14 Thailand: Siri Ganjarerndee

642 Government Bond Market Development in Asia
14
Thailand
Siri Ganjarerndee
Executive Summary
The Asian crisis, which erupted in Thailand in July 1997, had a

devastating e¬ect on the country. Gross domestic product (GDP) growth
fell by 10.2 percent in 1998 and more than 50 percent of bank assets
were estimated to be nonperforming.
With a sequence of budget decits reecting the Governments at-
tempt to mitigate the e¬ects of the nancial crisis, the scal position has
become very weak. The accumulation of past scal surpluses, of some 400
billion baht (B) in 1996, has been run down to a mere B90 billion.
Meanwhile, smaller than predicted revenues have forced the Government
to rely more on decit nancing, raising the ratio of government debt to
GDP from 16 percent of GDP in 1996 to 36.8 percent of GDP in 1999.
Of this amount, 55 percent was domestic and 45 percent was foreign
debt, while 51 percent was from the Governments direct borrowings and
49 percent by state enterprises. Based on the current scal policy stance,
total government debt is projected to rise further to B2.37 trillion in 2000,
or approximately 44 percent of GDP, peaking at around B2.8 trillion, or
49 percent of GDP, in 2001, with decits predicted to continue until 2003.
Thailands domestic bond market, as a ratio of GDP, stands at 12
percentsmall, compared with 97 percent in Singapore or 84 percent in
the Republic of Korea. The Asian crisis thus provided the impetus for
concerted bond market reform and development, in an area where there
is still plenty of room for growth.
Part of the International Monetary Fund (IMF) recovery program,
implemented in August 1997, includes specic reference to bond market
reform. Initiatives include a master plan aimed at addressing infrastruc-
ture concerns, such as the establishment of a better benchmark yield
curve, while improvements in bankruptcy legislation, which will enhance
lenders ability to recover debts, are expected to reduce the spread of
Thai sovereign bonds issued in the United States (US).
Historically, bond issuance started early. The Thai Government issued
Thailand 643
the rst Thai bond in Europe as early as 1905, and the rst domestic
bonds in 1933.
However, the bond market did not really take o¬. Bonds issued to
fund successive budgetary decits during the period of the 1961 Na-
tional Economic and Social Development Plan, for example, were absorbed
by a captive market, preventing the development of a secondary market,
as institutions preferred to hold on to bonds until maturity.
Despite recent developments, infrastructure such as the tax envi-
ronment and clearing and settlement system remains insu¹cient. In the
primary market, investors or nancial institutions are often unable to
e¹ciently plan their investment portfolio due to irregular auction sched-
ules. Moreover, they may not be able to purchase required amounts of
bonds due to insu¹cient supply in the market.
In the secondary market, illiquidity remains a problem in both the
public and private bond market, due to the lack of a market-making
system, electronic trading system, and e¹cient price discovery. Disclo-
sure of both pricing and fundamental information is not fully transparent,
and some investors still face investment constraints due to the ine¹cient
regulatory framework. There is also a lack of common understanding of
the pricing convention. These problems, in both markets, arise partly
from the ine¹ciency of the supporting infrastructure.
It is clear, however, that the growing nancial needs of Thailands
economy can no longer be met by the banking sector alone, and its
overregulated environment will soon have to give way to a more mar-
ket-oriented, private sector-driven one that is more conducive to the
development of new instruments and institutions.
The bond market today is dominated by government securities. In
1991, their share of the market was 90 percent, compared with less than
2 percent for corporate bonds. This was because, before 1992, the issu-
ance of corporate bonds was limited to public companies and companies
listed on the Stock Exchange of Thailand (SET). As a result, private
companies relied heavily on bank loans and equity as funding sources.
This meant the proportion of outstanding value of corporate bonds was
minimal compared to that of government and state enterprise bonds.
This all changed with the crisis, however, which brought massive
problems of nonperforming loans and low condence, resulting in a sharp
decline in bank lending to the private sectoreven to top-rated compa-
nies. The Government had to step in to support the distressed nancial
sector with B500 billion in government bonds issued through the Finan-
cial Institutions Development Fund (FIDF) to recapitalize the system,
and state enterprises and corporations had to issue debt to restructure
their debts and fund new projects.
This, along with previous deregulation of the corporate market,

saw the corporate bond market share rise to 15.2 percent in 1999.
The market still su¬ers from a lack of diversity of instruments.
These should be expanded for the benet of both issuers and investors.
Currently, many institutional investors are hindered by out-of-date re-
strictions, while Thailands low per capita income and limited market
understanding among individual investors have constrained retail par-
ticipation.
Despite Thailands recognition of the numerous benets of devel-
oping its bond market in terms of noninationary decit nancing, e¬ective
implementation of monetary policy and e¹cient domestic savings mobi-
lization, the Government must commit itself to investing in this system
to reap these benets, by developing both long and short-term strategies.
Based on the responses of 41 active bond market participants and
regulators, the following are urgent requirements in the key bottlenecks
a¬ecting current market development in Thailand.
On the supply side, the following are needed: (i) improved regularity
and predictability of bond supplies; (ii) increased varieties of tenor of
bonds; (iii) accelerated centralization of public debt and Treasury man-
agement, and (iv) rationalized tax structure on nancial services towards
neutrality where possible.
On the demand side, e¬orts are needed to (i) expand the investor
base, especially through individual participation; (ii) establish an infor-
mation network, particularly on investment opportunities through issuers,
securities companies, the Thai Bond Dealers Club (Thai BDC), and mutual
funds; (iii) update guidelines and remove investment constraints for in-
stitutional investors, particularly insurance companies, pension funds,
and provident funds; and (iv) enhance market liquidity through equal
tax treatments of repo outside the Bank of Thailand (BOT).
Finally, the development of market infrastructure could be acceler-
ated through (i) augmenting the capabilities of primary dealers (PDs)
and market makers with predetermined performance criteria; (ii) separat-
ing trading rights in BDC from membership rights (to prevent members
from stalling the introduction of new members); (iii) e¬ectively enforc-
ing fair market practices via the coordination of Thai BDC, the Securities
and Exchange Commission (SEC) and BOT; and (iv) strengthening the
capability of credit rating agencies.
Longer-term strategies involve making improvements in nine key
categories: (i) distribution methods, in particular the auction system; (ii)
interest rate determination; (iii) coordination between Ministry of Finance,
Central Bank, and other agencies; (iv) currency and maturity of scheduling
structures; (v) promotion of PDs and market makers; (vi) derivative markets
Thailand 645
and risk management; (vii) accounting practice and transparency issues;

(viii) general infrastructure, including regulatory framework, settlement
system, benchmark yield curve, and credit rating agencies; and (ix) re-
moving articial impediments, such as explicit and implicit taxes.
I. Fiscal Policy and Management
Thailand was severely a¬ected by the Asian crisis, with GDP growth
falling by 10.2 percent in 1998 and more than 50 percent of bank assets
estimated to be nonperforming.
Since the beginning of the IMF recovery program in August 1997,
the macroeconomic policy framework has concentrated on stabilizing
the value of the baht, fostering economic recovery, and reforming the
nancial sector.1 The two last objectives have given rise to an increas-
ing budget decit as a percentage of GDP, from 0.7 percent in scal year
(FY) 1997 to 2.5 percent in FY2 1998 and 5 percent in FY 1999.
With a sequence of budget decits reecting the Governments at-
tempt to mitigate the e¬ects of the nancial crisis, the scal position
has become weaker. The accumulation of past scal surpluses, of some
B400 billion in 1996, for example, has been run down to a mere B90
billion. Meanwhile, smaller than predicted revenues have forced the
Government to rely more on decit nancing, raising the ratio of gov-
ernment debt to GDP from 16 percent of GDP in 1996 to 36.8 percent of
GDP in 1999.
Of this amount, 55 percent was domestic and 45 percent foreign
debt, while 51 percent was from the Governments direct borrowings and
49 percent by state enterprises. Based on the current scal policy stance,
total government debt is projected to rise further to B2.37 trillion in
2000, or approximately 44 percent of GDP, peaking at around B2.8 tril-
lion, or 49 percent of GDP, in 2001.
1. This section is based on reports from the Ministry of Finance, Thailands

Letters of Intent to IMF, and a research study by the Thai Farmers Bank Research
Center, published in Bangkok Business News on 11 December 1999; p. 17.
2. Fiscal year in Thailand starts in October and ends in September. FY1997/
98 or FY98 in short, for example, covers the period from October 1997 to
September 1998.
TABLE 1
Government Debt Projection, 20002003
(B billion)
End of Fiscal Year 1999 2000 2001 2002 2003

Public Debt Outstanding 1.87 2.37 2.80 2.91 2.99
Government 0.95 1.40 1.79 1.84 1.87
Expenditure Projection 0.86 0.91 0.97 1.02
Revenue Projection 0.75 0.83 0.91 1.00
Fiscal Balance 0.11 0.09 0.06 0.03
a
Financing on FIDFs Behalf 0.30 0.30
Development Loanb 0.04
Government Guarantees 0.90 0.95 1.00 1.05 1.10
FIDF Debta 0.96 0.83 0.86 0.56 0.26

Public Debt and FIDF 2.83 3.19 3.66 3.47 3.25
Percent of GDP 55.7 59.3 64.1 57.3 51.1
GDP 4.80 5.09 5.39 5.72 6.00
a
Financed by domestic bond issues.
b
Financed externally.
Source: Ministry of Finance for 1999; projections by Trust Fund Bureau Research Center.
If the 1999 direct borrowings of some B960 billion of the FIDF

