The third economic coronavirus relief package worth at least 1.9 trillion baht is not without controversy. Various aspects of the plan, which was announced this month, has been criticized by analysts and former officials.
The Bank of Thailand (BOT)’s move to buy corporate bonds with a budget of 400 billion baht has been singled out as being one of the more controversial measures.
Many advocates; in line globally
The BOT is not the only central bank to take such action.
For example, the US Federal Reserves’ latest bond-buying round will see them buying at least $300 billion US worth of corporate bonds and other securities to prop up their long-term value.
They said they are doing this because investors are rapidly exiting risky assets to either keep cash or buying up safe-haven assets amid crisis. This panic selling is happening everywhere because of the coronavirus pandemic, including Thailand.
The BOT argued that the Corporate Bond Stabilization Fund (BSF) that was approved by the cabinet last week is required since the liquidity within the corporate bond market, which is an essential channel of savings for households and financing for businesses, have “tightened” and shown signs of “dysfunction.”
The total outstanding value of the Thai corporate bond market is around 3.6 trillion baht or more than 20 per cent of the GDP.
“If the corporate bond market cannot function properly, or investors lose confidence during the period of heightened economic uncertainty, additional financing or rollover will be limited and highly costly, even for high-quality firms,” the BOT said in a statement.
“Therefore, there are risks that many corporations will experience liquidity shortage and may not have sufficient capital to conduct normal business operations, which may become a systemic risk. This will impact savers through intermediaries.”
Ariya Tiranaprakij, senior executive vice-president at Thai Bond Market Association, agreed with the BOT and told Thai Enquirer that the BOT’s measure is “needed” to help stabilize the private bond market.
She explained that the value of maturing bonds every year is 500-600 billion baht. Around 50 billion baht worth of bonds were classified as high-yield in 2020 and normally, they will all be booked. That is not happening due to the coronavirus outbreak.
For example, Ananda Development on April 2 announced a bond tranche to refinance its upcoming maturing bonds. The terms of the bonds came with 2 and a half year of maturity and 4 per cent yield.
The bond’s size was about 2 billion baht. As it turns out, the demand for the bond was only 740 million.
“In general, almost no company will prepare enough cash to payout 100 per cent of their bonds and given that the [coronavirus outbreak] situation happened very quickly, it caught everyone by surprise,” she said.
“The new round of measures are needed because companies did not reach their selling target and did not prepare enough liquidity for [this] situation,” Ariya said.
She added that if many companies with good fundamentals cannot fully rollover their bonds, the situation will further effect investor confidence and it will damage other financial market via the domino effect as well.
When asked how many companies are experiencing a shortage of liquidity, she explained there is less than 500 billion baht worth of bonds left to be roll-overed in the next 6-7 months. Of that, around 90 per cent of bonds that are due to mature this year are of investment grade.
This is important because one of BOT’s conditions for its bond-buying program is that they will only buy bonds that are of an investment grade.
Many of the large corporations that are eligible for the program like PTT would unlikely come out to ask for money from the central bank to help them rollover their bonds because the interest rate for fund will be higher than the market.
“They will only go to the central bank as a last resort,” she said. “The measure will add confidence for investors and it will stop the spread of the problem to other markets,” she added.
Sornchai Suneta, Managing Director of the Chief Investment Officer at Siam Commercial bank, told Thai Enquirer that apart from the switch to cash, investors were also selling to take profit as the Thai bond market has been doing very well in the past decade from the low level of the interest rate.
“We were in a boom market until the market correction during the outbreak,” he said.
Sornchai pointed out that the Thai financial market is getting better because the global financial market is recovering as major central banks are flooding their financial market with capital.
The 2008 crisis was a learning experience because the FED acted so slowly, Sornchai said.
“Many central banks around the world were quite fast and unbelievably aggressive once the outbreak happened, both monetarily and fiscally,” he said.
The SET has also shown its approval for the BOT’s measure to add liquidity into the private bond market.
“The measure is suitable and up to date,” they said in a statement last Friday. “The measure will add confidence for the bond market and the overall financial market and it is in line with the actions that have been taken by other major central banks around the world such as the US, the European Union, and Japan,” they added.
Room for abuse
A prominent group of economists led by BOT’s former chairman Veerapong Ramangkun, have criticized the BOT’s move via an open letter to the central bank.
The group said that the BOT should not be giving out direct soft loans as the measure could be done via state-owned banks and special financial institutions (SFIs). They reasoned that the central bank should stick to their principles and that the central bank should only be the government’s bank. They should only act as a lender of last resort for commercial banks.
“The law allows the Bank of Thailand to use its discretion in helping some companies but not others based on credit ratings that are being given by credit rating companies,” the letter read.
“If there is a lawsuit, the BOT will have to sue private companies and that will destroy the image and the credibility of the central bank.”
Veerapong pointed out that similar moves under the Sarit Thanarat government over half a century ago resulted in massive debts and problems for the country.
The BOT countered these criticisms by saying that conditions and a committee will be put in place to ensure transparency. They also said that the emergency decree that will be used for the authorization of the BFS is not an amendment but more of a temporary action that could last 5 years.
Apart from the condition that the bonds have to be of investment-grade, other conditions are that eligible corporate bonds must have raised the majority of their funding needs through other means such as bank loans or capital increase, have a clear long-term financing plan, and meet other conditions as set out by the BSF’s investment committee.
“There are clear criteria such as minimal ratings and they will have to come to the central bank as a last resort which is what they are,” Ariya said. “The BOT will not give 100 per cent of the fund, they will only add to what is missing and they said that the limit would be around 50 per cent but we still have to wait once the emergency decree comes out,” she said.
She also explained that the BOT will definitely look at companies’ financial plan and their ability to raise funds in the future,” she said.
