Bond Outlook

The bond market is no exception. The political turmoil has lifted investors' funding costs, particularly in terms of premiums for sovereign risk as well as the credit risk of corporate issuers.

Persistent political uncertainties have considerably slashed the confidence of international investors and brought a higher cost of borrowing from international sources of funds.

As a matter of fact, Fitch Ratings has indicated a possible downgrading of Thailand's sovereign rating if the unfavourable situation is prolonged.

Domestically, unstable political conditions have also shaken consumer confidence and delayed the investment decisions of the private sector.

These factors tend to deter overall economic expansion and lead to a lower return on investment. As a consequence, most corporations are suffering higher credit risk, which will eventually increase the creditrisk premium of private enterprises.

The impact of the political crisis is also apparent in the secondary market. Most investors are shunning trading in debt instru¬ments out of a lack of confidence.

Excluding the Bank of Thailand's shortterm bonds, which have been issued in tranches of more than Bt500 billion per month since the beginning of the year, trading of bonds in the secondary market slowed from a daily average of Bt9.9 billion during the first quarter to Bt8.1 billion in the second quarter and Bt6.9 billion during July and August.

Although nonresident investors still posted a net buy during the first eight months, holding about Bt84 billion worth of bonds at the end of last month, average daily trading by nonresident investors dropped significantly from Bt1.3 billion per day during the first half to Bt0.6 billion per day during July and August.

In conclusion, political prob¬lems generate a cost to the econo¬my as a whole, not to mention implicit social costs. We advocate freedom of political expression, which is a characteristic feature of democracy. However, such freedom must be based on rationale and the social contract to ensure that the financial system and overall economy are on the right track.