Thailand’s finance ministry has mandated four banks — HSBC, Kasikornbank, KrungThai Bank and Siam Commercial Bank — to arrange the kingdom’s first inflation-linked bond. Thailand plans to raise between Bt20 billion and Bt40 billion ($665 million to $1.3 billion) from the bond issue and it will offer a tenor of up to 10 years. The deal is expected to be offered to both domestic and foreign investors and the coupon is expected to be tied to the consumer price index (CPI).
A number of foreign banks are also said to have pitched for the deal, including Deutsche Bank, Standard Chartered and Royal Bank of Scotland.
Asia has been slow to adopt inflation-linked bonds, but the region is now starting to embrace them as governments struggle to tackle inflation. Thailand’s inflation rose by 3.14% in March compared to a year ago. Meanwhile, in February, Hong Kong’s CPI rose 3.7%, touching a 29-month high, while Singapore’s CPI rose by 5%.
Aside from Thailand, other governments are planning to launch such bonds as populist measures aimed at placating the general public and further developing the domestic bond market.
Hong Kong’s government started the ball rolling in February, when it said it would issue HK$5 billion to HK$10 billion ($641.6 million to $1.28 billion) of inflation-linked retail bonds, to help the city’s residents cope with rising inflation. The bonds are expected to be issued off a retail bond programme, which was set up by Bank of China and HSBC last year.
Other countries in the region are also said to be contemplating issuing inflation-linked bonds, though none has yet taken concrete steps.
“We could see more inflation-linked bonds in the region. Hong Kong has said it will issue and, given Singapore’s rivalry with Hong Kong, it may also do so. The Philippines and Indonesia may also consider them,” said one Hong Kong-based banker.
Inflation-linked bonds have grown at a snail’s pace in Asia, with Korea being one of the few countries to issue. Globally, the three biggest markets for inflation-linked bonds are the US, UK and Australia.
Some attribute the dearth of inflation-linked bonds to a lack of understanding of the products, as well as a lack of liquidity.
“It is a bit of a chicken-and-egg situation,” said Bunt Ghosh, vice-chairman of fixed income, Asia-Pacific, at Credit Suisse. “Governments are reluctant to issue inflation-linked bonds, hence there is not enough liquidity and the market doesn’t develop as it should.
“Globally, the inflation-linked bond market is relatively small and illiquid compared to the overall bond market. Pension funds tend to lock the bonds away into their portfolios,” Ghosh added.
Inflation-linked bonds often have complex structures and each bond has individual quirks. In some cases, the principal is tied to the CPI and, in other cases, the coupon is indexed to the CPI.
Furthermore, not every country in Asia has reliable CPI figures, which poses obvious challenges. “Unlike the US, which has a reliable consumer price index that is closely followed, a lot of countries in Asia don’t have accurate numbers. If your return is based on a variable that is not reliable, it is very difficult,” said another Hong Kong based banker.
