Bond market hit by low participation

After nearly two decades, the local bond market is still immature, says Nattapol Chavalitcheevin, president of the Thai Bond Market Association, which trades over 600 bonds.

Both the primary and secondary markets do not function well due mainly to unclear policies in state bond issuance, low participation from corporate issuers and the narrow variety of products and investors, he said.

"The bond market is almost 60 per cent of gross domestic product. That looks huge, but it's illusionary given that nearly half of the bonds are from the Bank of Thailand. We need more bonds from permanent issuers, whether state bonds to finance mega-projects or corporate debentures," he said.

Without the central bank bonds, the market is 40 per cent of GDP.

In an effort to set benchmarks, last year the Finance Ministry was authorised to issue bonds even when the country is not running a fiscal deficit.

Still, the market is too small. State enterprises, like blue chip companies, will come to the bond market only when interest rates are attractively low.

In most cases, if they are large enough, they can resort to other funding sources, domestic or overseas.

With little concern about funding-risk diversification and with easy access to an active banking industry, which could expand anywhere, smaller companies also find it more convenient and cheaper to seek bank financing.

In the US, where the corporate bond market is most active, banks must get a licence to operate in each state. This limits access to bank loans and companies turn to the fixed-debt market.

Aside from the convenience of bank loans, Thai companies need to get a bond issue rated for a public offering, with rating fees starting at Bt700,000 regardless of the size.

The underwriting fee could also take 15-20 per cent of the proceeds.

Potential issuers thus opt for private placement, and the issue is small.

"It's not worthwhile to publicly offer bonds in small sizes given the fees," Nattapol said.

This scares away small issuers, which might attract little attention from investors.

"It's like an election race. If you're a newcomer and have never set foot in your constituency, who's going to vote for you?"

The veteran economist noted that the bond market is captive for another reason, because only a few companies are large. Most companies with over Bt100 billion in assets are units of overseas companies, which can tap funds anywhere.

The local units can also seek funds from or through their parent companies.

The bond market would see more issues if the Board of Investment made it conditional on the winners of tax incentives to issue baht bonds to finance their operations here.

Since potential issuers are limited in number, the variety of products on offer is also limited.

The second of this two-part series will cover Nattapol's suggestions on how to make the bond market more active.