(designed to recapitalize the distressed banking sector) were incorpo-
rated into public sector debt, the total debt outstanding would then
amount to B2.83 trillion, or 55.7 percent of GDP. As nancial reform
and scal stimulus e¬orts, including incentives to set up asset manage-
ment companies (AMCs), continue, public sector debt including the FIDF
is projected to rise further to a peak of 64 percent of GDP in 2001.
As AMCs e¬orts begin to pay o¬ in 20022003 (assuming 40
percent recovery from the non-performing loans [NPLs] and the proceeds
of sales of some intervened banks), the FIDFs loan is projected to fall
to B260 billion by the end of 2003. Public sector debt outstanding will,
accordingly, start to decline to 57 percent of GDP in FY2002 and 51
percent in FY2003. Of course, the rate of decline may be faster if the
economy recovers faster than projected or if AMCs manage to recover
more than 40 percent of the NPLs.
From 2000 to 2003, the scal position is projected to continue to
be in decit, however, to stimulate the domestic economy. In terms of
scal outlays, gross expenditure is projected to continue to rise from
B860 billion to above B1 trillion during the same period. Here, expen-
diture includes interest costs of nancial restructuring of around B300
Thailand 647
billion over ve years. As the economy recovers, however, revenue will
also pick up, leading to a lower level of budget decit, declining from
B110 billion in 2000 to just B26 billion in 2003.
A. Fiscal Burden Arising from the FIDF
Playing the roles of both lender of last resort and deposit insur-
ance, the FIDF has incurred a total gross outlay of some B1.9 trillion.
From these transactions, however, it expects to receive a certain amount
of money in return from recovery of NPLs by the AMCs, proceeds from
sales of intervened banks and Financial Sector Restructuring Authoritys
(FRA) assets, as well as scal compensation, totaling some B1.3 trillion.
The FIDF will thus incur a net loss of some B560 billion, with the
Government taking up around a B1.1 trillion scal burden (around 20
percent of GDP) from the whole process.
TABLE 2
Net Fiscal Burden of the FIDFs Financial Restructuring E¬orts
(B billion)
Item Amount
Losses of the FIDF (Items) 554.4
Expenditures 1,905.4
Loans to 56 FCs Closed Down 410.5
Deposit Insurance for 56 FCs 291.2
Losses from BBCs Capital Reduction 26.0
Losses from FIDFs Renancing of BBCs Loans 56.0
Capital Increases to Intervened Banks 451.6
FIDFs Share of Bad Debt Provisioning Burden 370.0
Interest Costs (19992004) 300.0
Revenue and Compensation 1,350.0
Proceeds from Sales of Intervened Banks 130.0
40 percent of NPL Recovered by AMCs 550.0
First Fiscal Compensation for FIDFs Losses (1998) 500.0
FRAs Auctioning Proceeds 170.0
Total Government Compensation 1,055.4
FCs = Finance Companies.
Source: Trust Fund Bureau Research Centers estimates.
B. Implications for Bond Market Development
Development of a stronger debt market in the wake of the Asian

crisis is absolutely crucial, and components of the IMF nancial sector
reform package include specic reference to bond market reform. Initia-
tives include a master plan aimed at addressing infrastructure concerns,
such as the establishment of a better benchmark yield curve, while im-
provements in bankruptcy legislation, which will enhance lenders ability
to recover debts, are expected to reduce the spread of Thai sovereign
bonds issued in the US.
E¬orts to deepen and broaden the bond market become even more
urgent to prevent the possibility of debt indigestion over the medium
term. Barring this problem, the bond market in Thailand will reach its
deepest point in 2001 (at around 64 percent of GDP), after which this
depth is projected to decline gradually. From this perspective, the bond
markets medium- to long-term development strategy will probably need
to take into consideration private and government bonds. This point is
likely to become even more relevant when deposit insurance is intro-
duced. Since deposit insurance only promises to reimburse up to a certain
limit in case of a nancial institutions failure, it is likely to induce a
disintermediation process where larger depositors withdraw money to
invest in other nancial instruments perceived to be more liquid or more
secured. These instruments will most likely include debt as well as eq-
uity instruments, particularly private bonds.
On the government side, to prevent problems of debt indigestion,
supportive measures could be considered in addition to development of
the bond market to strengthen the scal position and lower the public
debt burden. These include (i) measures to improve tax collection e¹-
ciency; (ii) privatization as a means of raising revenue; (iii) enhancement
of AMCs management e¹ciency; and (iv) the establishment of the Pub-
lic Debt Management O¹ce (this has already been done).
II. Monetary Policy and Management
BOT, established in 1942, is responsible for maintaining monetary

policy and advising the Government on economic policy.
It conducts monetary policy with the following objectives: (i) to
stabilize the countrys scal balance to consolidate the budget decit
and control debt repayment over the medium term; (ii) to build a man-
agement mechanism to minimize nancing costs and avoid bunching
government debt; and (iii) to develop a bond market to promote public
and private saving and support debt management.
Thailand 649
Coordination of Monetary and Fiscal Policy
BOT will have to take responsibility for the B555 billion remain-
ing losses of the FIDF, as well as the burden of servicing IMF loans.
This represents the rst step in coordination between monetary and s-
cal policies. Given the magnitude of the debt instruments to be oated
on the domestic nancial market in particular, further close cooperation
will be required to avoid disruption of domestic stability, and also to
foster longer-term development of an e¹cient bond market and ensure
competitive costs of decit nancing. This is being proposed within the
framework of ination-targeting, whereby the monetary policy stance
will be set under a projected set of macroeconomic variables, including
scal decit and nancing needs two years ahead.
III. Overview of the Bond Market
On the whole, Thailands initiatives to develop its debt/bond market

are still at an initial stage. The Asian crisis provided both the opportu-
nities and political will to study the existing impediments to a stronger
debt market, which is necessary as the nancial requirements of the grow-
ing economy can no longer be served by the banking sector alone. The
overregulated environment will soon have to give way to a more mar-
ket-oriented, private sector-driven climate that is conducive to the
development of new instruments and new institutionsin keeping with
the demands of globalizationand better equipped to handle or prevent
any repeat of the 1997 meltdown.
In 1991, the outstanding value of government and state enterprise
bonds accounted for more than 90 percent of the market, compared with
less than 2 percent for corporate bonds.
Increasing realization of its importance among Government and
investors has seen the bond market grow rapidly since then, with the
value of the total bond market surging from B215.1 billion at the end of
1992 to B519.3 bilion at the end of 1996. Today, the bond market, as a
ratio of GDP, stands at 12 percent, but this is still small compared with
97 percent in Singapore or 84 percent in the Republic of Korea.
Government and state enterprise bonds still comprise more than 75
percent of the bond market, although corporate debt instruments out-
standing soared from B5.1 billion in 1992 to B182.4 billion in 1996.
Moreover, the corporate debt securities o¬ered increased 8.5 times be-
tween 1992 and 1996.
A. Secondary Trading
Before the establishment of the Thai BDC, no bond trading statis-

tics were available. Total trading value from January to December 1999
was B431.197 billion, which signicantly increased from the level in
1998. Of this amount, 80 percent was in government bonds, 12 percent
state enterprise bonds, and 8 percent corporate bonds.
The secondary bond market is still illiquid, however. In October
1999, total turnover ratio in the secondary bond market was only 3.53
percent. Government bonds represented the highest liquidity, with a turn-
over ratio of 5.26 percent. Corporate bond trading had 3.32 percent
turnover, while state enterprise bonds had only 1.12 percent, far lower
than in well-developed bond markets.
Illiquidity can be attributed to the lack of a market-making sys-
tem, electronic trading system, and e¹cient price discovery. Disclosure
of both pricing and fundamental information is not fully transparent,
and some investors still face investment constraints due to the ine¹cient
regulatory framework. There is also a lack of common understanding of
the pricing convention. These problems in both markets arise partly from
the ine¹ciency of the supporting infrastructure.
Infrastructure such as the tax environment and clearing and settlement
system is also insu¹cient. In the primary market, investors or nancial
institutions are often unable to e¹ciently plan their investment portfolio due
to irregular auction schedules. Moreover, they may not be able to purchase
required amounts of bonds due to insu¹cient supply in the market.
FIGURE 1
Thai Bond Dealers Club Trading Movement
(B billion)
200
180 Corporate Bonds
160
140
120
B billion
100
80
60
40
20
0
1995 1996 1997 1998 1999
Thailand 651
FIGURE 2
Thai Bond Dealers Club Turnover Ratio
16
14
12
10
Percent
8
6
4
2
0
1994 1995 1996 1997 1998 1999
FIGURE 3
Thai Bond Dealers Club Trading Value 1999
Gov. Bonds
80%
Corp. Debt Sec.

8%
State Enterprise
Bonds
12%
Source: The Thai Bond Dealing Center.
E¬orts to deepen and broaden the market are thus more urgent
than ever to prevent the possibility of debt indigestion over the me-
dium term. Barring this problem, the bond market in Thailand is predicted
to reach its deepest point in 2001 (at around 64 percent of GDP), after
which this depth is projected to decline gradually.
B. Historical Overview
While the Thai Government issued the rst Thai bond in Europe as
early as 1905, and the rst domestic bonds in 1933, the Thai bond market
did not really take o¬. The Government issued bonds to fund successive
budgetary decits as it tried to achieve the objectives of its 1961 Na-
tional Economic and Social Development Plan. These were absorbed by
a captive market (commercial banks, which were required to hold gov-
ernment debt securities or state enterprise bonds as part of the requirements
for bank branchinga regulation that was gradually relaxed and nally
removed in May 1993). A secondary market therefore failed to develop
as institutions preferred to hold on to bonds until maturity.
In an attempt to solve the liquidity problem, BOT o¬ered to buy
back certain types of bonds from individual investors at xed buyback
prices announced in advance. This failed, however, as interest rates rose
and bond market prices fell below these xed prices.
Several developments primed the secondary market between 1983
and 1986, among them the increased role of commercial banks in trad-
ing government bonds. In addition, exchange bonds were ineligible for
reserve requirements and had to be sold in the secondary market. Also,
some types of bonds were not eligible for BOT buyback, and had to be
sold in the secondary market, and declining interest rates in the market
raised bond prices to levels higher than BOT buyback prices. Trading of
other bonds, such as the Telephone Organization of Thailand and the
Government Housing Bank, also became eligible for secondary trading.
However, the secondary market still remained moribundespecially from
1987 to 1989, when interest rates declined again and BOT buyback
became attractive once more. Tax policies (on interest income and with-
holding tax on capital gains) were not favorable either, and an improved
budget decit resulted in fewer issues of new bonds, especially during
Thailands high growth period from 1990 to 1996.
New attempts to strengthen the bond market were made in the
latter half of the 1990s. BOT started issuing short-term bonds (of one-
three- and six-month maturities), with the aim of using these for open-
market operations (OMO), establishing benchmark interest rates, and
accommodating excess demand for government bonds for the reserve
requirement purposes of nancial institutions. The FIDF also issued one-
three- and six-month bonds, which were later expanded to one- and two-
year bonds. The Government encouraged state enterprises to issue bonds
to fund their infrastructure projects. It also lifted interest rate ceilings in
June 1992 and removed tax disincentives (capital gains tax for individuals
who were not initial holders and stamp duty on bond transactions). Foreign
Thailand 653
exchange controls were relaxed and asset management companies were

increased to eight in 1995. Provident and contractual savings funds
were also set up, and the types and proportions of securities in which
these could invest were increased.
C. Corporate Market
Before 1992, the issuance of corporate bonds was limited to public

companies and companies listed on the SET. As a result, private compa-
nies relied heavily on bank loans and equity as funding sources. This
meant the proportion of outstanding value of corporate bonds was mini-
mal compared to that of government and state enterprise bonds. In 1991,
while the outstanding value of government and state enterprise bonds
accounted for more than 90 percent of the total bond market, corporate
bonds accounted for less than 2 percent. By December 1999, this gure
had risen to 15.2 percent, worth B179,387 billion.
FIGURE 4
Issuance of Domestic Corporate Bonds
300
250
200
B billion
150
100
50
0
1992 1993 1994 1995 1996 1997 1998 1999
Year
Note: The gures of corporate bonds included bonds issued under SLIPS/CAPS
program, which amounted to B138 billion in 1999.
Various factors brought about this signicant growth in the corpo-

rate bond market. First, the Public Companies Act and Securities and
Exchange Act, passed in 1992, allowed public and private companies,
listed and nonlisted, to issue bonds. Second, the rst Thai rating agency,
called the Thai Rating Information Service (TRIS), was set up in 1993.
Third, Thai BDC was established in November 1994 as a secondary
market for bond trading. Fourth, issuers recognized the importance of

raising funds by issuing debt securities as an alternative of direct nanc-
ing. Also, investors have gained a better understanding of investing in
debt securities, and institutional investors such as nancial institutions,
mutual funds, provident funds, government pension funds, and insur-
ance companies have played signicant roles in investing in the bond
market because of their long-term investment horizon.
As a result, the value of the total bond market surged from B215.1
billion at the end of 1992 to B519.3 billion at the end of 1993. Corpo-
rate debt instruments outstanding soared from B5.1 billion to B182.4
billion in 1996, more than an eightfold growth.
TABLE 4
Current Status of Corporate Debt Market
Type of Bond 1998 1999

