BOT ready to pump Bt1 trillion into ailing financial markets

The BOT will allow banks to borrow money from it should investors make panic sales of investment units in bond mutual funds, BOT Governor Veerathai Santiprabhob said on Sunday.
Veerathai, senior officials from the Finance Ministry and representatives from financial markets held an emergency press conference on Sunday (March 22) to announce measures to support the bond market, which is suffering from a potential liquidity crunch as investors want to hold cash amid the uncertainty fuelled by the virus fears. 
Virathai said that commercial banks could use investment grade bonds as collateral for borrowing money from the central bank’s lending facility, worth over Bt1 trillion.
Investment in money market funds and daily fixed-income funds is estimated to be over Bt1.6 trillion while the market liquidity has become thin as investors worry about the severe impact of the Covid-19 outbreak.
Banks that also own investment management companies, managing mutual funds, are ready to buy investment units from their subsidiaries when investors sell investment units back to the fund managers, Predee Daochai, president of the Thai Bankers’ Association said.
Veerathai said the central bank will coordinate with commercial banks, Government Savings Bank, insurance companies and Government Pension Fund to create a bridging fund of between Bt70 to Bt100 billion. The bridging fund will provide short-term lending for up to 270 days for those companies that had previously issued corporate bonds and could not adequately redeem it when the bonds reached maturity. Usually, bond issuers do not find a problem as they roll-over their bonds when corporate bonds reach maturity, but the current market has become thin, due to virus fears, said Veerathai. The bridging fund will top up when insurers cannot fully raise money in the financial market to meet their obligations.
Veerathai also promised to provide more liquidity in the government bonds market after the central bank recently purchased Bt100 billion worth of government bonds.
Prasong Poontaneat, permanent secretary of the Finance Ministry, said the ministry will on Tuesday submit to the Cabinet another economic package to support people and labour affected by the impact of the coronavirus outbreak. He did not reveal details but said that Social Security will support those who lose their jobs while the ministry will provide support to those who are not members of the Social Security Fund.
The secretary-general of the Securities and Exchange Commission, Ruenvadee Suwanmongkol, promised new measures to support the stock market affected by investors selling-off shares. Restrictions on treasury stocks, or buying back stocks, would be eased in order to allow corporates, or executives of companies to buy back stocks more easily. Currently they have to wait for one year after the first buyback takes place, she added.
Veerathai assured the markets that Thailand has plenty of liquidity due to high international reserves, banks having adequate capital and corporates having lower foreign debt. “This situation is different from the Asian financial crisis of 1997 when the country ran out of reserves, banks did not have enough capital and corporates had high foreign debt, but this time, international reserves are high, and banks have a solid capital base,” Veerathai added.

Below is the joint statement issued on Sunday on the Thai financial market’s response to the Covid-19 situation:
"The recent development of the Covid-19 situation has led to turbulence in financial markets and sales of assets across the world. This has affected liquidity and functioning of the financial market, and regulators in many countries have issued several measures to stabilise the financial markets.
"Even though the Thai financial system remains strong, with commercial banks holding healthy levels of capital and liquidity reserves, the liquidity stress and the resulting irregularity in the global financial market have begun to affect the Thai financial market. The Bank of Thailand (BOT) alleviated the situation through a government bond purchase programme of more than Bt100 billion from March 13-20, and the reduction and cancellation of BOT bond issuance, while the Monetary Policy Committee has reduced the policy rate to the record-low level of 0.75 per cent per year on March 20. "The BOT stands ready to make additional purchases of government bonds to lower the volatility of the government bond yield and ensure the normal functioning of the government bond market.
"Nonetheless, the highly volatile environment has led some investors to redeem their investment units from bond mutual funds. This has forced some bond mutual funds to liquidate their bond holdings — most of which are high-quality — at prices below fair value, impacting the funds’ value. This rapid decrease in the funds’ value might lead to further selloff of other mutual funds and result in the disruption of the bond markets, mutual funds, and eventually the overall financial markets and economy at large.
"The Ministry of Finance, the Securities and Exchange Commission, and the Bank of Thailand have been closely monitoring the situation in the financial market, and deem it necessary to take the following measures to stabilise the financial market and stop the liquidity problem from spreading further:

"Bond mutual funds: The BOT has set up a special facility to provide liquidity for mutual funds through commercial banks. Commercial banks that purchase investment units of high-quality money market funds or daily fixed income funds, which are impacted by the decreased market liquidity, will be able to use the underlying unit trust as collateral for liquidity support from this special facility. The facility will remain open until the market condition returns to normal. The BOT’s preliminary estimate of eligible bond mutual funds is approximately Bt1 trillion.
"Corporate bonds: The Thai Bankers’ Association, the Government Savings Bank, Thai insurance providers, and the Government Pension Fund have together set up a Bt70 billion to Bt100 billion Corporate Bond Stabilisation Fund to invest in high-quality, newly issued bonds by corporates that cannot fully roll over maturing corporate bonds.
"Government bonds: The BOT will continue to provide liquidity to the government bond market through bond purchasing to ensure the government bond market continues to function normally

"These measures are expected to provide liquidity and help the normal functioning of the financial market and help build investors’ confidence. Relevant public and private institutions will continue to work together, monitor the situation, and provide additional measures to ensure the normal and efficient functioning of the financial market.
"As the current stress period is the result of the temporary liquidity shortage while bond mutual funds still hold low-risk, good-quality assets, they urged the public not to rush to redeem during this period of market abnormality. Doing so might result in prices that are significantly below fair value."