By
Michael Preiss
HONG KONG (KWR) There are some recent developments in Thailand, which could
make the country even more interesting to investors in 2004. Last
year Thailand was the market for equities. The SET being the best
performing Asian equity market (+135%) and the Thai baht has risen
(+8.7%) against the US dollar in 2003.
In 2004, however the investment story in Thailand might be corporate bonds.
More than 30 blue chip Thai companies are expected to have their corporate
bonds listed and traded on the domestic market in the 1st quarter of 2004.
The deepening of the domestic corporate bond market helps the government’s
objective of not only having quantity of growth but also “quality” of
growth.
This is because of the following reasons: Corporate bonds provide added fuel
for the already fast-growing economy, while at the same time, reducing the
risks of overheating.
The reason being that it offers companies and investors a less risky alternative
to the stock market, better asset allocation, capital structures and as an
end result, better risk and capital raising diversification.
The Thai economy is expected to grow by over 6% in 2004, which would make
it Asia’s third-fastest growing economy after China and Vietnam. Private
sector economists are even more bullish, forecasting growth this year to
be at around 6.4% and 8% for 2004.
Prime Minister Thaksin is even more ambitious and wants economic growth to
reach 10% in 2005. However, without a liquid and well functioning bond market
this most probably would lead to an overheating of the economy and misallocation
of capital.
Non-performing loans are still putting a drag on quality growth but the increased
issuance of liquid debt securities will help in assisting the workout and
restructuring of bad debts.
In addition, more corporate bonds issues will result in better capital structures
for companies, a lower weighted average cost of capital as well as providing
an alternative to bank financing.
Another added advantage of the bond market is that of channeling funds to
the right sectors of the economy. Bank lending sometimes tends to be politically
motivated, but the scrutiny and more democratic nature of the bond market
helps an economy to best allocate capital for productive rather than speculative
use.
For this very same reason, Chinese authorities at present are carefully studying
and implementing the enhancement of their local currency denominated bond
markets.
Thailand has shown leadership by setting up the Bond Market Exchange (BMX),
a new trading platform for corporate bonds. Trading liquidity of listed companies
has been improved, an efficient clearing and settlement system has been introduced
and as a result a wider array of alternatives has been provided.
Before the launch of the BMX, bond trading was the domain of the Thai Bond
Dealing Centre (TBDC) whose purpose was to provide infrastructure for the
secondary bond market and to facilitate discussion of issues related to bond
market development.
Pricing transparency however was low and there was no scope for retail investors
to get involved. Even among institutional investors most of the activity
was concentrated on government rather than corporate bonds.
This in turn lead to little interest by companies to issue corporate bonds
due to a lack of investor interest and subsequent low liquidity and transparency.
But now this is all changing. Last month the BMX started trading with Bt141
billion of bonds (US$3.5 billion) from some of Thailand’s leading companies:
Siam Cement, Thai Airways, National Finance (the country’s biggest
finance company) Advanced Info Services (the nation’s largest mobile
phone company by subscribers, and its parent Shin Corp, (Prime Minister Thaksin’s
main company).
Buyers and sellers can get their bonds or money two days after executing
a transaction, one day faster than the settlement for stocks.
Before the launch of the BMX, only 53 of Thailand’s 415 listed companies
had raised funds through the bond market. Total outstanding issuance amounts
to approximately Bt 542 billion or less than 10 per cent of the market value
of all the stocks that trade on the Stock Exchange of Thailand.
The BMX’s electronic trading and efficient settlement system will open
the bond market to retail investors. Hong Kong as well is slowly warming
up to the idea of a retail bond market.
However, breaking the dominance of the stock market might be difficult at
first. This applies to both Hong Kong and China as well as Thailand -- but
it is equally important.
The bond market in Thailand and Asia is still in its early stages. A strong
educational push is needed, but there is a lot of room to grow and the outlook
is very promising.
The Writer is the Chief Investment Strategist
for CFC Securities.
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