Outstanding Outstanding
Issuance at Year-End Q1 Q2 Q3 Q4 a Total at Year-End
Corporate Debt
Securities
Domestic
Secured 2.00 7.07 8.55 17.62
Unsecured 13.12 23.63 10.42 33.45 67.50
Subordinated 17.28 70.62 63.53 2.91 137.06
Convertible 6.00 0.20 3.36 3.57
Short-term 0.66
Subtotal 37.06 96.45 84.38 44.91 225.75
O¬shore
Secured
Unsecured
Subordinated 26.52 26.52
Convertible
Subtotal 26.52 26.52
Total 37.06 177.65 122.98 84.38 44.91 252.27 403.80
Note: The gures of corporate debt securities included bonds and subordinated bonds
attached to preferred shares under SLIPS/CAPS.
a
Preliminary.
Sources: Bank of Ayudhya Public Co. Ltd., Bangkok Public Co. Ltd., Bangkok First In-
vestment and Trust Public Co. Ltd., Trust Fund Bureau, Thailand Securities Depository
Co. Ltd., etc.
Major issuers of corporate bonds are banking, nance, and securities

(44 percent), the building sector (12 percent), energy sector (9 percent),
food industry (7 percent).
The crisis in mid-1997, which brought massive problems of NPLs
and low condence, was another major factor as it resulted in a sharp
decline in bank lending to the private sectoreven to top-rated companies.
The Government had to step in to support the distressed nancial sector
Thailand 655
FIGURE 5
Outstanding Value of Bond by Sector
(as of 30 December 1999)
Fin & Sec

Banking 11%
33% Property
5%
Energy
9%
Holding
7%
Food
7% Build. & Furnis.
Others
1% Transportation Commun 12%
2% 6%
Chem.
4%
Source: Thai Bond Dealing Center.
with B500 billion in government bonds issued through the FIDF to

recapitalize the system, and state enterprises and corporations had to
issue debt to restructure their debts and fund new projects.
D. Types of Securities
Government Bonds. Government debt securities are made up of gov-

ernment bonds, state enterprise bonds, BOT bonds, FIDF bonds, Property
Loan Management Organization (PLMO) bonds, and other government-
related bonds. These are normally one- to 10-year xed-rate instruments.
FIDF bonds were developed as a result of a royal decree empower-
ing the Ministry of Finance to issue bonds to renance FIDFs debt
burden, which arose from an FIDF e¬ort to save cash-strapped compa-
nies and other nancial institutions from collapse. FIDF bonds pay regular
coupons, and principal at maturity. They are normally xed-rate instru-
ments with maturities ranging from three months to three years.
State Enterprise bonds (either guaranteed or nonguaranteed by the
Ministry of Finance), are xed-rate bonds with maturities from two to 10
years. The guaranteed issues enjoy credit ratings similar to those of
government bonds, while the nonguaranteed ones are usually issued by
state enterprises with sound nancial standing. Financial institutions hold

these bonds mainly to meet their liquidity reserve requirements, and
trading them on the secondary market thus remains thin. PLMO bonds
are typically seven-year xed-rate bonds.
Corporate Bonds. Most corporate bonds outstanding in Thailand are

subordinated, unsecured, and carry xed interest payment. However there
are also other features such as secured, oating rate, convertible or amor-
tizing bonds, or any combination of these. The bonds that carry more
complex features are likely to be increasingly issued. The maturity of
corporate bonds generally ranges from one to 14 years. However, most
of them are clustered around three to ve years.
Normal bullet and oating rate bonds captured around 83 percent
of the total corporate bond outstanding, while amortized bonds and con-
vertible bonds took up 13 percent and 4 percent, respectively. Amortizing
bonds have become increasingly popular among issuers due to the debt
restructuring of distressed companies. This enables the companies to design
cash ow payments that are more appropriate to their current and future
incoming cash ows. Securitized bonds are another important type of
xed income instrument, and are expected to grow in popularity among
both issuers and investors. Since the securitization process is the transfer
of nonmarketable assets into liquid and marketable securities, the sell-
ing of assets of 56 closed nance and securities companies has increased
the number of securitized bonds issued lately.
Money Market Instruments. Money market instruments traded com-

prise treasury bills (T-bills), commercial bills, negotiable certicates of
deposit (NCDs), and transferable certicates of deposit (TCDs). T-bills
are issued by the MOF and purchased mainly by the BOT and the Ex-
change Equalization Fund (EEF). Commercial banks and nance companies
issue NCDs. Commercial bills include promissory notes, bills of exchange,
and bankers acceptances. They are mostly issued by highly rated corpo-
rations and foreign bank a¹liates, such as the Industrial Finance
Corporation Thailand (IFCT).
The Royal Thai Government stopped issuing T-bills in 1990 as a
result of budget surpluses, and issuance of TCDs by commercial banks
has declined drastically since 1987.
International Bonds. International bonds have been issued by the Elec-

tricity Generating Authority of Thailand (EGAT) in 1988 (US$300 million)
and 1999 (US$300 million). These were World Bank guaranteed and
priced at 285 bps over US treasuries.
Thailand 657
FIGURE 6
Outstanding Value of Corporate Bonds by Issue
140,000
120,000
100,000
B Million
80,000
60,000
40,000
20,000
0
Straight issues Convertible issues Amortized issues
FIGURE 7
Outstanding Value of Corporate Bond by Maturity
50,000
45,000
40,000
35,000
30,000
B Million
25,000
20,000
15,000
10,000
5,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Lack of Diversity
Overall, the products currently available in the Thai bond market

cover only a narrow range of xed income instruments. As di¬erent in-
vestors have diverse risk/return perceptions and di¬ering investment
horizons, a wider range of nancial instruments should be introduced to
help expand the investor base.
On the supply side, di¬erent types of xed income securities will

t with di¬erent issuers, who have varied cash ow projections, and
well-designed xed-income instruments can reduce their nancing costs.
The issuance of the following xed-income instruments should be
considered by the Government to better serve investor demand: (i) zero
coupon bonds or strips, (ii) ination-linked bonds, and (iii) long-term
government bonds. The corporate sector needs to issue (i) longer-term
bonds, (ii) credit-linked bonds, (iii) securitization instruments, and (iv)
structured notes.
Although widening the range of xed-income instruments has a
great number of benets, there are also some drawbacks. First, some
types of instruments are complicated and hard to understand. This can
lead to illiquidity of the product, and investors may require a higher
yield to compensate for their unknown or black-box risk. Research pub-
lications explaining bond features and risk/return characteristics can help
address this issue. Second, laws and regulations may create constraints
that make the issuing process costly. Finally, investing in more compli-
cated products without care and good knowledge may lead to disaster,
since some securities are very risky. Care, education, and good informa-
tion should reduce this problem.
E. Investor Base
Besides nancial institutions (60 percent), major players in the

bond market are contractual savings funds, whose trading value contrib-
uted 32 percent of the total trading value from January to December
1999. Of this amount, 22 percent came from nancial institutions, 20
percent from mutual funds, 17 percent from others, and 5 percent from
insurance companies. There are also 757 pension funds in Thailand,
with assets estimated at B31 billion (US$1.2 billion), more than 30 per-
cent of which is invested in state sector or corporate bonds.
Despite the important role of institutional investors in the Thai
bond market, their participation is still limited because of various in-
vestment restrictions. For example, provident funds are currently allowed
to invest only a limited amount of funds in the bond market, principally
government bonds. This limits their opportunities to invest in high qual-
ity corporate bonds, and thus to enjoy a potential of higher return. Some
of the restrictions are out of date and need to be reviewed to facilitate
the access of these investors. Insurance companies, for example, are not
allowed to purchase bonds sold above par value. Most of the bonds in
which they invest are held to maturity, resulting in inactive trading in
the secondary market. Therefore, investment controls on these institutional
Thailand 659
investors should be relaxed to broaden the investor base for both the
primary and secondary markets.
Thailands low per capita income, compounded by limited market
understanding among individual investors, has hindered participation by
retail investors.
IV. Bond Market Infrastructure
A. Structure of Primary Dealer System
Market makers play a crucial role in the bond market. By continu-

ously making bid and o¬er prices available to the market, they act as a
market for those bonds they quoted. Thus, the network of market mak-
ers stimulates bond market activities and creates a liquid market.
In the Thai bond market, there are dealers who seemingly act like
market makers. However, they do not have the commitment to make a
consistent bid and o¬er. They act like discount brokers, earning spread
from buying and selling bonds to di¬erent parties. Designated primary
dealers are ABN Amro Bank NV, Dhana Siam Securities Company Ltd.,
Bangkok Bank PLC, Merrill Lynch Phatra Securities Company Ltd., Bank
of Asia PLC, Siam Commercial Bank PLD, Citibank NA, Thai Farmers
Bank PLC, and Deutsche Bank AG.
B. Issuance Methods and Procedures
1. Government Bonds
The Securities and Exchange Commission (SEC) is responsible for

