The Finance Ministry is considering whether to temporarily stop foreign governments and companies from issuing baht-denominated bonds and swapping the proceeds into US dollars due to concerns over tightening liquidity in the Thai financial market.
Foreign entities planning to raise funds from the primary bond market without swapping proceeds into the dollar are expected to be able to go ahead even after a suspension, a source said.
The amount of baht-denominated debentures foreign companies issued and then swapped into the greenback last year amounted to about 25 billion baht -- relatively small compared with the issuance of corporate bonds worth 570 billion.
The source said foreign firms with operations in Thailand benefit from low funding costs from the practice.
"The temporary ban on foreign entities raising baht-denominated bonds and converting the money into the dollar is fine, but if imposed for a long time, it could affect the country's plan to upgrade the bond market into the Asean hub of funding," the source said.
Liquidity is expected to recede in the Thai market following hefty capital outflows from the bond and equity markets triggered by the US Federal Reserve's recent rate reversal, Thailand's economic slowdown and the government's big-ticket infrastructure investment plans.
Ariya Tiranaprakit, executive vice-president of the Thai Bond Market Association (TBMA), said the market had had net inflows of around 30 billion baht since the start of this year thanks to the increasing possibility the US central bank would slow its rate rises amid the global headwinds including China's slowdown.
She said offshore capital inflows to short-ended notes had been spotted this year.
The Thai policy rate-setting panel is expected to either keep the rate at 1.5% or raise it by 25 basis points to 1.75% late this year, Ms Ariya said.
With the prevailing low-interest-rate environment, supply of new corporate bonds is expected to be 520-550 billion baht this year or even close to last year's 570 billion, she said.
Most issuers will be medium-sized firms engaged in alternative energy, building and materials, businesses linked to government infrastructure investment and start-ups.
The TBMA will continue to encourage mid-sized and small companies in provincial areas to raise funds by issuing bonds and bills of exchange after it successfully attracted 39 new issuers last year, Ms Ariya said.
Higher issuance of debt instruments matches high demand for corporate bonds.
Returns from short-term bonds are 2-3%, bonds of three to five years yield 3-4% and three-year non-rated bonds provide about 5%.
Returns for short-ended bonds depend on the Monetary Policy Committee's rate direction, while longer-term ones are dictated by the Fed's rate movements, Ms Ariya said.