BANGKOK/SINGAPORE — Thailand is becoming susceptible to capital outflows on speculation interest-rate cuts will further reduce Southeast Asia’s lowest yield premium.
The yield gap between the nation’s 10-year bonds and US Treasuries has narrowed 46 basis points in three months to 71 and fell to 45 on Jan 8, the lowest since May 2011, data compiled by Bloomberg show.
Indonesia, the Philippines and Malaysia offer premiums that are at least three times as large. The baht will drop 2.7% against the dollar by Dec 31, the most in the region, Bloomberg surveys of strategists show.
Thailand posted the weakest annual economic growth last year since 2011, a Bloomberg survey shows, and has the region’s lowest inflation rate at less than 1%. Lenders may park cash in bonds, pushing yields lower, as loan demand ebbs in tandem with the slowing economy, according to Kasikorn Asset Management Co, which pointed out the risk to Thailand from a Federal Reserve interest-rate increase this year.
“There’s some speculation in the market that the Bank of Thailand may need to cut its policy rate if the economic slowdown deepens,” Chajchai Sarit-Apirak, a Bangkok-based fixed-income manager at Kasikorn Asset, the country’s biggest private fund with about $34 billion, said by phone Jan 15. “There would be some pressure on foreign fund outflows from Thai fixed-income securities on speculation about the higher rate in the US.”
Foreign ownership
Former Prime Minister Yingluck Shinawatra may face impeachment on Friday for alleged negligence in her role overseeing a state rice-purchase programme. She could get a five-year ban from politics if at least 132 of the 220-member legislature vote in favour. Renewed political tensions will be negative for the baht, according to Malayan Banking Bhd. The currency lost 0.4% on May 22 when the military seized power in a coup, and ended the month 1.4% weaker. It fell 0.3% in 2014.
Overseas investors owned about 714 billion baht, or about 10% of Thailand’s 7.29 trillion baht in outstanding debt issued by the government and state companies as of September, central bank data shows. Commercial banks held about 2 trillion baht, or 27% of the total.
The local-currency sovereign debt returned 0.4% in December, the least since a June loss, according to a Bloomberg index. Malaysia’s notes dropped 0.7% and those in Singapore fell 0.6%. Indonesia and the Philippines delivered respective declines of 0.2% and 0.3%.
The 10-year bond spread was 598 in Indonesia, 243 in the Philippines and 210 in Malaysia. Southeast Asian currencies have all weakened in the past three months, with the exception of the peso, amid global financial turmoil and the prospect investors will be drawn to higher US interest rates as the world’s biggest economy heads a global recovery.
Divergent economies
The Social Security Office, Thailand’s largest pension fund with about $36.9 billion in assets, plans to reduce holdings of the nation’s government debt because of the falling returns, Win Phromphaet, the SSO’s head of investment, said in a phone interview this month from Bangkok.
One-year interest-rate swaps show traders have pared bets for a cut in the 2% policy rate. The contracts have climbed 20 basis points to 1.93% from a six-month low in November, data compiled by Bloomberg show. The two-year bond yield has moved down eight basis points, or 0.08 percentage point, to 2.14% from a one-month high on Dec 24.
“There will be a divergence between the US and Thai economies this year,” Kobsidthi Silpachai, head of capital markets research at Kasikornbank, the country’s fourth- biggest lender, said in a Jan 15 interview on the sidelines of a banking conference in Bangkok. “Higher US interest rates and low Thai rates may trigger outflows into the dollar.”
'Brave cuts'
While Thai inflation eased to 0.6% in December and 2014 growth is forecast at 0.7%, rising household borrowing could be compounded by a cut in interest rates.
Outstanding household debt was 10.2 trillion baht as of September, a 3.3% rise from the end of 2013 and equal to 83% of gross domestic product, up from 77% in 2012, according to the central bank’s website.
The Bank of Thailand trimmed its 2014 expansion estimate last month to 0.8% from 1.5%, and 2015’s projection to 4% versus 4.8%.
There’s a “high probability” inflation will remain below the lower end of the 1% to 4% target this month, Roong Mallikamas, a senior director at the monetary authority in Bangkok, said in a Jan 9 interview. The benchmark rate is “already accommodative,” she said ahead of the next policy review on Jan 28.
Goldman Sachs Group Inc and Morgan Stanley said in reports this month the central bank will probably remain on hold throughout 2015 as a cut will do little to boost the economy.
“More brave cuts may likely end up in capital flight,” Hakan Aksoy, a London-based fund manager at Pioneer Investments overseeing $246 billion globally, said in a Jan 13 e-mail. “Any cut in the policy rate will likely put more pressure on the baht, while providing a very limited growth impact.”