supervising and overseeing issuance practices. Government bonds are
issued through auctions organized by the BOT. Primary market auction
participants are nancial institutions, institutional investors such as mu-
tual funds, provident funds, and insurance companies. The auction
originally followed the Dutch, or uniform price, system, but this was
changed in September 1999 to the American, or competitive price, auc-
tion. The changeover period was August, when government bonds with
maturities up to 10 years were auctioned under the American system,
and those with maturities over 10 years under the Dutch system.
There is no xed auction schedule. When there are new bonds,
Thai BDC members are notied. Government debt securities are auto-
matically listed once the auction process in the primary market is complete.
There is currently an attempt to develop a more systematic auction
schedule for government bonds. With the schedule set and announced in
advance, investors will be able to e¬ectively plan their investment pro-

gram, and when issued yield curve, with a more appropriate maturity
structure, constructed. Issuing authorities will be able to improve their
nancial planning and debt management. Although the Debt Manage-
ment O¹ce (DMO) aims to implement a regular government bond issuance
program, details regarding maturities to be auctioned should be consid-
ered as well as just the type of bonds. Apart from the issuing schedule,
the auction method should also be considered. Uniform price and mul-
tiple price auction systems each have advantages and disadvantages.
2. Corporate Bonds
Issuance can be either through public o¬ering (PO) or private place-

ment (PP). To publicly o¬er issues, a company must rst obtain approval
from SEC and le the disclosure document for public investigation.
However, this is relatively simple.
Public O¬ering. Due to the di¬erent risk and return characteristics of

each type of security, the approval criteria for public o¬ering vary. How-
ever, common qualications for applicants are (i) having denite objectives
for the use of proceeds raised from securities o¬ering; (ii) their business
must be of economic or social benet to the country; (iii) the manage-
ment must be competent, honest, socially responsible, and not have an
adverse track record; and (iv) they must have good nancial status, per-
formance records, and strong potential for ongoing concern.
As well as gaining SEC permission, PO issues must be credit-rated
by an approved credit rating agency. Only three kinds of debentures can
be issued through public o¬ering without SEC permission. These are (i)
those o¬ered by a state enterprise, (ii) those where MOF guarantees the
interest and principal, and (iii) those o¬ered in total to shareholders of a
private limited company.
Private Placement. Private placement is dened as one of the follow-

ing activities: (i) applicants have denite objectives for the use of proceeds
raised from the securities o¬ering; (ii) securities are issued to no more
than 35 investors during a 12-month period; and (iii) securities are is-
sued to the prescribed 17 types of institutional or sophisticated investors.
Most newly issued corporate bonds are o¬ered on a private place-
ment basis. With PP, much useful information, such as a nancial statement
and credit rating, does not have to be disseminated. This can lead to
low demand for such bonds due to insu¹cient information. The problem
worsens during any economic depression. The good news is that the
Thailand 661
SEC recently announced a new regulation, e¬ective from the second

quarter of 2000, requiring PP issues to be credit-rated, with the exemp-
tion of issuing amounts of less than B100 million, or with transfer limits
less than 10 holders.
C. Secondary Trading Systems
Trading is usually on an over-the-counter (OTC) basis for both

listed and nonlisted bonds. Dealers and institutional investors play a
major role in the market. The Thai BDC is an organization that has the
status of a bond exchange. It was rst founded in 1994, known as the
Bond Dealers Club, and operated under the umbrella of the Association
of Securities Companies. Initially, only corporate bonds were traded through
the system provided by BDC. BDC changed its name to Thai BDC in
April 1998 and has expanded its service to include government and
state enterprise bonds as registered securities. Government securities are
automatically listed as soon as the primary auction is completed. The
emergence of the Thai BDC over the past ve years has contributed
signicantly to the development of the bond market, with issuance of
domestic bonds increasing by 140 percent.
The primary role of Thai BDC is to provide an environment for
fair and secure trading, monitor trade, and disseminate market informa-
tion. Members must be nancial institutions with a license to trade
securities or debt instruments. As of October 1999, it had 48 members
(11 commercial banks, nine securities companies, one nance company,
and 27 nancial and securities companies).
A nancial institution with a dealer license places bid and o¬er
prices, usually on an indicative basis, either via online communication
or newspaper. Interested parties can contact their prospect dealer. Dealers
have to report all bond transactions to Thai BDC. Thai BDC compiles
and disseminates trading information to the general public at the end of
the day.
D. Electronic Trading System
In the Thai market, an electronic trading system called BondNet,

operated by BDC, was developed in 1994. BondNet provided BDC mem-
bers with a market place where they could quote prices on a blind and
rm commitment basis, and dealers could negotiate, put-through, and
approve transactions. The agreed transaction was then put through the
clearing and settlement process at the Thailand Securities Depository
Co. Ltd. (TSD). Only corporate bonds and BOT and FIDF bonds could
be traded via BondNet, and only dealers who were BDC members were
allowed to use the system. From 1995 to July 1997, the system worked
quite well, resulting in improved liquidity in the market. However, due
to the crisis, half of BDCs members stopped operating, and condence
in the corporate bond market diminished, along with the popularity of
BondNet. In May 1999, Thai BDC decided to stop operating the BondNet
system.
The lack of bias in an electronic trading system can contribute to
market liquidity even in a market where securities are traded OTC. It can
serve as real-time advertising page, where market makers or dealers can
quote their bid and o¬er prices for particular bonds. The system should
be able to facilitate the dealing process, where interested parties can
communicate with each other and execute the transaction.
With declining interest levels making the bond market popular
again, an electronic trading system would therefore be a useful tool for
market participants. The system should be expanded to o¬er real-time
bid-o¬er pages to dealers and investors, and the trading, clearing, and
settlement processes should be integrated.
E. Market Conventions and Standards
Trading of bonds is based on yields quoted up to six decimal

places. Prices are quoted on a clean basis as a percentage to par value
with six decimal places. Market convention for the price/yield calcula-
tion is actual/365 basis. Coupon payment on bonds is mostly on a
semi-annual basis. In an attempt to create a uniform market practice,
which would help increase liquidity and reduce trading confusion, Thai
BDC has set up a listing standard for all corporate bonds registered with
it since 1997. However, this has not yet covered those bonds carrying
special features, such as securitization bonds or restructured bonds. Dis-
tressed bonds are usually traded at a at price.
F. Repo Market
The repo market provides market players with a cost-e¬ective -

nancing channel. It is also an alternative means of short-term investment
with low risk. An e¹cient repo market is thus essential to the liquidity
of the bond market. Currently, an o¹cial repo market is operated by
BOT, allowing only banks and nance companies with accounts at the
Central Bank to participate in the market. Only government bonds and
guaranteed state enterprise bonds are accepted as eligible securities. Due
to these limitations, a repo market outside BOT has developed to serve
Thailand 663
a broader range of nancial institutions, such as securities companies,

and accept other types of securities, such as corporate bonds. However,
the market is still inactive because supporting infrastructure, such as
clear tax practice and market accepted contract agreements, are not yet
in place.3
Bond Borrowing and Lending
Short-selling and securities lending have been allowed by SEC

since 1998 to help maintain bond market liquidity, but market activity
has remained minimal due to inadequate knowledge.
G. Other Aspects
1. Benchmark Yield Curve
In early October 1999, Thai BDC developed the risk-free Thai

Government Bonds Benchmark/ Yield Curve, derived from average bid
prices quoted by nine counterparties of the BOT. Thai BDC publishes
the yield curve at the end of each trading day. Benchmark bonds must
have remaining maturities of approximately 1, 2, 5, 7, or 10 years, and
amounts outstanding of at least B20 million.
Initially calculated only for up to three years, the issuance of gov-
ernment long-term bonds resulted in a yield curve span of up to 15
years. Government bonds are also selected to represent benchmark bonds.
Thai BDC also launched a government bond index in January 1999
to help market participants track bond market movements, compare mar-
ket returns, and to be used as a frame for their fund performance. It is an
index calculated from the weighted average executed yield of all gov-
ernment bonds registered at Thai BDC.
Despite the availability of this regular yield curve and bond index,
however, some important tools are still needed to make the benchmark
more meaningful.
Risk-Free Z ero-Coupon Yield Curve. Yield curves available at present

are constructed based on coupon-bearing bonds. Although this kind of
yield curve has a number of benets, a yield curve constructed using
this method is subject to the coupon e¬ect, since di¬erent bonds carry
3. The Thai Bond Dealing Center is working with Internet Statistics and
Metrics Analysis (ISMA) in nding an acceptable annex to add to the Global
Master Repurchase Agreement, making it applicable in the Thai market.
dissimilar coupons. This may bias the spread of comparing bonds. In

addition, yield from a zero-coupon yield curve can be directly used to
calculate bond price more e¬ectively. For state enterprise and corporate
bonds, spread can be added to the zero-coupon yield to calculate the
price. Moreover, forward curve can be directly constructed from a zero-
coupon yield curve.
Without a broad range of government zero-coupon bonds or strip
zero-coupon bonds, the zero-coupon yield curve cannot be directly cre-
ated. However, synthetic zero-coupon yield curves may be constructed,
although their use is subject to a set of assumptions.
Well-Dened and Market-Accepted Benchmark Interest Rate. In de-

veloped markets, there are accepted short-term and long-term interest
rate benchmarks, e.g., London inter-bank o¬er rate (LIBOR) and Singapore
inter-bank o¬er rate (SIBOR), which have proved to be very useful to
both issuers and investors. They allow issuers to estimate their credit
spread over an appropriate interest rate benchmark. Investors also use
spread when evaluating alternative investment instruments. With a well-
accepted interest rate benchmark, oating rate securities can be issued
and traded more e¬ectively.
At present, oating rate bonds in Thailand usually index their cou-
pons with some type of interest rate benchmark, such as minimum lending
rate (MLR), or the average xed deposit rates of major banks. A major
limitation of MLRs is that there is no known maturity structure and the
rate is not consistently quoted. For xed deposit rates, although their
maturity structures are known, they have no known credit quality. Therefore,
market-accepted interest rate benchmarks such as Bangkok inter-bank
o¬er rate (BIBOR) should be created, as these will become important
tools in the xed income market.
2. Tax Treatment
Taxation on bond trading and investment is rather complex since

it involves many di¬erent types, and varies across investor classes.
For domestic institutional investors, there is no withholding tax on
interest income and capital gains, but they are subject to corporate in-
come tax at the end of the year. Foreign institutional investors are subject
to 15 percent withholding tax on income and capital gains. The rates
are lower for countries with double taxation treaties.
Individual investors were previously exempt from capital gains tax,
but the rule was revised in July 1999. Both interest income and capital
gains are now subject to 15 percent withholding tax. This could not
Thailand 665
only discourage individual investors from investment in bonds, but also

