Proposed easing of controls for debentures

Fund managers have welcomed the central bank's proposed exemption of foreign investment in debentures from its 30-per-cent capital-reserve requirement when the debentures are fully hedged and registered during transfer.

They say the relaxation will allow the debt market to return to normal.

Their comments came after Bank of Thailand (BOT) Governor Tarisa Watanagase said consideration would be given to relaxing capital controls on foreign investment in debt instruments if the baht were stabilised.

She said if implemented, the relaxation would exempt foreign investments in debt instruments from the harsh withholding requirement if they registered during transfer. That means the identity of both the transferor and the transferee would be registered. As well, capital inflows for investment in both long- and short-term debt instruments must be fully hedged.

Ratchakritpong Ekrangsun, executive vice president of KGI Securities' Fixed Income Department, said if the relaxation were implemented, then the market would probably return to normal in the middle to long term.

"Actually, hedging is what corporations must do - in principle - when they are about to issue debentures. The BOT's [proposed] measure gives a clearer direction. Also, it would help solve short-term speculation in the bond market," he said.

"However, issuers would not forget to price in the cost of hedging. Corporations would be left to choose whether to issue debentures or borrow from banks. It will depend on the details, which will have to be scrutinised sector by sector."

The central bank's withholding requirement has resulted in a sluggish debt market, because investors and issuers have hesitated to participate, fearing the impact of uncertainty from the capital-control measure.

Arsa Indaravijaya, head of fixed-income investment at Ayudhya Fund Management, agreed that the relaxation, if it went ahead, would help increase the flow in swap transactions.

"Since the central bank announced the 30-per-cent reserve-requirement measure, the swap curve has declined to almost [the same level] as the government's bond yield. The gap between the government's bond yield and the swap curve should be about 30-40 basis points," he said.

"If the measure is implemented, it will increase liquidity and push the swap curve back to a normal level. Multinational companies that would like to lend money to their subsidiaries in Thailand will be able to get back to business."

On Monday, the BOT announced it would exempt corporate offshore loans, fully hedged for up to one year, from the 30-per-cent reserve requirement effective from today. It will also exempt fully hedged intercompany loans, foreign-currency receipts of public issues of debt instruments, money brought in for investing in stock warrants or for buying non-performing loans left by insolvents.

Piyarat Setthasiriphaiboon

The Nation
Thu, February 1, 2007