Some of the world’s largest investment funds returned to Thailand for the first time since 2006 last month, displaying overwhelming demand for Bt40 billion ($1.37 billion) of inflation-linked bonds. International investors took up two-thirds of the debt, accounting for Bt24 billion. The biggest investors came from the US and Singapore, with investors from 11 countries making up the total book.
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Many of these international global investment funds exited the country in 2006 amid political turmoil after the military coup and subsequent capital controls issued by the Bank of Thailand (BoT). “The return of these large global funds highlights how investor confidence has returned to Thailand, and that they see we have price stability here,” explains Chularat Suteethorn, the director general of the government’s public debt management office at the finance ministry.
“Moreover, the tenor of the debt shows that investors are here for the long term – this is not just hot money coming into the country,” she says.
“The fact that Thailand has issued another ILB this year is a clear message to the market that the government plans to control inflation,” says Niwat Kanjanaphoomin, president of the Thai Bond Market Association. “But this can come at a high price to the government.”
The first ILB issued by Thailand was in 2011 for Bt30 billion and with a shorter tenor of 10 years. Two-thirds of the book was taken up by domestic investors. “Investors received returns of 1% on top of inflation, which was a lot more than real returns in the market at the time, about 0.85%. The 15-year ILB could create similar problems for the government and end up being a costly product.”
Suteethorn is much more positive, however: “International investors were much more aggressive this time around,” she says. “This, combined with the overwhelming demand we saw for the issue, meant that we could price the bond at the lower end of the guide price at 1.25%, which was a lot better than we initially expected.”
The 15-year ILB was three times oversubscribed. According to BNP Paribas, the Thai bond market has attracted $7.3 billion in inflows this year, the biggest of any Asian market. HSBC, Deutsche Bank, Bangkok Bank and TMB Bank were the lead managers on the deal.
ILBs provide investors with a hedge against price instability by linking principal and interest payments to an official inflation index. The Asian Development Bank forecasts 4.2% inflation in emerging Asia in 2013.
Deepening bond market
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| Chularat Suteethorn, the director general of the government’s public debt management office at the Thai finance ministry |
Thailand has started issuing a variety of bonds to develop the capital markets, says Suteethorn. “Some of our investors have requested more innovation of the Thai bond market, so we started looking at new types of products and have reacted to this,” she says. “Through this, we have not only expanded the Thai capital markets through diversification, but we have expanded our investor base.” As part of the diversification of the bond market, Thailand issued its first amortizing bond in December – a Bt30 billion 25-year deal. The government also hopes to issue its first dollar-denominated bond since 2003 this year, raising between $1 billion and $3 billion.
“We hope to issue another ILB at the beginning of next year, for a longer tenor,” says Suteethorn. “The goal is to have a benchmark for ILB by the time we enter into the Asean Economic Community (AEC).
"Thailand sees itself as a regional leader in the AEC because of its newfound resolute economic development and geographical location, so it’s important for us to have these references for the domestic corporate market as well as our regional peers.”
But the likelihood that corporates in Thailand will follow in the government’s footsteps and issue ILBs is limited, says Kanjanaphoomin. “Corporates in Thailand would rather have costs that they can predict, and ILB can be a bit more unpredictable and expensive compared with plain-vanilla bonds.
"There might be some companies, oil companies for instance, that have inflation-linked businesses that could be more tempted to issue ILB.”
South Korea, Hong Kong and Japan are the only other countries in the region to have issued ILBs, but the Philippines might be next in line to issue inflation-linked debt, says Suteethorn.
“A representative of the Philippines is scheduled to come and visit us at some point this month to learn a bit more about the bond and perhaps look to doing something similar in the future,” she says. “We think Thailand will be a leader in the development of the debt capital markets within the Association of South East Asian Nations.”