create an impediment to bond market liquidity. Unlike in the equity
market, individual investors are exempt from capital gains tax.
Tax di¬erentiation between the bond and equity markets should
be eliminated to promote the participation of individual investors in the
bond market as an alternative means of saving. In addition, a tax reduc-
tion should be considered for investors with long-term holding periods
to promote long-term investment in bonds.
Some market participants consider the specic business tax for banks
and nance companies as an impediment to bond market trading activ-
ity. Banks and nance companies are subject to 3.3 percent specic
business tax on interest income, including bonds coupon and capital
gains from trading debt securities. Unlike corporate income tax (30 per-
cent and applied at year-end), which is based on net prots, the specic
business tax is applied on a gross basis, meaning that the capital loss of
one trade cannot be deducted from the capital gains of another. To a
certain extent, this tax adds friction to market making, in both the out-
right and repo markets.
In December 1999, the Revenue Department claried the tax treat-
ment for repo transaction, making it consistent with its content as a
borrowing/lending, rather than trading, activity. Nevertheless the market
is still waiting for announcement of the details of the tax practice.
3. Credit Rating
TRIS was established in 1993 with the support of BOT and technical
support of Standard and Poors. It is owned by about 70 shareholders
made up of public, private, and international nancial institutions. It o¬ers
two kinds of ratings: (i) company assessment, which rates the companys
overall creditworthiness; and (ii) issue rating, which assesses the issuers
ability to service the interest and principal of a particular debt issue.
TRIS largely rates corporate debt, while Standard & Poors and
Moodys rate government, some nancial institutions, and corporate debt.
A second local rating agency is expected to be established soon.
4. Transparency of Information
Information is a vital factor to increase market e¹ciency. In a de-

veloped market, information is highly transparent and e¹cient. This means
it is disseminated to all market participants accurately, promptly, and
comprehensively, so that nobody can benet from gaining more infor-
mation, and there is no moral hazard due to asymmetric information. In
other words, no investor need worry that someone else has access to
more information about the product. Asymmetric information can cause
moral hazard and lead to higher premia, reluctance to trade, and higher
costs of fund to issuers. Finally, the lack or nontransparency of informa-
tion can lead to an illiquid and higher-cost market.
Presently, attempts are ongoing to improve bond market informa-
tion disclosure. Technological innovations, such as the Internet, have
greatly contributed to lower-cost information dissemination.
BOT continuously disseminates not only information on the gov-
ernment bond market, but also other useful economic indicators, via the
Internet without any charge to interested investors. However, information
regarding the bond market covers only government bonds. In addition,
the data collected by BOT are based on settlement dates, not trade dates.
Information on bids and o¬ers is not yet available to investors either.
To enhance market transparency for bond trading, Thai BDC has
developed a bond information system called the Thai BDC System, avail-
able to market participants via the Internet. It contains a broad range of
bond market information, such as trading data and statistics, information
on registered bonds, and a brief rundown on bond issuers and market
news and development. Trading data are directly reported by Thai BDC
dealer-members. The information is available in many forms, such as
real-time, end of day and historical trade, and covers government bonds,
state enterprise bonds, BOT/FIDF/PLMO bonds and corporate bonds.
There are still some points of concern, however. For example, in-
formation provided through Thai BDC system does not cover nonregistered
bonds, and there is still no real-time bid/o¬er facility. In addition, the
Thai BDC system depends on trading data reported by its dealer-mem-
bers, so care should be taken to ensure the accuracy and reliability of
the information.
5. Hedging Instruments and Derivative Market
Hedging instruments and derivative markets are essential tools in

stimulating bond market activities. With a derivative market, derivative
products such as interest rate options, interest rate futures, and interest
swaps can be constructed. With derivative products, some types of risks
can be segregated and transferred among market participants. In prin-
ciple, there are three types of players in the derivative market: (i) hedgers,
who use derivative instruments to hedge against the risk of the underly-
ing asset; (ii) speculators, who speculate on the movement up or down
in prices of derivative products; and (iii) arbitrageurs who look for riskless
prot in the markets.
Thailand 667
These three types of market players stimulate trading between de-

rivative markets and the underlying securities in spot market activities
in both the derivative and xed-income markets.
As a rst step to creating a derivative market, supporting infra-
structure, such as a market-maker network, electronic screen trading, clear
tax practices and an e¹cient clearing and settlement, should be imple-
mented. Moreover, well-accepted yield curves and bond indexes also
play a crucial role as benchmarks and underlying assets.
H. Clearing and Settlement
Currently, government and state enterprise bonds are cleared and

settled at BOT, which acts as the registrar for government securities. As
BOT requires physical evidence of the transfer of ownership, the process
is rather cumbersome. On settlement, market participants prefer to use
checks as a means of settlement, because Bahtnet, a real-time money
transfer network developed by BOT, is too costly. In addition, only a
limited range of nancial institutions are allowed to open accounts with
BOT. Therefore, credit risk emerges from a clearing time lag, and results
in incomplete delivery-versus-payment (DvP). Moreover, electronic book
entries for all government securities are not yet fully developed, and
most government securities are still in script format. This results in transfer
inexibility.
Corporate bonds, which are mostly issued in scriptless form, can
be cleared and settled through TSD, set up in 1994 as a subsidiary of
SET. It acts as a depository, registrar, and clearinghouse for equities and
debt instruments, but due to incomplete DvP, settlement risks exist simi-
lar to those in government securities. Therefore, to further facilitate the
development of the bond market, a more e¹cient and reliable clearing
and settlement system, which incurs minimal costs, should be devel-
oped. There are plans to link TSD with BOTs Bahtnet to facilitate clearing
and settlement of government bonds.
Market Conventions. The market convention for settlement, value date,

ex-dividend, day count basis, holidays, and calculations are for bonds to
be settled on a T+2 basis, with a value date equal to the settlement date.
The day count basis is actual/365, with bonds ex-dividend the same as
the coupon.
V. Regulatory Structure and SROS
A Debt Management O¹ce (DMO) was established in 1999, with

the objective of centralizing debt management activities previously con-
ducted by the Fiscal Policy O¹ce, the Comptroller Generals Department,
and the BOT. This o¹ce is responsible for the countrys debt policy and
management, and is tasked to raise funds with consistency, predictabil-
ity, and transparency.
SEC, established in 1992, has responsibility for the supervision
and development of the primary and secondary markets, with power and
duties to supervise, promote, and develop the securities markets.
VI. Major Policy Issues and Recommendations
As already pointed out, the development of a bond market pre-

sents numerous advantages, which include noninationary decit nancing,
e¬ective implementation of monetary policy, and e¹ciency of domestic
savings mobilization. In light of the Asian crisis, where volatility in
short-term capital ows played a critical role in setting o¬ the panic, the
merit of a deeper and more stable debt market with greater transparency
and longer maturity becomes even clearer. This is particularly important
when considering the high savings ratios, but poorly developed bond
markets, in the region.4
A. Short-Term Strategy
Based on a survey of 41 active bond market participants and regu-

lators (72 distributed, with 58 percent response rate), three main areas
have been identied for urgent attention in the key bottlenecks to mar-
ket development e¬orts in Thailand.
First, on the supply side wish list, the four most commonly identi-
ed issues are (i) improved regularity and predictability of bond supplies;
(ii) increased varieties of tenor (type) of bonds (see below); (iii) acceler-
ated centralization of public debt and treasury management; and (iv)
rationalized tax structure on nancial services toward neutrality where
possible.
On the demand side, e¬orts are needed to (i) expand the investor
base, especially among individuals; (ii) establish an information network,
4. Asia and Pacic Economic Cooperation (APEC), Compendium of Sound

Practices: Guidelines to Facilitate the Development of Domestic Bond Markets in
APEC Member Economies, August 1999.
Thailand 669
particularly on investment opportunities through issuers, securities com-

panies, Thai Bond Dealing Center, and mutual funds; (iii) update guidelines
and remove investment constraints for institutional investors, especially
insurance companies and pension funds; and (iv) enhance market liquid-
ity through equal tax treatment of repo outside BOT.
The development of market infrastructure could be accelerated
through (i) augmented capabilities of PDs and market makers fullling
predetermined performance criteria; (ii) separation of trading rights in
Thai BDC from membership rights (to prevent members from stalling
introduction of new members); (iii) e¬ective enforcement of fair market
practices via coordination of Thai BDC, SEC, and BOT; and (iv) strength-
ening the capability of credit rating agencies.
In terms of increasing the variety of bonds on o¬er, the following
are recommended.
Z ero Coupon Bonds or Strips. A zero coupon bond is the simplest

kind of xed-income instrument, with a single cash ow paid out at the
end of maturity. It thus enables investors to adjust their portfolio more
e¹ciently. One of its major benets is that it can be used to create a
more meaningful benchmark yield curve as compared to a yield curve
constructed from coupon bonds.
Instead of issuing zero coupon bonds, the Government can strip
standard coupon-bearing bonds. Each coupon is torn o¬ and can be
separately traded in the market as a zero coupon bond, of which matu-
rity date equals the payment period for each coupon. In this way, a
strip zero coupon yield curve can be constructed.
Ination-Linked Bonds. Ination-linked bonds are similar to oating

rate bonds in that the coupon payment is tied to the ination index, i.e.,
consumer price index (CPI) ination-linked bonds thus provide investors
with a real rate of return above ination, and help investors hedge the
ination risk.
Long-Term Government Bonds. Issuance of government bonds with a

broader range of maturities would be benecial to the construction of a
benchmark yield curve. A benchmark would greatly facilitate the pricing
of bonds in both the primary and secondary markets. Therefore, it could
provide a foundation for the issuance of corporate and state enterprise
bonds at longer maturity, which would contribute to the development of
the bond market. Moreover, investors with a long-term horizon invest-
ment will nd a greater range of products in which to invest.
Corporate Bonds
Longer-Term Bond. This would match cash ows for long-term projects
better than rolling over short-term bonds. Investors with an appetite for
higher yield will nd a place to put their money.
Credit-Linked Bond. The coupon spread of this bond can be adjusted

according to its future credit rating. Credit-linked bonds should benet
both issuers and investors. Investors will be protected against a future
fall in credibility of the issuer, while issuers who expect better future
prospects can reduce costs of fund over the long term.
Securitization Instruments. These include those structured in the sim-

plest form, such as pass-through securities, collateralized mortgage
obligations (CMOs), and more complicated securities such as interest
only (IO) and principal only (PO). Asset-backed bonds are not only lim-
ited to mortgages but also include other assets, such as receivables, and
car loans. Securitization is the process of transforming illiquid and non-
marketable assets into more liquid and marketable securities. It o¬ers a
number of benets to both investors and issuers and adds value to the
overall economy. It gives investors a greater range of securities and a
pattern of cash ow to match their requirements. Issuers, meanwhile, are
able to transform nonmarketable assets into marketable ones, thus reduc-
ing the need to maintain high capital reserves.
Structured Notes. This is a bundle of xed income instruments and

