CIMB sees infrastructure plans as window for govt to expand local-currency bond market

A senior executive at the Malaysian banking group cites Thailand’s solid fundamentals and infrastructure development needs, but warns that the absence of appropriately high international credit ratings could hinder Asean countries when it comes to achieving cross-border investment in their local-currency government and corporate bond markets.

Given the administration’s planned projects for flood prevention, “there’s a good window for the government to achieve a broadening and deepening of the bond market through this infrastructure funding requirement”, Lee Kok Kwan, group deputy CEO of CIMB Group Holdings, said yesterday.

He sees this as the opportunity for Thailand, which has a high savings rate without huge government debts, to create more local-currency bond supplies. 

As of last September, the Kingdom’s local-currency bonds accounted for US$225 billion (about Bt7 trillion), according to the Asian Development Bank. 

The country’s local-currency bonds are growing with strong support factors like the planned government spending and reliance on local-currency borrowings. “Domestically, there could not be a problem,” Kwan said.

“In the West, it is another problem. There’s too much supply but no demand. Here [Thailand] is too much demand but no supply,” he added.

Kwan also cautioned over international credit ratings, which he said should be assigned higher on bonds in Asean+3 countries, where economic fundamentals are stronger than in the West. 

Asean+3 countries – members of the regional grouping plus China, South Korea and Japan – have high international reserves, low reliance on foreign-currency debts, high savings rates and ample liquidity in the financial system. 

“Credit ratings should be much higher, compared to our counterparts in the West. Compared with Italy and Spain, we [Asean+3] have improved very significantly since the Asian financial crisis in 1997, but the international credit ratings have not reflected that,” he said.

As of December, Thailand was assigned Baa1 and BBB+ unsolicited sovereign-credit ratings by Moody’s and Standard & Poor’s, respectively, while Italy’s equivalent ratings were A2 and A, and Spain’s were A1 and AA-.

Kwan said Asean corporate and bank ratings were capped by their impaired unsolicited international sovereign ratings.

“If Asean+3 [countries] continue to impose reliance on international ratings to govern their cross-border investment, it will be difficult for them to achieve success in cross-border investing in the Asean+3 local-currency government and corporate bond markets,” he warned. 

On the money markets, Kwan expects Asian currencies to weaken due to capital flight on the back of turbulence in the West, with Europe now likely in a recession.

However, Asian currencies will eventually strengthen, and this will continue given the countries’ strong fundamentals, he added. 

“Europe will come to a conclusion [on resolving its debt problem] sometime this year. After that, Asian currencies will start stabilising and strengthening again,” the banker said. 

The baht is expected to trade around the regional level, as currencies in the region tend to move together, he said. 

“Europe will be in a kind of shrinkage, then we might have to cope with greater turbulence, especially in the first half [of 2012]. That will be in the short term,” Kwan said, adding, “Asia will face volatility from there to here. Our volatility comes from the other side [the West].”