Rising political risk in Thailand is keeping foreign investors cautious about the country’s bonds, even as they tiptoed back into the market in May for the first time in six months.
Global funds bought $511 million of Thai bonds last month, but that amount pales in comparison to their purchases in Indonesia, India and South Korea — Asian peers that provide updated foreign flow data. A gauge of foreign positioning relative to the historical trend also shows Thailand at the bottom of the regional pack.
Escalating tensions between the Bank of Thailand and the government are adding to the risk in local markets. A legal case that threatens Prime Minister Srettha Thavisin’s position and concern over heavy government borrowing have already been casting a shadow over Thai bonds and the baht.
“This short-term political uncertainty adds some volatility to the market which could prevent foreign investors from buying more Thai assets even if some stocks and bonds are already at quite attractive levels,” said Poon Panichpibool, a strategist at Krungthai Bank.
Renewed bets on US Federal Reserve interest-rate cuts this year, following weaker-than-expected US economic data, sparked a gain in emerging Asia bonds and currencies in May. However, Thai bonds saw little benefit from the global rally as the benchmark yield rose six basis points during the month. It’s currently at around 2.82%, near the highest level this year.
Foreign positioning in baht notes remains light due to outflows over the past year, and stands at 1.1 standard deviations below the five-year mean. The gauges for Indonesia, India and South Korea are higher — signalling heavier foreign positioning in their domestic bonds.
Political tensions are brewing in Thailand as the Constitutional Court in May accepted a petition by a group of senators seeking to dismiss Mr Srettha on ethical grounds for appointing a cabinet minister with a criminal record, even though that minister later resigned. A royal defamation case against paroled former PM Thaksin Shinawatra, the de facto leader of the governing Pheu Thai Party, is also causing some nervousness.
Separately, the government is discussing ways to exert more control over the central bank, according to people familiar with the matter, fuelling concern over the monetary authority’s independence.
Worries over debt supply are further reducing the appeal of Thai bonds, with the economy in need of a boost as it grew at the slowest pace in Southeast Asia in the first quarter. The government announced in late May that it would target a wider fiscal deficit this year and a larger public debt to fund its 500-billion-baht digital wallet cash handout in the fourth quarter.
The US investment bank Goldman Sachs “continues to be bearish both Thai rates and currencies” as it sees a wider fiscal deficit adding to financing needs this year and the next, strategists wrote in a note last week. The bank also expects the large Thai-US rate differential and structural issues in the economy to weigh on the baht.
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