other types of securities on interest rate/currency swap, etc. Structured
notes are designed to meet specic investor demand and lower the cost
of fund for issuers. Although widening the range of xed-income instru-
ments has a great number of benets, there are also some drawbacks.
First, some types of instruments are complicated and hard to understand.
This can lead to illiquidity of the product, and investors may require a
higher yield to compensate for their unknown or black-box risk. Re-
search publications explaining bond features and risk/return characteristics
can help to address this issue. Second, laws and regulations may create
constraints, which make the issuing process costly. Finally, investing in
more complicated products without care and knowledge may lead to
disaster, since some securities are very risky. Care, education, and good
information should reduce this problem.
Thailand 671
B. Long-Term Strategy
Longer-term strategies can be divided into nine categories: (i) dis-

tribution methods, in particular the auction system; (ii) interest rate
determination; (iii) coordination between the MOF, BOT, and other agencies;
(iv) currency and maturity of scheduling structures; (v) promotion of
PDs and market makers; (vi) derivative markets and risk management;
(vii) accounting practice and transparency issues; (viii) general infra-
structure, including regulatory framework, settlement system, benchmark
yield curve, and credit rating agencies; and (ix) articial impediments,
including explicit and implicit taxes. Some of the most important features
include:
Distribution Methods. In terms of longer-term development, access to

distribution systems should be fair and open to all potential partici-
pants. In particular, there should be a consistent treatment between members
and nonmembers (in case of exchange or association) with consistent
tax policies for all nancial instruments and market participants. The
conditions for listing and delisting should be set out a priori and avail-
able to everyone involved.
In the maturing stage of a bond market, strategies are needed to
ensure consistency between the Central Banks OMO and the governments
sovereign debt and risk management. At this stage, some of the auction
methods may be considered to enhance the e¹ciency of bond issuance.
Auctioning at the early stage of market development can neverthe-
less create problems of fragmented participation, and thus high transaction
costs. In such a thin market, the authorities may restrict trading to cer-
tain periods to allow buying and selling orders to accumulate, thus making
them easier to match. Lower transaction costs permitted by economies of
scale with deeper and broader participation improve both liquidity and
market activities. Since each transaction represents a price discovery,
more matches also imply more uid information ows, which in turn
allow closer market monitoring, and fuel further transactions.
Interest Rate Determination. Transactions records of bonds at various

maturities may then be used to construct a benchmark yield curve, which
is a set of reference prices on which borrowing and investment decisions
can be made. Based on this information, e¹cient pricing of risks and
return can be achieved, contributing to improved nancial resource
allocation e¹ciency. Clearer risk, return, and liquidity proles improve
participation, and thus liquidity.
Underlying this is the assumption that bond yields are market-
determined, and that the government represents only another individual

player subject to the uniform treatment of the market. The authorities
thus have to refrain from coercive measures, such as reserve require-
ments, which allow them to raise funds at submarket interest rates. Such
an implicit tax not only distorts transactions in the primary market, but
also discourages trading in the secondary market. Since the primary buyers
who wish to sell their bonds on the secondary market have to recognize
a book loss, they tend to hold on to these bonds rather than sell them.
In the case of Thailand, the fact that the reserve requirement has
been gradually lowered over time and eventually abolished (for branch
opening requirements) is in line with this view. Here, it is important that
the policy is not reversed if and when the Government is faced with
rising needs for decit nancing over the medium term.
Coordination between MOF, BOT, and Other Agencies. Due to the

dynamics and complex structure of a market with diverse participants,
such as nonresidents, custodians, and settlement banks, many layers of
supervision are required to prevent regulatory gaps, overlaps, and conicts.
Some of these involve scal discipline versus bond market deepening
strategy, and monetary policy independence versus scal costs. To alle-
viate potentially disastrous tension between policy objectives, an explicit
set of priorities based on mutual understanding among the authorities is
required to enhance credibility, which is essential for orderly market
operations.
Currency, Maturity, and Scheduling Structures. The ease of arbitrage

and hedging, and thus market liquidity, depends largely on bond fun-
gibility or standardized bond lines (preferably with a simple structure
not complicated by redemption or call features). Larger volumes on
issue relative to the markets total size and the average market transac-
tion size also help improve liquidity.
Regular bond issuance of various maturities leads to the develop-
ment of a yield curve essential in the price discovery process in both
primary and secondary markets. As a market development strategy, e¬orts
could be focused rst on the treasury bill markets that may be expanded
into longer maturities later. Moreover, market fragmentation may be re-
duced by reopening maturities after initial issuance (particularly among
the most popular lines). Less fragmented markets lower the risk premia
demanded by dealers.
To meet its various objectives, including cost e¬ectiveness, bond
issuance needs to be timed to t the markets absorptive capacity. Here,
forecasting capability needs to be strengthened by government cash
Thailand 673
management. At the same time, market participants condence may be

improved by preannouncing issuers plans, e.g., on schedules, maturities,
and volumes. To this end, the recently established Thai DMO has initi-
ated a bond calendar, although this does not include the full details as
done in more developed markets.
Promotion of Primary Dealers and Market Makers. For the OTC market,
the roles of PDs and interdealer brokers may be enhanced to improve
market depth and liquidity. This could involve granting bidding privi-
leges for them in primary markets. Where such an arrangement is not
available, encouraging an active interbank market, or active trading among
institutional investors, may be a good start. The experiences of more
developed markets have shown that it is essential that any privileges be
based on performance-linked criteria, such as trading volume, contribu-
tions in terms of bringing in new market players, and market stability
enhancement; these criteria should be subject to annual or semiannual
reviews.
Excessive privileges open opportunities for dealers to corner the
market, which has led some OECD countries to revise their policies. The
relative costs and benets of this policy should therefore be regularly
reviewed.
Derivatives Markets and Risk Management. To strengthen risk man-

agement, promotion of a bond or interest futures market may be considered
after the bond spot market has been rmly established. Better risk man-
agement encourages broader participation, which, in turn, helps increase
the volume of transactions and thus market liquidity. Where bond sup-
ply is still somewhat thin, short-selling also improves availability, making
bond markets more liquid. Developing a repo market, for example, per-
mits dealers to create or cover their short and long positions rapidly,
enabling them to respond to market needs exibly.
In the case of Thailand, policy direction has gradually shifted in
favor of derivative markets, with legal frameworks, e.g., for short sales,
being set up. Fully edged derivative markets, however, require time for
the development of both understanding and basic infrastructure, such as
the settlement system, security lending, repo outside BOT, and respec-
tive tax treatments.
As in the case of PDs and market makers, derivatives markets are
also subject to abuse. For example, repo and futures markets may be
used as a means of squeezing the cash market. From this perspective,
activities in these markets, as well as their cash counterparts, need to be
monitored closely. When abuse is detected, the relevant authorities may
intervene through a securities lending facility to alleviate shortages of

stocks, or restrict short-selling by increasing margin requirements, or
prohibit short-selling below the best o¬er price.
Accounting Practice and Transparency Issues. In more developed

countries, mark-to-market accounting has fostered a more active second-
ary market, and should thus be encouraged. In a broader framework, the
whole transparency issue relating to the adequacy of accounting, audit-
ing, and disclosure standards will need to be addressed, for example by
strengthening the bond market information dissemination mechanism.
Here, transparency standards may be monitored and enforced for compli-
ance. In the case of Thailand, developments along these lines are well
under way.
While disclosing government issuance strategy improves market
condence, regular reports on secondary market price and trading are
essential for constructing a market-based yield curve, which reinforces
pricing e¹ciency. This is also essential for evaluating participants ex-
posures (e.g., in case of a crisis), or forming the basis for good investment
decisions (under normal circumstances). It may be noted, however, that
in OTC trading among institutional investors, price and volume informa-
tion may be more di¹cult to obtain.
Regulatory Framework. An orderly bond market needs a set of rules

and procedures that are enforceable, with predictable consequences, and
that do not provide participants with a false sense of security.
While the common aims are to promote sound business practices
and address systemic risks to protect investors, rules and procedures can
vary signicantly across nations with di¬erent market structures and in-
stitutional arrangements. For example, institutional investors may be
regulated based on good governance principles (e.g., a checks and balances
system by active participation of shareholders or an internally appointed
autonomous body in management), or through a set of guidelines govern-
ing investment decisions subject to external assessment by credit rating
agencies.
Settlement System and Legal Enforceability. One of the most impor-

tant impediments to bond market development is the principal risk, i.e.,
the risk arising from failure to deliver bonds or pay for them by either
one of the counterparties. To minimize this risk, the DvP is used. How-
ever, other settlement procedures, such as marking-to-market of unsettled
trades, have also been used to address replacement cost risks, or simple
shortening of the trade settlement lag (to no more than three days)also
Thailand 675
intended to address principal and liquidity risksalthough in a more

lenient form than DvP. There are also a number of versions of DvP itself,
e.g., the Real-Time Gross Settlement System (RTGS) and RTGS with net
cash settlement at the end of the day.
To prevent the risk of the settlement bank failing, the funds ac-
counts used for settlement should be placed with the Central Bank.
Benchmark Yield Curve. Given the importance of a benchmark yield

curve in the price discovery process, as well as in risk management,
concerted e¬orts should be made to promote its development. Here, the
Government, as issuer, may assist in exchanging more liquid issues for
less liquid (or more fragmented) issues from dealers, or to redeem matur-
ing bonds prior to the maturing date, or reopen issues to prevent disruption
of refunding operations.
Credit Rating Agency. As a bond market becomes more mature, there

is a tendency to shift toward market-based regulation from merit regula-
tion (evaluation by regulators), which tends to prevail in the emerging
stage, and credit rating agencies thus take on a more prominent role.
For rating agencies to function properly,5 however, they need to be
equipped with a number of important characteristics, including objectiv-
ity, transparency, credibility, international access, adequacy of resources,
and recognition by regulatory authorities.
The rating policy, however, should avoid setting a minimum rating
for issuers to enter the market. Such a policy would tend to deect
bonds into unregulated markets, such as CP, which is even harder to
monitor, let alone regulate. Moreover, tough rating institutions that
seek to maintain high standards may nd it relatively harder to nd
corporations to rate. Most importantly, such a policy would subject the
bond quality of the whole market to technical validity and the capabil-
ity of rating agencies rather than market judgmentraising the possibility
of costs arising from analytical errors in the rating process. Here, an
exceptional case can be made for repo markets, where certain grades of
bonds may be required to ensure substitutability between these assets
and Central Bank liabilities.
Articial Impediments, Explicit and Implicit Taxes. In addition to

removing reserve requirements as a means of eliminating implicit taxes
and enhancing secondary market development, other developing countries
5. Basle Committee on Banking Supervision, Consultative Paper on a New

Capital Adequacy Framework, June 1999.
have demonstrated the merits of restricting access to alternative Central

