The Thai bond market now averages 65 billion baht in daily transactions -- a remarkable increase from just 1 million baht in 1994.
Bonds serve as vital financing instruments for both public and private sectors. With such significant values at stake, investment decision tools become crucial, particularly Credit Ratings issued by Credit Rating Agencies (CRAs). Companies seeking to raise funds through bonds must engage CRAs to assess their credit ratings. These ratings influence bond yields and play a key role in attracting investors.
However, recent market experiences have shown that credit ratings don't always capture the full spectrum of risks. Cases of "fallen angels" -- where bonds face severe downgrades -- have demonstrated how rating changes can significantly impact both individual securities and broader market confidence.
This reality highlights the important role of CRAs, which demands a thorough evaluation of business and financial factors, along with continuous monitoring of market conditions. Additionally, CRAs need transparent procedures, accurate data, and effective management of potential conflicts of interest. They must also ensure investors have comprehensive access to rating information.
Thailand currently has two credit rating agencies: TRIS Ratings and Fitch Ratings. Both operate under the Securities and Exchange Commission's (SEC) supervision, which maintains a white-list approval system. To retain their approved status, CRAs must follow international standards, provide regular reports, and allow SEC inspections. Breaking these rules can lead to licence revocation.
However, the current regulatory framework has two significant limitations:
First, it relies too heavily on end-stage regulation. The SEC's only available enforcement tool is licence revocation, which can be too severe for minor violations and limits options for preventive measures.
Second, the rating emphasises organisational measures. Yet it lacks appraisal measures in other areas, such as conflict of interest prevention and transparency enhancement.
While regulators worldwide have implemented various tools to enhance credit rating quality, not all of these can be applied to Thailand's market structure and regulatory environment. Regardless of these limitations, there is always room for improvement. Therefore, we recommend two preliminary steps to strengthen market confidence:
The SEC should establish analyst rotation requirements to promote rating independence by reducing long-term relationships between CRAs and issuers. While the European Union mandates CRA rotation every four years, Thailand's limited number of CRAs (only two) suggests adopting this measure to focus on individual analyst rotation for issuers, with safeguards ensuring the continuity and quality of rating services.
Additionally, the SEC should require CRAs to disclose information in two areas: significant financial relationships between CRAs and issuers which may influence decision-making (such as shareholding or revenue ties), and information helping investors understand rating process limitations, such as analytical assumptions, the completeness and quality of data received from issuers, and risk factors which may affect future credit ratings.
While these recommendations are possible preliminary steps, they must be coupled with broader reforms in the following key areas to effectively improve the quality of credit ratings in Thailand:
First, increase competition in the CRA market. Having only two providers limits issuer choices and impacts service quality competition. Importantly, it creates regulatory challenges as regulators must balance strict enforcement against market-wide impacts, as revoking approval from either CRA could significantly affect the entire bond market.
Second, strengthen fraud prevention measures. Credit rating quality partly depends on the accuracy of issuer-provided information. Recent defaults, such as Stark Corporation's case involving accounting fraud, show that ratings can be misleading when issuers deliberately provide false information. The SEC must prioritise developing whistleblowing protection measures to detect misconduct early and reduce opportunities for using false information in credit ratings.
Third, balance reliance on credit ratings in the capital market system. While credit ratings are important risk assessment tools, they shouldn't be the sole decisive factor. Thailand's capital market currently relies on credit ratings in many areas of the regulatory framework, creating system vulnerabilities and causing stakeholders to neglect other risk analysis tools. The role of credit ratings should be reviewed alongside developing and promoting diverse risk assessment tools.
Enhancing credit rating quality and ensuring their appropriate use is crucial for developing Thailand's bond market. While improving the CRA regulatory framework is one approach to strengthen both independence and transparency in ratings, parallel reforms in competition, fraud detection, and credit rating reliance will help build lasting market confidence.
Pichamon Keakij and Dollada Kasarn are researchers at the Thailand Development Research Institute (TDRI). Policy analyses from the TDRI appear in the 'Bangkok Post' on alternate Wednesdays.