Friday, 14 December 2018

Thriving amid turmoil

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Investors have been flocking to Thailand even as political instability threatens the country. A strong regional economy is lending support to local industry and with Thailand enjoying an economic boom, its financial markets are offering attractive returns to investors, writes Han-Nee Tay.

Violence erupted in the land of the bloodless coup in May this year. “Red shirt” protestors, supporting deposed ex-Prime Minister Thaksin Shinawatra, took to the streets for over a month and clashes with police led to at least 90 deaths in Bangkok. Months later, the political standoff remains in place, but financial markets are thriving. The benchmark stock exchange of Thailand has risen 23.2% from the end of May to September 10.

More tellingly, foreign investors, who were net sellers of Bt59.8bn (US$1.94bn) in the second quarter of this year, have turned net buyers of Bt30.5bn in the third quarter to early September, according to figures from ING Funds Thailand, which has US$3.7bn worth of assets under management in the country. Templeton Asset Management, which has “billions of dollars of investments” in Thailand, said it considered the country stable with an environment that is conducive for business.

“Political stability in Thailand and all countries around the world is a factor when it comes to the rule of law and fundamental rights for businessmen to function without having government interference,” said Mark Mobius, executive chairman of Templeton. “For foreign investors, the ability to bring money into the country and, more importantly, take it out again is the most important factor. To the extent that political instability does not interfere with those basic rights, then it is possible to invest and in many cases, invest more profitably if the perception of other investors is negative.”

It is clear that as long as a reliable legal framework is in place, political strife could be accepted by investors as a part of life and investing in Thailand. As long as regional economies continue to power Thailand’s growth, investors are optimistic and happy to pour money into the country, said market observers. “The protests in May were the latest in a series of protests,” said Kim Eng Tan, a director of sovereign ratings at Standard and Poor’s in Singapore. “First there were the yellow shirts, then now the red shirts. Investors have come to the recognition that there will always be someone on the street. Whichever one of the two big political faction is ruling, there’s the potential for someone to be out there protesting in Bangkok.”

More important for investors is the fact that Thailand is a major beneficiary of strong regional growth. The two behemoths of growth – China and India – are on Thailand’s doorstep. The Chinese economy is expected to expand by a staggering 10.5% in 2010, with India’s economic growth forecast at 9.4% and Thailand’s at 5.5%, according to the International Monetary Fund. As Asia continues to outperform the global economy, many investors have been motivated to reallocate assets to Thailand, where many had previously been underweight, analysts said.

On the back of this projected growth in the economy, capital markets activity is also set to increase in Thailand. Mergers and acquisitions are on the rise, particularly in the energy sector, as consumption in the region continues to increase. The automotive sector is also growing rapidly, with carmakers such as General Motors, Nissan and Honda all announcing plans to build new factories in the country. In the public sector, government spending on infrastructure, including a planned high-speed railway connecting China to Thailand, is also poised to increase significantly.

With this flurry of activity expected in the capital markets, bankers said loan issuance will likely rise this year and next after a muted 2009. As the Thai central bank is expected to raise interest rates by at least another 25 basis points (bp) before the end of the year, borrowers are expected to want to lock in lending rates at current levels. The benchmark interest rate was increased by 25bp to 1.75% in August. Even on an upward trend, the Thai interest rate remains low and as lenders look to expand their books again in the aftermath of the credit crisis. Bankers expect 2010 to be a healthy year for the loans asset class.

The year of the bank loan

“As banks come back to the loan markets and start building their assets, 2010 has become the year of the bank loan, and this is expected to continue into 2011,” said Ornkanya Pibuldham, managing director and head of corporate and investment bank at Deutsche Bank in Thailand. “The loan approval process has been streamlined to be faster than the bond issuance process as banks are eager to resume lending activity. In recent large acquisition transactions, companies have chosen to finance through bank loans rather than bonds. They may choose to refinance in the debt capital markets, but we don’t expect that to happen this year.”  

Bond issuance has indeed been muted this year, with figures at US$5.7bn so far in 2010 compared to US$10.4bn in 2009. However, the secondary market has been active. Investors are reportedly seeing inflows, particularly from foreign investors into the market, as global funds seek exposure to Thailand.

“There are significant foreign inflows into bond and equity markets,” said Jessada Sookdhis, fixed income fund manager at Ayudhya Fund Management, which oversees US$2.3bn. “Especially in the bond market, participation from foreign investors is increasing, mostly from the big global bond funds now that there is more stability on the political side (compared to a few months ago).”

To develop the debt market further, authorities recently relaxed regulations to allow foreign-denominated bonds to be issued onshore. PTT Exploration and Production subsidiary PTTEP Australia International opened the market by selling a US$200m five-year bond to institutions in August via lead manager Bangkok Bank. It is early days yet for this particular asset class in the country, but Sookdhis said he expects to see demand from local private wealth funds for foreign-denominated paper as arbitrage opportunities present themselves.

“It’s still too complicated for retail to buy dollar paper,” said Sookdhis. “There will be more participation from private individuals if the comparative returns of the US-dollar paper are much higher than local paper and offer arbitrage opportunities for investors.” In a sign of the maturing of the financial markets, Thailand is also expected to launch inflation-linked bonds this year, a programme that had been delayed from 2008 as the credit crisis unravelled throughout the world.

The world sneezes, Thailand catches a cold

As such, the picture for the Thai economy and financial markets certainly look rosy at this point. Nonetheless, there are challenges ahead that could still rock the country. Another flare-up of violence between the “red shirts” and the government could undermine financial activity, but the prospect of a global double-dip recession is a bigger worry, with the potential to derail Thailand’s strong growth. There are concerns that domestic consumption alone would not be robust enough to support and sustain the local economy, should global growth falter. There is cause for concern: compared to the high growth figures expected for China and India, the US is only expected to post economic growth of 3.3% this year, Germany 1.4% and Japan 2.4%. In addition, unemployment remains high in the US, while home sales are still weak.

“It would be very challenging for the Thai economy if the US and European economies are in a slowdown,” said Sookdhis at Ayudhya. “We can take some comfort from the fact that we now trade intra-region much more than before. But then, if the G3 economies are in trouble, it will have indirect effects on Thailand. For example, if China and South Korea exports less electrics to the US or Europe, their economies would suffer and that will in turn affect the Thai trade sector. The biggest challenge to the Thai economy over the next few years is global growth.”

Thailand also needs to bolster faith in its regulatory system by making it more transparent and accessible. Market observers point to bureaucratic wrangling and delays that have stalled the development of the port of Map Ta Phut in Rayong province, in which foreign investors have sunk in billions of dollars to build over 70 industrial projects.

Also hampering the market is the continual delay of the auction of third-generation licenses to telecommunications companies due to differences between government departments, policy makers and technology providers. After years of dithering, authorities had finally given the approval for the auction to take place in September. But investors said unwarranted delays like these could hurt Thailand’s reputation as a place to do business.

“Thailand has a responsibility to reduce the perception of high regulatory risk,” said Matthew Williams, head of strategic marketing at ING Funds Thailand. “The Map Ta Phut issue has remained unresolved for almost one year. The 3G license auction has also been delayed for many years.  Now both issues are finally moving forward.”

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