Bank rediscount windows as a supportive measure. Since these windows
represent an alternative liquidity adjustment facility, such a measure tends
to drive participants more toward the bond market. More positively, Central
Bank bond repos tend to increase private demand for them (due to the
lower liquidity risk). Thus, in a more general framework, the Government
should seek to rationalize all tax distortions by removing any legal and
regulatory impediments to competition in bond investments and trading,
such as clouding accrued interest calculations by withholding tax.
Although a large part of Thailands implicit taxes under reserve
requirements have already been removed, the broader tax structures on
nancial services, such as taxes on repo outside BOT, capital gains taxes
(for zero-coupon bonds), and withholding taxes, may be further rational-
ized. Also, very importantly for long-term development, policy, regulation,
and intervention should not be allowed to get in the way of market
innovation.
References
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Appendix 1
The Evolution of Thai Bond Market
TABLE A.1.1
Composition of Thai Bond Market
(B billion)
Type of Bond 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Government 213.1 201.4 195.2 150.8 133.9 100.7 62.5 52.5 58.5 64.4 411.9 630.2
Guaranteed
State Enterprise 7.4 10.4 16.6 49.4 62.9 109.7 159.8 208.7 239.7 247.3 255.7 309.1
Nonguaranteed
State Enterprise 1.6 1.6 1.6 1.3 13.2 25.3 30.6 29.6 38.7 46.5 44.9 47.3
Corporate 5.1 26.3 86.1 133.6 182.4 187.7 177.6 403.8
Total 222.1 213.4 213.4 201.5 215.1 262.0 339.0 424.4 519.3 545.9 890.1 1,390.4
Source: Bank of Thailand, Securities Exchange Commission.
TABLE A.1.2
Breakdown of Debt Securities in Thai BDC as at 30 December 1999
(B million)
Type of Bond Value Percent

Government 538,846.29 49.68
Guaranteed State Enterprise 309,090.64 28.50
Nonguaranteed State Enterprise 47,278.89 4.36
FIDF 9,000.00 0.83
PLMO 1,000.00 0.09
Corporate 179,386.61 16.54
Total 1,084,602.43 100.00
Thailand 679
TABLE A.1.3
Outstanding Value of Corporate Bond Classied by Sector in Thai BDC
(B million)
Sector Value Percent

Banking 58,901.345 32.80
Finance 18,884.210 10.52
Property 8,269.724 4.60
Energy 17,013.008 9.47
Holding 13,370.482 7.45
Building and Furnishing 22,273.714 12.40
Communication 10,754.126 5.99
Chemical 7,100.000 3.95
Transportation 3,500.000 1.95
Commerce 1,000.000 0.56
Machinery 600.000 0.33
Agribusiness 500.000 0.28
Electric Products 500.000 0.28
Health 500.000 0.28
Textile Company 1,200.000 0.67
Others 2,500.000 1.39
Hotel and Travel Services 900.000 0.50
Food 11,820.000 6.58
Total 179,586.609 100.00
TABLE A.1.4
Thai BDC Trading Movement 19951999
(B billion)
Type of Bond 1995 1996 1997 1998 1999
Governmenta 0.93 4.83 15.24 55.67 347.59

State Enterpriseb 7.53 50.78
Corporate 50.60 195.77 90.95 8.90 32.82
Total 51.53 200.61 106.19 72.10 431.20
a
Government bonds have been listed in Thai BDC since April 1998, before that there
were only corporate bonds, Bank of Thailand, FIDF, and PLMO. b State Enterprise bonds
have been listed in Thai BDC since April 1998.
Appendix 2
The Thai Bond Market Structure

TABLE A.2.1
Summary of Registered Bond in Thai BDC (as of December 1999)
Number of Outstanding Value Percent of Total

Issues (B million) Outstanding
Government Debt Securities
Government Bonds 36 538,846.29 49.68
Investment bonds 4 4,804.81 0.44
Loan bonds 17 499,041.48 46.01
Saving bonds 15 35,000.00 3.23
State Enterprise Bonds 224 356,396.52 32.86
Guaranteed 206 309,090.63 18.50
Nonguaranteed 18 47,278.89 4.36
FIDF Bonds 4 9,000.00 0.83
PLMO Bonds 1 1,000.00 0.09
Subtotal 265 905,215.81 83.46
Corporate Debt Securities
Straight Issues 103 130,674.80 12.05
Convertible Issues 5 6,679.53 0.62
Amortized Issues 14 42,032.28 3.88
Subtotal 122 179,386.61 16.54
Asset Securitization
Total 387 1,084,602.42 100.00
Source: Thai Bond Dealing Center.
TABLE A.2.2
Thai BDC Government Bond Yield Curve
Term Yield (in percent)

(years) 1999 1998
Q1 Q2 Q3 Q4 Q3 Q4
1 3.72 2.99 3.45 3.57 7.60 4.92
2 4.77 4.28 4.41 4.6 7.93 5.47
3 5.14 4.79 5.14 5.25 8.26 5.79
5 6.33 6.06 6.34 6.48 9.26 6.73
7 7.22 7.02 7.22 7.25 7.66
10 7.55 7.71 7.95 7.92 8.19
14 8.30 8.28
15 8.00 8.13
Source: Interpolated by Thai Bond Dealing Center.
Thailand 681
TABLE A.2.3
Thai BDC Government Bond Index, 1999
Date Gross Clean Total Date Gross Clean Total

Price Price Return Price Price Return
Index Index Index Index Index Index
4 Jan 99 100.00 100.00 100.00 5 Mar 99 102.36 101.63 103.22
5 Jan 99 100.02 99.99 100.02 8 Mar 99 101.86 101.05 102.72
6 Jan 99 100.08 100.03 100.08 9 Mar 99 101.61 100.76 102.47
7 Jan 99 100.19 100.11 100.19 10 Mar 99 101.53 100.66 102.39
8 Jan 99 100.27 100.17 100.27 11 Mar 99 101.44 100.54 102.30
11 Jan 99 100.36 100.19 100.38 12 Mar 99 101.36 100.44 102.22
12 Jan 99 100.43 100.24 100.46 15 Mar 99 101.02 100.02 101.89
13 Jan 99 100.51 100.30 100.54 16 Mar 99 100.48 99.44 101.34
14 Jan 99 100.75 100.50 100.77 17 Mar 99 99.73 98.65 100.58
15 Jan 99 101.00 100.73 101.02 18 Mar 99 99.76 98.66 100.61
18 Jan 99 101.10 100.78 101.15 19 Mar 99 99.93 98.81 100.79
19 Jan 99 101.19 100.84 101.24 22 Mar 99 99.98 98.78 100.84
20 Jan 99 101.22 100.84 101.27 23 Mar 99 100.45 99.24 101.32
21 Jan 99 101.29 100.90 101.35 24 Mar 99 101.05 99.81 101.92
22 Jan 99 101.34 100.92 101.40 25 Mar 99 101.18 99.92 102.06
25 Jan 99 101.36 100.88 101.45 26 Mar 99 101.25 99.96 102.12
26 Jan 99 101.39 100.89 101.48 29 Mar 99 101.26 99.91 102.15
27 Jan 99 101.40 100.87 101.49 30 Mar 99 101.33 99.95 102.22
28 Jan 99 101.37 100.81 101.46 31 Mar 99 101.89 100.50 102.79
29 Jan 99 101.38 100.79 101.46 1 Apr 99 101.95 100.53 102.85
1 Feb 99 101.39 100.75 101.51 2 Apr 99 101.98 100.54 102.88
2 Feb 99 101.44 100.78 101.56 5 Apr 99 102.00 100.50 102.92
3 Feb 99 101.56 100.87 101.67 7 Apr 99 102.09 100.54 103.01
4 Feb 99 101.76 101.04 101.87 8 Apr 99 102.10 100.52 103.02
5 Feb 99 102.12 101.39 102.24 9 Apr 99 102.15 100.55 103.07
8 Feb 99 102.48 101.69 102.62 12 Apr 99 102.26 100.59 103.20
9 Feb 99 102.92 102.11 103.06 16 Apr 99 100.40 100.39 103.09
10 Feb 99 103.01 102.18 103.15 19 Apr 99 100.55 100.47 103.24
11 Feb 99 103.20 102.34 103.34 20 Apr 99 101.05 100.96 103.76
12 Feb 99 103.41 102.53 103.56 21 Apr 99 101.29 101.18 104.00
15 Feb 99 103.49 102.56 103.67 22 Apr 99 101.35 101.22 104.06
16 Feb 99 103.53 102.57 103.70 23 Apr 99 101.32 101.16 104.03
17 Feb 99 103.52 102.54 103.70 26 Apr 99 101.34 101.12 104.06
18 Feb 99 103.65 102.64 103.82 27 Apr 99 101.29 101.04 104.00
19 Feb 99 103.75 102.72 103.93 28 Apr 99 101.20 100.93 103.91
22 Feb 99 103.68 102.62 103.91 29 Apr 99 101.25 100.95 103.96
23 Feb 99 103.61 102.52 103.83 30 Apr 99 101.12 100.79 103.82
24 Feb 99 103.62 102.51 103.85 4 May 99 101.17 100.75 103.87
25 Feb 99 103.56 102.42 103.79 6 May 99 101.18 100.72 103.88
26 Feb 99 103.56 102.39 103.79 7 May 99 101.19 100.71 103.89
2 Mar 99 102.93 102.28 103.79 10 May 99 101.15 100.60 103.86
3 Mar 99 102.89 102.22 103.75 11 May 99 101.05 100.47 103.75
4 Mar 99 102.79 102.09 103.65 12 May 99 100.19 99.58 102.87
TABLE A.2.3
(continued)

