Thai bond yields spike 20% as kingdom adopts a confident, pro growth pose amid capital flight

May 14, 2022 at 1:51 pm
by Joseph O' Connor
in Economy, Living, Personal, Thai World, Thailand
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Patricia Mongkhonvanit of the Public Debt Management Office this week said that the government had been able to swap ฿140 billion worth of long and short term bills and instruments to suit the needs of individual investors as the government seeks to raise ฿1.4 trillion in this financial year which began on October 1st last.

The yield rate on Thai government bonds is rising smartly as the kingdom continues to maintain its dovish monetary policy with a record low interest rate of 0.5% to increase growth this year. The 10-year rate ended this week near an eight-year high and rose by 20% from Monday to Friday to reach 3.276%. It comes in a week while both the Thai Prime Minister, Prayut Chan ocha and his Minister of Finance, Arkhom Termpittayapaisith warned that the country must manage its public debt effectively with a plan to sell dollar-denominated bonds put off due to current volatile market conditions. At the same time, the country’s central bank, this week, minimised the impact of a falling baht on inflation as it came forward with significant liberalisation measures to allow greater access to foreign exchange reserves for smaller firms and individuals.

economic-outlook-volatile-growth-pursued — This week, Ms Patricia Mongkhonvanit (left) of the Public Debt Management Office gave details on the government’s efforts to raise ฿1.4 trillion in the current financial year in a week which saw Thai bond yields spike and a plan to issue dollar-denominated bonds scrapped due to market volatility. At the same time, over at the Bank of Thailand, Assistant Governor, Alisara Mahasandana (right) held a video conference in which she explained that a falling baht had only a limited impact on inflation as the bank’s monetary policy remains weak with historically low interest rates. Ms Alisara presented plans to make foreign exchange facilities cheaper for small businesses and individuals by liberalising the market with some measures going into effect this week and others between now and 2024.

The interest rate on Thailand’s 10-year government bonds has risen by nearly 110 basis points in the last month bringing the rate near an eight-year high as global investors react to strengthening US interest rates, an increasingly destabilised global economy, rising inflation and a deteriorating outlook for the Chinese economy by seeking a haven in assets such as the US dollar.

The situation presents itself as a new challenge for Thailand’s economic policy makers with senior officials such as Minister of Finance Arkhom Termpittayapaisith and the country’s Prime Minister Prayut Chan ocha both emphasising this week a need for prudence in managing the country’s public debt and limiting further long term borrowing.

Thai bond offering in dollars called off due to rising borrowing costs and a volatile financial market

This comes days after Bloomberg reported that Thailand had called off a US dollar bond offering because of the current volatility and uncertainty in the markets as well as the rising cost of borrowing.

The same report quoted Ms Patricia Mongkhonvanit of the Public Debt Management Office within the Ministry of Finance as saying that the government was seeking to raise ฿1.4 trillion in the current fiscal year which began on October 1st last to retire existing debt and manage the kingdom’s finances.

Ms Patricia revealed that up to ฿140 billion of this would be renewed this week with shorter-term securities being replaced by long term bonds as an alternative to the planned dollar-based bond offering.

The senior Thai official explained that the current trend in interest rates would not have a ‘drastic effect’ on the kingdom’s debt servicing costs as nearly 82% of Thai bonds have been issued at fixed interest rates.

Direct boost to the economy as Thai government tries to grow GDP further with 3.5% growth expected

In December, Moodys when reaffirming Thailand’s sovereign credit rating, also pointed out that 98% of Thai government borrowing or debt is denominated in baht meaning any depreciation of the currency will have little or no effect.

Thai bond yield at a nearly eight-year high with rate jump this week as capital flees emerging markets

Friday’s closing yield rate for Thailand’s 10-year bonds was the highest seen since November 2014.

It is part of a growing momentum which sees capital being pulled out of emerging markets.

Yields on Thailand’s 10-year bonds reached a historic low point in February 2020 at 1.075%. The rate quoted on Friday at the close was 3.276% having risen from 2.71% at the start of the week as the global economic outlook grows darker.

Ms Patricia, however, was confident that Thailand can manage the current choppy waters.

‘The bond yield increase may raise the borrowing cost but the debt office has managed the risk for the government debt portfolio,’ Ms Patricia said. ‘The PDMO is confident that under such circumstances, we will be able to continue fund-raising by adjusting the proportion of each type of instrument to meet the needs of investors.’

Officials at the Bank of Thailand defend its policy saying a lower baht has limited impact on inflation

This confidence was echoed by the Bank of Thailand, on Thursday, when Assistant Governor for Financial Markets Alisara Mahasandana defended the bank’s stated policy of keeping interest rates at a historic law to underpin growth.

