Thai regulators want this week's debut baht-bond sale by Laos, whose economic growth has averaged 7.5% in the past five years, to blaze a trail for issuance by larger Southeast Asian neighbours.
Laos, which is profiting from power sales to Thailand after increasing hydroelectricity production 29% in 2012, raised 1.5 billion baht (US$50 million) of three-year notes at 4.5% in a private placement. That is a premium of 181 basis points over similar-maturity Thai government notes.
A ruling that foreign sovereign issuers do not require a credit rating may encourage Cambodia and Myanmar to follow suit, Thai Bond Market Association President Niwat Kanjanaphoomin said.
The Lao bond is a milestone for other countries that want to raise funds in Thailand, Niwat said in a May 28 telephone interview from Bangkok. If the outcome is successful, there will be some discussion on that with Myanmar and Cambodia, he said, adding that its cheaper to borrow in Thailand than in Laos because the regions second-largest economy offers a bigger pool of investors.
Southeast Asia needs to spend $1 trillion this decade on infrastructure such as railways and ports for which financing will increasingly be sought from within the region, the Asian Development Bank estimates. The Manila-based lender forecasts Laoss economy will expand 7.7 percent this year and next, supported by investments in hydropower, mining and construction of hotels, offices and houses.
Attracts Investors
The bond sale offers diversification for local investors and makes the Thai market more attractive relative to its peers, Pongtharin Sapayanon, the Bangkok-based head of fixed income at Aberdeen Asset Management Plc, which manages $322 billion globally, said in an interview Thursday.
"This attracts foreign investors. If you are a Singapore investor who wants exposure to Laos, you will have to come to Thailand."
Thailand backed its neighbour's decision in November to push forward with a $3.7 billion dam on the Mekong River, dismissing claims from activist groups that the structure would damage the environment. The hydropower plant is the first among eight that Laos plans to build on the Mekong to expand its economy by selling electricity to neighboring countries.
Vietnam in 2011 recommended a 10-year delay for all dams on the river, which also runs through Myanmar, Thailand and Cambodia from its source in China's Tibetan plateau.
The Lao notes mature in three years and proceeds will finance the government's budget deficit and other investments, according to a filing on the Thai Securities & Exchange Commissions website. TMB Bank Pcl helped arrange the sale.
Zero Default
The likelihood of default is zero, Noy Siackhachanh, a senior adviser at the ADB's office of regional economic integration in Manila, said in a May 28 telephone interview. Even though it doesn't have a rating, they have a revenue stream coming from the sale of electricity. It's a step for Laos to come out of its own market to issue bonds in Thailand. It's a way to test the market.
Cambodia may take several years to follow suit, she said. The nation still relies on concessional loans because its economy is still in the early stages of development, according to Siackhachanh. Cambodia is rated B2 by Moodys Investors Service, the companys fifth highest junk grade. Thailand is ranked Baa1, the third-lowest investment grade, while Laos doesn't have a rating.
Laos's sale took four to five years from when it first proposed issuing baht bonds, Chularat Suteethorn, director general of Thailand's public debt management office, said in an interview in Bangkok Friday. "Others may need less time because we already have an example and know what fundamental infrastructure they need for bond issuance," she said.
Asean Economies
Laos, Thailand, Cambodian, Myanmar and Vietnam are among the 10 members of the Association of Southeast Asian Nations, or Asean. The grouping is seeking to encourage capital flows within the region to expand its debt markets. In 2012, Asean published a 1,500-page guide to its markets including Thailand, Laos and Vietnam.
Laos, with a population of 6.6 million, is opening up Asean's smallest economy. The nation's stock exchange started operations in January 2011 with two companies listed, beating Cambodia, which opened its bourse last year.
Like Vietnam, Laos is a one-party state, ruled by the Lao Peoples Revolutionary Party. Both countries began introducing market-oriented economic measures in 1986. Laos was accepted by the World Trade Organization this year, becoming the last of the Asean members to join the global trading club. Vietnam was inducted in 2007.
Lao Kip
While Thailand has sparred with Cambodia over territorial disputes in recent years, its ties with Laos are smooth and the two nations share a similar language.
The Lao kip is a managed, floating currency, and has strengthened 3.7% this year to 7,680.95 per dollar, according to data compiled by Bloomberg, outpacing the baht's 1.3% advance in the same period.
Thailands local-currency sovereign debt returned 1.9% this year, the best performance in Asean after the Philippines and Malaysia, indexes compiled by HSBC Holdings Plc show. The nation's three-year yield touched 2.67% on May 21, the lowest level since December 2010, and was 2.69% Thursday, according to data compiled by Bloomberg.
Financial Centre
The cost of insuring Thai sovereign debt for five-years using credit-default swaps fell six basis points this year to 88.5, according to data provider CMA, which is owned by McGraw- Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That compares with a decline of seven basis points for the Philippines and a 29 basis point increase for Indonesia.
"We have an ambition to promote Thailands capital markets as the center for neighboring countries to raise funds," Vorapol Socatiyanurak, secretary general of Securities & Exchange Commission, said on May 28 by telephone from Bangkok.
"It will also benefit Thai investors by providing new alternative financial instruments. Laos, Cambodia and Myanmar have been key trading partners and investment destinations for Thai companies."