Scrutinising the need for overseas bonds

Scrutinising the need for overseas bonds

Explainer: As the debt office debates raising funds in a foreign currency, a detailed analysis of the pros and cons of such a move

Mr Srettha has pitched overseas bond sales to allow global funds to finance sustainability projects.
Mr Srettha has pitched overseas bond sales to allow global funds to finance sustainability projects.

Several heads turned when the government said last week it is considering a plan to raise US$1 billion (about 36 billion baht) worth of foreign currency-denominated bonds, with some observers expressing doubts about worthiness and the risk of currency devaluation.

The Finance Ministry's Public Debt Management Office (PDMO) is conducting a feasibility study on offering the bonds in various currencies, including the US dollar, yuan and yen.

If the bonds are issued in US dollars, it would be the first such issuance in two decades by the Thai government.

In 2005, the Thai government issued ¥48 billion worth of three-year debt instruments, so-called Samurai bonds to mobilise funding to refinance a maturing loan from the Japan Bank for International Cooperation.

"The most likely choice is dollar-denominated bonds as it's a widely used currency and a benchmark," said PDMO director-general Patchara Anuntasilpa.

Q: What is the rationale for overseas bond issuance?

According to the PDMO, the proceeds from any international bond sale will likely go to finance sustainability-linked projects as they add value to the economy.

Thai authorities have preferred raising the billions of dollars it requires annually to bridge a budget gap and fund investments locally because of low interest rates. They have repeatedly said there is adequate liquidity available in the Thai market for fund mobilisation.

The Thai bond market has developed greatly since the 1997 Asian financial crisis, said Mr Patchara.

The bond market has become a significant funding source for the government and corporate sectors, as well as an instrument for monetary policy management by the central bank.

However, authorities said one reason to issue overseas bonds is to enable the government to diversify the investor base and exploit fewer credit constraints in more liquid foreign bond markets.

In addition, significant development needs coupled with reduced access to concessional financing as Thailand transitions from low to middle-income status make international bonds an attractive financing alternative, said ministry officials.

Q: What are the pros and cons of offshore issuance?

Mr Patchara said foreign currency bonds will help create a reference yield for Thai companies seeking funds in foreign markets.

However, raising funds overseas will have higher costs than in the domestic market, where interest rates are lower, he said.

Jindarat Viriyataveekul, the public debt advisor, said the advantage of issuing foreign bonds is managing the risk associated with borrowing from both the government and private sector.

If borrowing is concentrated domestically, it may lead to the crowding out effect, forcing interest rates higher and dampening loan demand in the private sector.

However, issuing debt in a foreign currency exposes Thailand to exchange rate risk because if the baht drops in value, paying down international debt becomes costlier.

Another potential drawback is higher borrowing cost based on interest rates. For instance, the benchmark 10-year US Treasury notes carry an interest rate of 4.6%, whereas domestic bonds with a similar maturity period carry interest of only 2.5%.

The financial cost of government public debt averages 2.74%, which has increased from 2.4% in the pre-Covid period.

Foreign currency debt held by the government constitutes only 1.4% of the total government debt portfolio, mostly in the form of loans from multilateral agencies.

The all-in cost of bond issuance by Thailand in any currency will be higher than local rates as it will include risk premiums, foreign exchange and other fees such as swapping into domestic currency, Mr Patchara said.

Q: Why is now the right time to issue and what is the expected time frame?

Kanjana Chockpisansin, head of research, banking and financial sector at Kasikorn Research Center, said the Thai government has often announced consideration of a plan to issue foreign currency bonds, but usually nothing materialises.

In 2022, the PDMO shelved a planned dollar bond offering partly because of market volatility.

Prime Minister Srettha Thavisin, who took office six months ago, has pitched overseas bond sales to allow global funds to finance sustainability projects.

Deputy Finance Minister Julapun Amornvivat said after a careful consideration of options, the government targets issuing bonds over the next 1-2 years.

While the borrowing cost of dollar-priced bonds would be higher than in the local market, it would be cheaper or on par with local costs if the bonds are denominated in yen or yuan, said Mr Julapun.

"If the issuance proceeds, the funds raised will be invested in environmental, social and corporate governance projects as they add value to the economy," Mr Patchara said.

Ms Kanjana said to make an overseas bond offering more logical, the proceeds should go to projects that use foreign currencies so they are not converted into baht. One example is the Land Bridge project, where the government has championed attracting foreign investment.

Thailand's state borrowing is estimated at 2.4 trillion baht ($66.4 billion) in the fiscal year that began on Oct 1.

However, some market observers raised doubts over the worthiness of issuing $1 billion in foreign currency-denominated bonds.

"If Thailand really is in need of foreign currency funds, why only $1 billion? The authorities could easily mobilise that amount from the domestic market," said a market observer who requested anonymity.

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