Global funds are ditching Thai bonds amid perceptions of political risk before next month’s election, but history suggests they may soon come rushing back.
Overseas investors have offloaded a net $750 million worth of Thai debt this month, the biggest selloff in emerging Asia based on divergence from the 12-month average.
Foreign funds also sold Thai bonds prior to the previous elections in 2014 and 2019, but inflows then surged after the votes took place.
In the present “lame-duck session” before the elections, bonds and currencies face a level of uncertainty over how political parties plan to fulfill their populist pledges, said Kobsidthi Silpachai, head of capital market research at Kasikornbank. After the vote, there may be a relief rally depending on the formation of the coalition government, he said.
Global investors cut holdings of Thai bonds by an average $308 million in the three months leading up to the prior polls in 2014 and 2019, according to analysis by Bloomberg. Foreign inflows then surged to an average $1.4 billion in the three months after the elections were over.
While international investors cut holdings of Thai bonds in the run-up to those previous votes, they increased purchases of Indonesian and Malaysian debt over the same period, indicating the outflows from Thailand weren’t driven by any external catalyst.
Thai bonds could do with a return of inflows this year. The country’s sovereign debt has produced a loss of 0.7% for dollar-based investors this month, the worst performer in Southeast Asia after the Philippines, according to a Bloomberg index.
Investors will be watching for the election outcome, including public expenditure plans, as all the main political parties have announced various forms of populist spending. Still, there isn’t any immediate concern over the country’s fiscal balance with banks such as Nomura saying the budget deficit for the fiscal year ending September 2023 may be lower than official estimates.
Thai bonds may get another boost once the Bank of Thailand joins the peak-rate bandwagon by signaling its tightening cycle is over, joining its peers in Singapore, South Korea, Indonesia, India and Malaysia.
The central is expected to raise its benchmark rate by a final 25 basis points by the third quarter, according to a median of economists surveyed by Bloomberg. The next meeting of the rate-setting Monetary Policy Committee will take place on May 31.
The BoT said this week it would continue “gradual and measured” monetary policy normalization for now as it still sees inflationary risks.