13 May 99 100.24 99.61 102.92 15 Jul 99 100.56 100.42 105.08
14 May 99 99.96 99.30 102.63 16 Jul 99 100.60 100.44 105.12
17 May 99 100.07 99.35 102.75 19 Jul 99 100.65 100.43 105.17
18 May 99 100.01 99.26 102.69 20 Jul 99 100.62 100.39 105.15
19 May 99 99.99 99.21 102.66 21 Jul 99 100.61 100.36 105.15
20 May 99 100.10 99.31 102.78 22 Jul 99 100.62 100.35 105.15
21 May 99 100.61 99.80 103.30 23 Jul 99 100.65 100.36 105.19
24 May 99 100.69 99.81 103.38 26 Jul 99 100.71 100.36 105.25
25 May 99 100.74 99.84 103.43 27 Jul 99 100.75 100.38 105.28
26 May 99 100.59 99.80 103.41 29 Jul 99 100.78 100.37 105.31
27 May 99 100.21 99.39 103.02 30 Jul 99 100.76 100.34 105.30
28 May 99 100.37 99.54 103.19 2 Aug 99 100.83 100.34 105.37
1 Jun 99 100.04 99.55 103.29 3 Aug 99 100.85 100.34 105.39
2 Jun 99 100.50 100.00 103.77 4 Aug 99 100.87 100.35 105.41
3 Jun 99 100.60 100.08 103.87 5 Aug 99 100.97 100.43 105.52
4 Jun 99 100.72 100.18 103.99 6 Aug 99 101.06 100.50 105.61
7 Jun 99 100.93 100.33 104.21 9 Aug 99 101.11 100.49 105.66
8 Jun 99 100.22 100.59 104.50 10 Aug 99 101.16 100.52 105.71
9 Jun 99 100.43 100.79 104.72 11 Aug 99 101.19 100.52 105.74
10 Jun 99 100.72 101.06 105.02 13 Aug 99 101.21 100.51 105.76
11 Jun 99 100.75 101.07 105.05 16 Aug 99 101.25 100.49 105.80
14 Jun 99 100.82 101.07 105.12 17 Aug 99 101.29 100.50 105.84
15 Jun 99 100.77 101.05 105.12 18 Aug 99 101.29 100.48 105.84
16 Jun 99 100.79 101.05 105.14 19 Aug 99 101.32 100.50 105.87
17 Jun 99 100.56 100.93 105.03 20 Aug 99 101.30 100.47 105.87
18 Jun 99 100.42 100.77 104.89 23 Aug 99 101.37 100.49 105.94
21 Jun 99 100.36 100.71 104.89 24 Aug 99 101.39 100.48 105.96
22 Jun 99 100.14 100.46 104.65 25 Aug 99 101.33 100.40 105.89
23 Jun 99 99.97 100.26 104.47 26 Aug 99 101.30 100.35 105.87
24 Jun 99 99.86 100.14 104.36 27 Aug 99 101.33 100.36 105.90
25 Jun 99 99.68 99.93 104.17 30 Aug 99 101.39 100.37 105.96
28 Jun 99 99.71 99.92 104.20 31 Aug 99 100.90 100.39 106.00
29 Jun 99 100.19 100.39 104.70 1 Sep 99 100.89 100.37 106.00
30 Jun 99 100.34 100.51 104.85 2 Sep 99 100.92 100.38 106.03
2 Jul 99 100.39 100.53 104.91 3 Sep 99 100.97 100.41 106.08
5 Jul 99 100.45 100.53 104.97 6 Sep 99 100.62 100.43 106.15
6 Jul 99 100.47 100.53 104.99 7 Sep 99 100.63 100.41 106.16
7 Jul 99 100.46 100.50 104.98 8 Sep 99 100.61 100.38 106.14
8 Jul 99 100.46 100.46 104.98 9 Sep 99 100.59 100.33 106.11
9 Jul 99 100.43 100.40 104.94 10 Sep 99 100.61 100.33 106.13
12 Jul 99 100.48 100.40 105.00 13 Sep 99 100.61 100.30 106.16
13 Jul 99 100.50 100.40 105.02 14 Sep 99 100.62 100.28 106.16
14 Jul 99 100.54 100.42 105.06 15 Sep 99 100.62 100.27 106.17
Thailand 683
TABLE A.2.3
(continued)

16 Sep 99 100.62 100.24 106.16 9 Nov 99 99.85 99.78 106.78

17 Sep 99 100.60 100.20 106.14 10 Nov 99 99.86 99.77 106.79
20 Sep 99 100.60 100.16 106.16 11 Nov 99 99.86 99.75 106.79
21 Sep 99 100.58 100.12 106.14 12 Nov 99 99.82 99.69 106.75
22 Sep 99 100.44 99.95 105.98 15 Nov 99 99.87 99.68 106.80
23 Sep 99 100.35 99.84 105.89 16 Nov 99 99.89 99.69 106.82
24 Sep 99 100.30 99.77 105.84 17 Nov 99 99.87 99.65 106.81
27 Sep 99 100.26 99.69 105.81 18 Nov 99 99.91 99.67 106.84
28 Sep 99 100.43 99.84 105.99 19 Nov 99 99.90 99.64 106.83
29 Sep 99 100.50 99.89 106.06 22 Nov 99 99.97 99.65 106.91
30 Sep 99 100.55 99.92 106.12 23 Nov 99 99.98 99.64 106.92
1 Oct 99 100.58 99.93 106.14 24 Nov 99 100.00 99.65 106.95
4 Oct 99 100.67 99.97 106.24 25 Nov 99 100.06 99.69 107.02
5 Oct 99 100.75 100.03 106.33 26 Nov 99 100.06 99.67 107.01
6 Oct 99 100.84 100.11 106.43 29 Nov 99 100.09 99.65 107.05
7 Oct 99 100.80 100.04 106.38 30 Nov 99 100.09 99.63 107.05
8 Oct 99 100.81 100.04 106.40 01 Dec 99 100.09 99.61 107.05
11 Oct 99 100.80 99.98 106.40 02 Dec 99 100.12 99.62 107.08
12 Oct 99 100.32 99.97 106.41 03 Dec 99 100.17 99.65 107.13
13 Oct 99 100.34 99.97 106.43 07 Dec 99 100.11 99.61 107.17
14 Oct 99 99.52 99.94 106.42 08 Dec 99 99.46 99.62 107.21
15 Oct 99 99.60 100.01 106.51 09 Dec 99 99.48 99.63 107.23
18 Oct 99 99.46 99.81 106.36 13 Dec 99 99.49 99.63 107.31
19 Oct 99 99.55 99.88 106.46 14 Dec 99 99.52 99.63 107.34
20 Oct 99 99.63 99.94 106.54 15 Dec 99 99.30 99.67 107.40
21 Oct 99 99.68 99.97 106.59 16 Dec 99 99.34 99.68 107.43
22 Oct 99 99.68 99.96 106.60 17 Dec 99 99.37 99.70 107.47
26 Oct 99 99.75 99.95 106.67 20 Dec 99 99.42 99.72 107.56
27 Oct 99 99.74 99.92 106.66 21 Dec 99 99.38 99.67 107.52
28 Oct 99 99.73 99.89 106.65 22 Dec 99 99.42 99.68 107.55
29 Oct 99 99.74 99.88 106.66 23 Dec 99 99.46 99.70 107.60
1 Nov 99 99.76 99.85 106.68 24 Dec 99 99.47 99.70 107.62
2 Nov 99 99.78 99.84 106.70 27 Dec 99 99.53 99.70 107.67
3 Nov 99 99.80 99.85 106.73 28 Dec 99 99.54 99.69 107.69
4 Nov 99 99.80 99.83 106.73 29 Dec 99 99.57 99.70 107.72
5 Nov 99 99.80 99.80 106.72 30 Dec 99 99.56 99.83 107.76
8 Nov 99 99.84 99.79 106.77

14 Thailand: Siri Ganjarerndee

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14 Thailand: Siri Ganjarerndee

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642 Government Bond Market Development in Asia

The Asian crisis, which erupted in Thailand in July 1997, had a

This, along with previous deregulation of the corporate market,

and risk management; (vii) accounting practice and transparency issues;

I. Fiscal Policy and Management

1. This section is based on reports from the Ministry of Finance, Thailands

End of Fiscal Year 1999 2000 2001 2002 2003

FIDF Debta 0.96 0.83 0.86 0.56 0.26

If the 1999 direct borrowings of some B960 billion of the FIDF

A. Fiscal Burden Arising from the FIDF

B. Implications for Bond Market Development

Development of a stronger debt market in the wake of the Asian

II. Monetary Policy and Management

BOT, established in 1942, is responsible for maintaining monetary

Coordination of Monetary and Fiscal Policy

III. Overview of the Bond Market

On the whole, Thailands initiatives to develop its debt/bond market

Before the establishment of the Thai BDC, no bond trading statis-

Corp. Debt Sec.

Source: The Thai Bond Dealing Center.

exchange controls were relaxed and asset management companies were

Before 1992, the issuance of corporate bonds was limited to public

Various factors brought about this signicant growth in the corpo-

market for bond trading. Fourth, issuers recognized the importance of

Type of Bond 1998 1999

Total 37.06 177.65 122.98 84.38 44.91  252.27 403.80

Major issuers of corporate bonds are banking, nance, and securities

Fin & Sec

Source: Thai Bond Dealing Center.

with B500 billion in government bonds issued through the FIDF to

Government Bonds. Government debt securities are made up of gov-

state enterprises with sound nancial standing. Financial institutions hold

Corporate Bonds. Most corporate bonds outstanding in Thailand are

Money Market Instruments. Money market instruments traded com-

International Bonds. International bonds have been issued by the Elec-

Overall, the products currently available in the Thai bond market

On the supply side, di¬erent types of xed income securities will

Besides nancial institutions (60 percent), major players in the

IV. Bond Market Infrastructure

A. Structure of Primary Dealer System

Market makers play a crucial role in the bond market. By continu-

B. Issuance Methods and Procedures

The Securities and Exchange Commission (SEC) is responsible for

advance, investors will be able to e¬ectively plan their investment pro-

Issuance can be either through public o¬ering (PO) or private place-

Public O¬ering. Due to the di¬erent risk and return characteristics of

Private Placement. Private placement is dened as one of the follow-

SEC recently announced a new regulation, e¬ective from the second

C. Secondary Trading Systems

Trading is usually on an over-the-counter (OTC) basis for both

D. Electronic Trading System

In the Thai market, an electronic trading system called BondNet,

E. Market Conventions and Standards

Trading of bonds is based on yields quoted up to six decimal

The repo market provides market players with a cost-e¬ective -

a broader range of nancial institutions, such as securities companies,

Bond Borrowing and Lending

Short-selling and securities lending have been allowed by SEC

1. This section is based on reports from the Ministry of Finance, Thailands

On the whole, Thailands initiatives to develop its debt/bond market

Various factors brought about this signicant growth in the corpo-

Total 37.06 177.65 122.98 84.38 44.91 252.27 403.80

Major issuers of corporate bonds are banking, nance, and securities

state enterprises with sound nancial standing. Financial institutions hold

On the supply side, di¬erent types of xed income securities will

Besides nancial institutions (60 percent), major players in the

Private Placement. Private placement is dened as one of the follow-

The repo market provides market players with a cost-e¬ective -

a broader range of nancial institutions, such as securities companies,

Well-Dened and Market-Accepted Benchmark Interest Rate. In de-

4. Asia and Pacic Economic Cooperation (APEC), Compendium of Sound

Ination-Linked Bonds. Ination-linked bonds are similar to oating

Structured Notes. This is a bundle of xed income instruments and

management. At the same time, market participants condence may be

intended to address principal and liquidity risksalthough in a more

Articial Impediments, Explicit and Implicit Taxes. In addition to