This year's Thailand Focus conference, the biggest annual domestic gathering of foreign and domestic investors as well as Thai corporate executives, successfully concluded a couple of weeks ago. For three days, more than 200 institutional investors including 116 foreign fund managers and more than 100 listed company executives and policymakers rubbed shoulders and discussed investment opportunities. Of course, foreign investors were particularly keen to learn more about Thailand's political roadmap. However, most of the discussion focused on long-term economic trends, particularly the Greater Mekong Subregion (GMS), which is already attracting investment from near and far.
Why? The GMS is a vast market covering Cambodia, Laos, Myanmar, Vietnam, Thailand and southern China's Yunnan province, all geographically bound together by the meandering Mekong River. The region constitutes 326 million consumers and workers and has abundant natural resources such as arable land, hydropower and oil and gas reserves. Most importantly, this significant market sits on one continuous land mass. Economic integration through falling barriers to trade, investment and workers will bring large gains to growth as firms invest across the GMS to tap new markets and create new production bases and supply chains. In fact, it is already in progress. Many Thai listed firms are already investing in the GMS and further afield. Foreign revenue accounts for 40% of the revenue for listed firms that disclose such data.
At this stage, the name of the game is connectivity. The full benefits of economic integration cannot be realised without connectivity. For the GMS truly to become one market, people, goods and capital must be able to flow easily where they are most needed. Underlying physical infrastructure in the form of road, rail and air links must be built or upgraded. Thailand, by virtue of its strategic location at the heart of the GMS, is destined to play a pivotal role as a logistics hub. To this end, the government has earmarked 2.4 trillion baht for infrastructure investment in fiscal years 2015-22. High-priority projects include public transport in Greater Bangkok and an intercity double-track railway. Of this budget, 5% is expected to be financed through infrastructure funds.
What exactly are infrastructure funds? Infrastructure funds are a new asset class on the Stock Exchange of Thailand. Private firms or state enterprises can use this new tool to mobilise funds to develop infrastructure projects. Last year's landmark initial public offering (IPO) of the BTS Mass Transit Growth Infrastructure Fund (BTSGIF) was the first of its kind. At 62 billion baht, it was the largest IPO ever in Thailand and one of the largest in Asia in 2013. Particularly for the public sector, infrastructure funds offer an attractive way to increase market discipline, lower debt burdens and manage risks to fiscal sustainability. An example from the private sector is the Amata B.Grimm Power Plant Infrastructure Fund (ABPIF) for power plant operation, whose IPO was 6 billion baht. Amata B.Grimm operates power plants for the industrial sector in both Thailand and Vietnam.
But what does all this mean for you, the investor? It means you have a new way to participate in the growth story of the GMS in addition to bonds and equities. The first option is your traditional government bond. Bonds, whether issued by, say, Thailand or Laos — the latter recently issued a 1.5-billion-baht bond to finance hydropower projects — to finance regional infrastructure are all very well and fine, but they lack the excitement of growth typically associated with the GMS. The second option is equities. However, investing in listed equities in frontier markets can be especially risky, as their political and economic institutions are still evolving. Frontier stock markets are also relatively illiquid. Alternatively, you can invest in Thai listed firms or holding companies that invest in the region to get some exposure — for example, CK Power Plc invests in Laotian hydropower. Thai listed firms in the finance, property and construction, and resources industries have been aggressively expanding in the region. But now there is a third option. Because infrastructure funds are a blend of fixed income and equities, they offer a balance of risk and return between bonds and equity — higher returns than normal bonds and safer than risky equities. In other words, you get to enjoy the best of both worlds — stable bond-like yields with positive equity upsides.
What's next for infrastructure funds? Current offerings are admittedly limited, as infrastructure funds are relatively new in Thailand. But there is more to come, as the need for infrastructure in Thailand and the GMS at large is undeniable. Most importantly, the public sector has already made clear its intention to finance parts of public investment with infrastructure, so you will surely get more investment options in GMS connectivity. If you choose to invest today, then one day years from now as you take a train ride or road trip with your family from Bangkok up to Kunming via Hanoi or Vientiane, you can get to tell your children how you "own" a certain stretch of rail or road and helped to bring together the GMS.
Kiatipong Ariyapruchya heads the Stock Exchange of Thailand's Capital Markets Research Institute. He holds a PhD in economics from Columbia University in New York.