Ms Alisara pointed out that the lower baht had quite a limited impact on the inflation rate as the baht continues to fall against the US currency.

The senior central bank official told a virtual briefing for media that the bank was carefully monitoring the situation after the US dollar surged by 16.6% against the dollar since 22nd January 2022 when it was quoted at ฿29.22 to the US currency to Friday’s close at ฿34.80.

‘The Bank of Thailand is closely monitoring the situation and is ready to take care of the baht if necessary,’ she said.

This follows reports that the bank may have been propping up the kingdom’s currency with a fall in the country’s Foreign Exchange Reserves from $242.4 billion at the end of March to $228.6 billion at the end of April.

This came despite the kingdom reporting a strong current account surplus for March of $1.2 billion, the highest seen since September 2020 but with the quarter still showing a negative balance of $1.612 billion.

Further liberalisation of capital market offers easier access to foreign exchange for small business

Nevertheless, the bank appears to be intent on emphasising its confident position as it announced a plan to further liberalise foreign exchange rules to give cheaper and faster access to foreign currencies to Thailand’s small to medium-sized firms as well as individuals.

The proposals will come into effect from Friday and will relax barriers and paperwork for financial organisations that are not banks in providing foreign currency exchange services to Thai customers.

The full package of measures will take approximately two years to come fully into effect and is expected to be complete by 2024.

Cost of foreign exchange facilities higher than the regional average for Thai businesses and individuals

Ms Alisara said the bank had established that Thai business operators and individuals pay approximately 7% for such services which is far higher than the regional average.

She promised that the move will ‘make overseas transactions easier while simplifying hedging for businesses so there can be more efficient risk management.’

‘We will focus on non-banks by expanding the scope of non-bank FX services and adjusting guidelines for more flexible FX transactions,’ she explained.

The new measures include doing away with red tape and document requirements for transactions, some of which will be immediate with changes going into effect from Friday.

New regime will make it easier for importers and exporters to hedge against future baht fluctuations

The bank official says this new relaxed approach will contribute to making foreign exchange rates less volatile in the future while also offering both exporters and importers simplified and cheaper access to foreign exchange facilities at a time when the bank is encouraging them to hedge against foreign currency charges particularly relating to the US dollar but also linked with other currencies.

While the Thai baht has slipped back against the dollar, it gained 5.4% against the euro from the 9th January 2022 to the close on Friday when the euro slipped from ฿38.18 against the baht to ฿36.13.

Similarly, the baht has gained 7.1% against the pound sterling since then when it was priced at ฿45.75 and has ended the week at ฿42.49.

The move comes with a prediction from US banking giant Goldman Sachs this week, in a note to its clients, suggesting that Thailand will have to raise interest rates by at least 0.5% in the next year with a rate hike of 25 basis points predicted from September next.

Thailand’s economic planners still think inflation can be tamed this year with core CPI rate at only 2%

The US bank attributed this to rising inflationary pressures.

Its position contrasts with other economists who feel there is still room for the Bank of Thailand’s policy with Thai officials at the Ministry of Commerce insisting that underlying core inflation, apart from food and energy, is well within the target range with the latest figure for the Consumer Price Index coming in at 2%.

However, the key factors in this equation are the prolonged nature of the war in Ukraine, other supply chain shortages in foodstuffs and possible supply chain issues linked with Chinese output because of that country’s severe lockdown to combat the virus.

Thai policymakers are still pinning their hopes on a more significant rise in foreign tourists in the months ahead, continued strength in exports and a tapering off of inflation in the last quarter of the year.

Ms Alisara Mahasandana said that the recent moves to liberalise capital markets by the bank had seen local investors moving assets offshore reach a 1o year high in 2021.

Liberalisation measures aimed at genuine economic players while transfers to offshore digital assets are prohibited as a threat to financial stability

This latest move is designed to facilitate genuine business users and individuals who wish to get access to foreign exchange assets for activities linked with the country’s economy

She warned that a prohibition remains in respect of efforts to transfer funds out of Thailand into digital assets.

This was one of several areas that the bank was on guard against as such activity is seen as a threat to the country’s financial stability moving forward.

The new liberalised environment will allow players such as online digital platforms and non-bank foreign exchange services to provide services to small business concerns and Thai individuals.

In the course of the briefing, Ms Alisara revealed that the bank has established that Thai exporters currently have hedged their position against currency fluctuations in respect of 19% of goods exported from the kingdom while the equivalent proportion for the kingdom’s importers was 24%.

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About the Author

Joseph O' Connor

Joseph Anthony is an expat from Ireland who has lived in Thailand for the last decade. He has worked extensively in the media including editorial positions in Ireland and Thailand. He is focused on economic and business stories in Thailand as well as the expat lifestyle.

All posts by Joseph O' Connor