms of improving the quantity of supply but also making sure there is good quality and more diversity, too. There need to be more deals that serve investors risk appetite. MTN programmes have been proposed to the SEC and it has been approved in principle, which we're very thankful for. The introduction of MTN programmes, which will apply to the issuance of Thai baht by foreign issuers as well as local issuers, will increase volumes in this market by making it more convenient, and much quicker, for issuers to tap the market when they see an opportunity.
During recent years, many Thai investors have been forced to go abroad to buy Thai corporate bonds issued in foreign currencies in the secondary market and paying higher spreads. This is because the existing law prohibited Thai issuers from offering foreign currency deals to Thai investors in the primary market. We brought this issue to the SEC who finally approved in principle, allowing Thai issuers to sell foreign currency-denominated bonds to their local investors as long as they file standard documentation before turning to the overseas markets.
AM: How much of a hindrance is withholding tax to foreign investors coming into this market?
Tiranaprakij, Thai BMA: There is not withholding tax on government bond coupons paid to non-resident investors. Capital gains on government bonds are also exempted, in practice, from tax. But interest payments and capital gains are still subject to 10-15% withholding tax on corporate bonds, depending on the tax treaty. This is something we need to overcome if we want to promote cross-border issuance and investment of corporate bonds.
Losoponkul, CIMB Thai Bank: At this moment, most foreign investors concentrate on government bonds. This is not too surprising, since the government bond market is the vast majority of the debt market here. At the end of August 2015, foreign investors held only around 9.3% of total government and BoT debt outstanding, as was mentioned earlier, so they are not really a threat in terms of outflows. It would be useful, in this context, to increase foreign investment in the corporate bond market, and dealing with the withholding tax issue would be a big help.
AM: It would be instructive to get a sense from the rest of the panel about what the priorities should be in this market. What is your wish-list for regulatory changes in this market over the next few years?
Vasu Suthiphongchai, Manulife: We are very, very conservative investors. We are mostly buying investment grade bonds from an international standard, which on a local-scale means we concentrate on double-A rated deals or above. Given Thailand's sovereign ratings, we find it very hard to find enough diversification in terms of the issuers we hold in our portfolio.
We have to settle instead largely for paper issued by foreign credits in the Thai baht market; issuers like the Asian Development Bank, Mercedes Benz or Toyota Leasing. The recent move by the SEC and the central bank to increase the number of foreign issuers in this market is very encouraging from our point of view. It could make a difference in terms of actually giving us greater freedom when we approach our portfolio management.
It is also very encouraging to see that eventually local investors will be able to invest directly in overseas markets. We think that retail investors will still need some sort of advice and guidance from investment managers in terms of which market to go into, which currency to go into, and especially, whether or not they should be hedging some of their exposure. The recent volatility in the currency markets shows the difference in returns investors would have got when hedging or not hedging.
We would like to see much more hedging flexibility in this market. There are interest rate swaps available, but that is based on dollar funding levels and Thai baht fixings. It is not a proper hedging tool. We also have bond futures, but the liquidity is really not enough. The solution is to develop a domestic funding benchmark that can provide a more responsive input into interest-rate swap calculations. BIBOR could be the answer to this problem, but its liquidity needs to improve. That would certainly be on my wish list of changes for this market.
Losoponkul, CIMB Thai Bank: With the liberalisation of the market landscape in Thailand, the situation facing investors is going to change dramatically. Investors will be able to go overseas directly, but that will depend in part on their resources in terms of monitoring foreign credits. We will see a segmentation happen between those investors who can move to the foreign markets on their own, and those who need managers to screen credits or provide hedging for them.
Kok Wei, CIMB: The greater availability of hedging instruments is extremely crucial for the development of this market, especially when you are looking at liberalisation. Why do domestic investors want to go overseas? To generate greater returns. But where do they want to get their returns – from credit risk, FX risk, liquidity risk, credit spread views or something else? It is about understanding where the comparative advantage is, and how to use hedging instruments to improve your return or reduce your risk.
The hedging instruments available today allow, to a large degree, the separation of these different risk factors. In a more globalised market, foreign investors will become a more important source of bond demand in this country. A good understanding of hedging instruments is going to be important for issuers here in appealing to those investors. When foreign investors come to this market, which risk factor are they concentrating on? That is going to drive asset valuations, and having some knowledge about that is going to help investors and issuers a great deal. This should not be underestimated.
It is worth noting that a variety of hedging instruments are available, to some extent, in most ASEAN markets. But instruments for hedging credit spread movements are practically non-existent in these markets. It would be very useful to see the development of more CDS liquidity.
Mahasandana, Bank of Thailand: It's good to hear the comments of market participants on the risks of the capital account liberalisation and the need to develop hedging instruments to help mitigate risk. This is something that the Bank of Thailand and other authorities like the SEC discussed when we were considering capital account liberalisation. These issues explain why we tried to do it on a gradual basis; there is still a cap on investments. The discussion from panelists today has done a good job, I think, of showing why that is the right move for us.
We are trying to make this market more diverse but also more resilient, making sure that issuers and investors have the right tools to manage the risk of volatility. We want investors to be prepared for the risks they will take in the long-term as we liberalise the capital account more. It is important to take these gradual steps.
AM: The lack of highly-rated securities that Khun Vasu mentioned is an interesting point to dwell on for a moment. This seems an area where institutions like CGIF could help. We tend to think of CGIF as being geared towards helping issuers tap overseas markets, but is part of the job also helping investors in the region? Could you see purely domestic guarantees becoming a greater part of your focus?
Boo Hock Khoo, CGIF: Allow me to respond from three different perspectives. Firstly, we have tried to attract conservative investors in the region to new markets – like our transaction for a company in Indonesia. As a guarantor, what we can do is limited to delivering the credit enhancement so that conservative investors – Japanese insurers in this case – are willing to buy the Indonesian rupiah bonds. We worked with a very strong company in Indonesia, but without the guarantee these investors would never have had an opportunity to buy their bonds. In fact, these Japanese insurers do not even buy Indonesian government bonds. Unlocking these types of investors is certainly an area where we can play a role. In the same vein, Thai investors can also invest in our guaranteed bonds in other ASEAN markets.
There are other factors that have a major impact on market development, however, like swaps, foreign exchange and withholding tax that are difficult for us to overcome with a guarantee. There are things we can fix with a guarantee and there are things we cannot.
Secondly, we are working with a Chinese issuer on a Thai baht bond that we hope will come to the market this year for the benefit of Thai investors. That issuer is making a very large FDI into Thailand, but it never occurred to them to issue a Thai baht bond until we sat down with them. They were only borrowing between one and three year tenures in the bank loan market. They saw that by using our guarantee they could issue a 10 year bond, which would more closely match their long-term investment into this country. So, it is not just companies coming synthetically into Thai baht market; it is also those who are planning large investments in this country and need help with funding.
Thirdly, we can help Thai investors indigenously in the project bond market. We need to design project bonds that are both high grade and high yield. But unfortunately, as we look across the region, many of the green-field projects have this construction risk hurdle. Many bond investors have told us that they cannot take the construction risk. This is why we have decided to look into wrapping construction risk. That would have a big impact on helping develop the project bond market in this region if it takes off.