Thailand’s stock market fortunes continue to grow on last year’s successes but, with the 1997 crash still fresh in investors’ memories, is it enough to convince the doubters to invest in other instruments, asks Simon Montlake in Bangkok.

Underpinned by a strong economic recovery, Thailand’s stock market was among last year’s high flyers with a 22% climb, a trend that has continued in 2003. While foreign funds are benefiting from Thailand’s growth story, domestic investors remain the driving force in Thai equities. This is partly because most are forbidden to invest their capital in overseas markets.

As low bank deposit rates continue to fuel interest in other investments, many observers think Thai securities have a bright outlook. The Stock Exchange of Thailand is busy promoting equities to domestic investors, notably through regional roadshows designed to tap potential investors outside Bangkok, which dominates the financial sector.

Yet behind the market froth there is a reticence among some Thai investors to bet on equities. Memories of the 1997 crash linger – it wiped billions of dollars off asset prices – and mutual funds that promise high returns are often greeted with suspicion due to dubious past practices.

Investors are wary

“Investors were badly hurt [in the crisis] and that’s why they stay away from capital markets. They are still reluctant to invest in such instruments,” says Jada Wattanasiritham, president of Siam Commercial Bank.

Broad economic growth may still convince the doubters that Thailand has turned the corner, and the low interest rate environment should also help to boost interest in equities. But investor caution is reflected in the huge gap between the liquidity in the banking system – put at Bt5000bn ($120bn) – and the mere Bt200bn invested in mutual funds.

Stock supply is short

Market participants say the other side of the coin is the limited supply of well-regarded stocks. Hopes of fast-track privatisations of state companies, including nationalised banks, have not been realised and private companies are increasingly issuing debt, rather than equity, to keep their operations ticking over.

“For capital markets in Thailand to grow, we definitely need more good companies to list,” says Supavud Saicheua, managing director of Merrill Lynch Phatra Securities.

Still, the reshaping of Thailand’s debt market in the past few years has been among the brightest developments. An upsurge in corporate debentures combined with a huge flow of government issues has lifted fixed-income securities into second place behind bank loans among Thai assets.

As of April, the bond market was worth Bt1660bn, of which the majority of issuances came from the government and state companies. In part, the expansion in Thailand’s debt market has come from the government’s need to restructure huge borrowings incurred during the crisis.

Until the 1990s, Thailand had ceased issuing domestic debt because its large surpluses prevented the government from tapping local markets. But since the crisis – itself the product of reckless bank loans and excessive currency risks – the country has woken up to the benefits of a liquid bond market. A new system of primary dealers and regular auctions of a range of government paper have transformed the debt market.

Thai companies are taking advantage of this expansion. Last year there was a record number of new issuances that lifted the corporate portion of the bond market to Bt280bn, and underwriters say at least Bt50bn will be brought to market this year. Among the major issuers is Aromatics Public Company, which sold Bt12bn in five-year and seven-year paper, an offer that was 1.5 times subscribed.

“There’s lots of room to grow. We’re seeing strong growth in capital markets for both corporate and government issues,” says Vorapak Tanyawong, managing director of debt capital markets at Deutsche Bank, one of 10 primary dealers in Thailand.

Thailand’s Stock Exchange Commission recently eased restrictions on bond issues from local units of multinational companies, whose paper attracts high ratings thanks to parent-company backing. This has spurred new listings by units of GE Capital and Nestlé, among others, giving investors yet more room to diversify their holdings.

Many large companies have repaired their balance sheets in recent years by issuing domestic debt and refinancing expensive bank loans that fuelled their 1990s expansion. For bankers, this move presents something of a challenge because disintermediation is expected to gain pace as Thai companies rethink their long-term financing needs.

Government issues

Away from corporate debentures, Thai investors have proven enthusiastic buyers of government issues. Last year’s Bt305bn savings bond, which was marketed through domestic banks, sold out in less than three days. Government securities now account for 45% of all paper issued in Thailand.

That commanding role may be curtailed, however, as the government’s fiscal position improves. Market participants say they are hopeful that Thailand will continue to use domestic bond financing because it provides direction to the market and keeps investors in the game.

“In the next few years, the government budget will be in surplus,” says Nattapol Chavalitcheevin, president of the Thai Bond Dealing Centre. “Under the old law, the surplus means the government cannot issue bonds. But we need government bonds as benchmarks and to supply liquidity.”

Not that the industry is sitting still. A new futures exchange for bonds will be launched later this year, and the Bond Dealing Centre is fine-tuning an electronic trading platform that it wants to introduce in 2004. Interbank repo trading is also likely to take shape during the next year as the market begins to acquire a more sophisticated and transparent structure, one that should boost Thailand’s financial strength in the years ahead.

thailand backs asia bond initiative

Thai Prime Minister Thaksin Shinawatra has emerged as an enthusiastic backer of the Asia Bond Fund, a $1bn fund set up in June with support from 10 other countries, including Japan. The idea of using Asia’s substantial foreign reserves to create a regional bond market has been around for several years but only became concrete this year.

Initially, the fund will invest in dollar-denominated sovereign issues in eight Asian countries. Managed by the Bank for International Settlements in Hong Kong, the fund will not invest in local-currency bonds or corporate issues. But central bankers who agreed to set up the fund say its scope could be expanded in future.

“Hopefully, the fund will make it cheaper for Asian issuers to issue bonds,” says Thirachai Phuvanat-Naranubala, deputy governor of the Bank of Thailand.


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