Thailand’s government bonds are leading gains in Southeast Asia as a worsening political crisis and deteriorating economy prompt local investors to favor the safest assets.
The debt has returned 2.4% in local currency terms this quarter, Bloomberg indices show. The 10-year yield dropped 12 basis points to 3.44% since the May 7 ouster of Yingluck Shinawatra as prime minister, touching a one year-low of 3.42% on May 16. Gross domestic product fell 2.1% in the first quarter from the preceding period, when it increased a revised 0.1%, official data showed today.
Anti-government protesters derailed plans for a July 20 election and the army has said it may use force to counter any escalation of political violence after three people were killed last week in Bangkok. Thai bonds have rallied even as overseas investors, which hold around 16% of the debt, pulled $654 million from the securities this month, exchange data show.
“We see strong demand from domestic investors,” Pareena Phuangsiri, an analyst at Kasikornbank in Bangkok, said in a May 15 phone interview. “The political unrest weighs on the economy, and when the economy is weak you prefer bonds.”
Recession predicted
The country has only had a caretaker administration since December when parliament was dissolved, which has limited government borrowing and stalled infrastructure spending. Thailand could slide into a recession, two straight quarters of contraction, this year, economists at DBS Group Holdings Ltd and Mizuho Bank Ltd said this month.
The 2.1% decrease in GDP in the first quarter is the sharpest slowdown since the final three months of 2011 when floods devastated the country. The economy expanded 0.6% from a year earlier.
The Bank of Thailand, which cut its benchmark rate by 25 basis points to 2% in March to spur growth, will stay on hold for the rest of the year, according to 12 of 21 analysts surveyed by Bloomberg. Two forecast a quarter of a percentage point reduction, while the remaining seven expect an increase of at least 25 basis points.
The 10-year Thai bond yield has dropped 49 basis points this year, helping the sovereign securities return 4.4%. The outflows this month from baht-denominated debt have pared inflows in 2014 to $666 million.
Onshore influence
Because yields have already fallen a lot, the pace of declines will be slower from here, according to Takahide Irimura, the Tokyo-based head of emerging-market research at Kokusai Asset Management Co, which oversees about $35 billion.
“Foreign investors who are sensitive to risk factors seem to have already adjusted their positions to cope with the political unrest,” he said in a May 15 phone interview. “That is putting bond markets more under the influence of onshore investors.”
The SET index of shares rose 0.4% since Yingluck Shinawatra’s ouster and has rallied 8.4% this year following a 10% drop over November and December. Foreign funds have pulled $99 million from equities this month.
The baht has weakened 0.4% since May 7 to 32.493 per dollar, data compiled by Bloomberg show. That extended its loss since the anti-government protests began at the end of October to 4.2%, the worst performance among Asia’s 11 most-traded currencies. The baht will drop a further 1.5% to 33 by the end of the year, according to the median estimate of analysts surveyed by Bloomberg.
Rating risk
“The risk the baht will weaken further is deterring foreign investors from buying and even encouraging them to pocket profits and leave,” Kim Jin Ha, head of the global fixed-income investment division at Mirae Asset Global Investments Co, which oversees 55 trillion won ($54 billion), said in a May 16 interview from Seoul. “It seems increasingly difficult to have a democratic transfer of power through elections and there’s even a chance of a military coup.”
The political impasse in Thailand is “credit-negative”, according to separate reports on May 8 by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s, all of which assess the nation at the third-lowest investment grade. Fitch said it may review its BBB+ sovereign ranking, while S&P said the dismissal of Ms Yingluck won’t affect its rating, citing the nation’s current-account surplus and modest government debt.
Overseas investors own 16.4% of Thai sovereign bonds, compared with 34.6% in Indonesia, 28.6% in Malaysia and 18.3% for the Philippines, according to a May 12 report written by analysts from BNP Paribas SA including Mirza Baig, the Singapore-based head of Asia foreign-exchange and interest-rate strategy.
“Thai bonds are quite resilient to foreign outflows as their holdings are not that large compared with other nations in the region,” Kasikornbank’s Phuangsiri said. “The long-term risk is if the political unrest lasts a really a long time, that could lead to rating action which will hurt bonds.”