The daily transaction volume in the Thai bond market currently stands at approximately 65 billion baht, which is a significant rise from just 1 million baht back in 1994.
Bonds act as essential financial tools for both governmental bodies and corporations. Given the substantial amounts involved, having robust investment analysis methods becomes critical, with one of these being Credit Ratings provided by Credit Rating Agencies (CRAs). Businesses aiming to generate capital via bonds require evaluations from CRAs regarding their creditworthiness. The resulting ratings affect bond returns and significantly help in drawing potential investors.
Nevertheless, recent market events have indicated that credit ratings may not encompass the complete range of potential risks. Instances of "fallen angels," referring to situations where bonds experience significant downgrades, have highlighted how alterations in ratings can substantially affect both specific financial instruments and overall market trust.
This situation underscores the crucial function of credit rating agencies (CRAs), necessitating an extensive assessment of commercial and fiscal elements, alongside ongoing surveillance of economic trends. Moreover, these entities require clear processes, precise information, and robust handling of possible ethical dilemmas. It is equally vital for them to guarantee that investors can easily obtain detailed details about ratings.
Currently, Thailand has two credit rating firms: TRIS Ratings and Fitch Ratings. These entities function under the oversight of the Securities and Exchange Commission (SEC), which employs a whitelist approval process. In order to keep their authorized standing, Credit Rating Agencies (CRAs) are required to adhere to global standards, submit periodic updates, and permit examinations from the SEC. Non-compliance with these regulations may result in license cancellation.
Nevertheless, the present regulatory structure encompasses two major drawbacks:
Initially, it places excessive emphasis on final regulatory actions. The SEC’s primary enforcement mechanism is license revocation, which might be overly harsh for slight infractions and restricts possibilities for proactive interventions.
Secondly, the rating focuses on organizational measures. However, it falls short in evaluating measures related to conflict of interest prevention and enhancing transparency in other aspects.
Although global regulators have introduced several measures to improve credit ratings, many of these may not be suitable for Thailand’s specific market conditions and regulatory framework. Despite these constraints, enhancements are still possible. Consequently, we suggest adopting two initial actions aimed at bolstering market trust:
To enhance rating independence, the SEC ought to implement analyst rotation rules aimed at diminishing prolonged connections between credit rating agencies (CRAs) and entities issuing ratings. Although the EU requires mandatory rotations every four years, Thailand’s small pool of only two CRAs indicates that focusing on rotating individual analysts rather than entire firms might be more effective. This approach would still maintain high standards and consistency in rating services through appropriate measures designed to protect their reliability.
Moreover, the SEC ought to mandate that CRAs reveal details in these key areas: substantial financial connections between CRAs and issuers that could sway judgment (like stock holdings or income links), along with insights aiding investors in grasping the constraints of the rating procedure. This includes disclosing their analytical presumptions, the thoroughness and caliber of the data obtained from issuers, and potential risks that might impact forthcoming credit assessments.
Although these suggestions can serve as initial measures, they should be complemented by more extensive reforms in several crucial sectors to enhance the caliber of credit ratings in Thailand effectively:
Initially, boost competitiveness within the Credit Rating Agency (CRA) sector. The presence of just two providers restricts issuers' options and hampers competitive pressure on service quality. Additionally, this situation poses significant regulatory hurdles, as watchdogs have to carefully navigate stringent oversight without causing widespread disruptions; for instance, withdrawing endorsement from even one CRA might substantially disrupt the overall bond market dynamics.
Secondly, enhance safeguards against fraudulent activities. The reliability of credit assessments hinges significantly on the precision of data supplied by issuers. Instances like the recent default of Stark Corporation due to accounting deceit highlight how ratings may mislead when incorrect details are intentionally provided. It is essential for the SEC to focus on establishing robust whistleblower protections aimed at identifying impropriety promptly and minimizing chances for inaccurate information from being incorporated into credit evaluations.
Thirdly, reduce dependence on credit ratings within the capital market structure. Although these ratings serve as crucial instruments for gauging risks, they ought not to stand alone as the definitive measure. In Thailand’s current financial landscape, credit ratings play an overly significant part across various aspects of regulation, which introduces systemic weaknesses and leads participants to overlook alternative methods of assessing risk. It would be beneficial to reassess the function of credit ratings concurrently with fostering and encouraging a variety of risk evaluation techniques.
Improving the quality of credit ratings and guaranteeing their proper usage is essential for advancing Thailand’s bond market. Although enhancing the regulatory framework for Credit Rating Agencies can bolster both autonomy and openness in evaluations, concurrent changes in competition policies, fraud prevention measures, and reliance on credit ratings will aid in establishing enduring trust within the marketplace.
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