Nachum Kaplan, IFR Asia Pacific Bureau Chief
The rise of Asia’s local currency bond markets may be old news but it still comes as a shock to see that Thailand‘s local market is now so big that the Kingdom feels it is able to turn all of its debt into baht.
The debt office manager’s comments to IFR last week show that the region’s local markets are approaching another milestone in their development – one where sovereigns as well as corporates can secure much of their funding in their own currency. Recent liability management exercises from the Philippines, including its use of peso-denominated global notes to refinance dollar debt, are another example.
Given that Thailand’s local currency market is now worth Bt8trn (US$268bn) – or about the same as the country’s bank market – the Kingdom’s confidence seems entirely justified. This is a poignant moment for Thailand because it is where the Asian Financial Crisis began in 1997, when too much short-term offshore debt helped tip the baht into freefall, sparking contagion that spread across the region.
Given that the flows of hot money into Asia over the past 12–18 months have reached levels unseen since before the Asian crisis – prompting older (if not necessarily wiser) heads to fret about a possible repeat – Thailand’s Public Debt Management Office must be feeling pretty pleased with itself.
The Philippines’ story is less redemptive because it escaped the worst of the Asian crisis for the wrong reason – it was an underachiever before the crisis, just as it has been since. That is not to say that the country learned nothing from it. It is rarely rated as a tiger economy, but the Philippines has in recent years turned itself into Asia’s most sophisticated sovereign issuer. It can issue off its dollar MTN programme almost instantaneously and been at the forefront of taking local currency bonds to global investors. Its deals have even won IFR Asia awards – and we do not give them to anybody.
While local currency markets have developed across Asia, many are not yet deep enough to compete with global funding. Indonesia, another country with a long-standing foreign debt addiction, has done a good job of building its local currency bond markets. Better-rated Indonesian corporates can do much of their funding at home if the amounts are not too large. However, the Indonesian market is nowhere near deep enough that the sovereign could tap it and is probably some years off reaching that point.
Down the curve
The next step in the development of the local markets will likely be the hardest of all and that is providing liquidity to lesser-rated credits.
Sovereigns shifting or starting to shift more of their funding to their local currencies is a natural result of local markets become deep enough to support bigger and longer borrowings. It says nothing about risk appetite, because domestic sovereign bonds are a risk-free asset – not a credit bet. If anything, sovereigns funding locally says more about the size of local markets than it does about their depth or sophistication.
There is still little appetite, or liquidity, for lower-rated issuers in the Asian markets, so these credits either have to tap the bank market or borrow offshore, which is one reason why there are so many high-yield G3 issues out of Indonesia.
Thailand’s plans to fund itself 100% domestically shows how far Asia’s markets have come. Lower-rated issuers’ lack of access shows how far they have to go. Let’s hope it doesn’t take another financial crisis for the development to continue.
