Preparedness for a new context in the financial world resulting from permanent cessation of the London Interbank Offer Rate (LIBOR) as an interest rate benchmark for financial transactions is an important mission of financial regulatory authorities in many countries. For Thailand, the Bank of Thailand (BOT) began promoting the Thai Overnight Repurchase Rate (THOR) in April 2020, representing an important milestone for the development of an overnight repurchase reference rate for borrowing in Thai Baht. The move is consistent with other countries, such as the US, which has developed the Secured Overnight Financing Rate (SOFR) to potentially be used as a US Dollar interest rate benchmark after LIBOR discontinuation.
The development of THOR by the BOT is intended to replace the Thai Baht Interest Rate Fixing (THBFIX), which will be phased out at year-end 2021 after LIBOR permanent cessation. One of the advantages of THOR over THBFIX is that it can better reflect liquidity of the Baht in the Thai financial market. In addition, THOR is less volatile and more in alignment with Thailand's monetary policy outlook than THBFIX, which is calculated by primarily using factors that reflect the US Dollar liquidity. Therefore, THOR is expected to play an important role in helping strengthen Thailand's monetary policy transmission mechanism and reduce risks caused to the Baht borrowing costs by volatile liquidity and US Dollar borrowing costs, as seen in the case of THBFIX during certain periods.
KResearch is of the view that the phasing out from THBFIX, which may cause its role to gradually decline over the near term, in particular during 2H21, will likely prompt business operators to base their loan contracts, including new financial products, on an alternative reference rate (Based on a current assessment, THBFIX-based commercial loans account for roughly 8 percent of total commercial loan portfolios). Business operators, therefore, may need to be familiar with THOR, especially new interest rates determined on the loan repayment due date and interest spread that reflects the credit risk of the borrowers. Although THOR will likely be used widely over the next 1-3 years, its popularity will hinge on a concerted effort by all parties concerned, including the BOT, government agencies, financial institutions and the business sector, in helping build market infrastructure and bolster financial transactions to ensure that the market has more liquidity in the future.