BOT continues draining liquidity

The BOT savings bonds, the first series this year, come in two tranches: three-year bonds with floating rate, and seven-year bonds with fixed rate. Minimum subscription is Bt50,000 and they will be on sale from August 26 until September 6. The coupon rates will be finalised on August 25.

BOT Assistant Governor Pongpen Ruengvirayudh hinted that the coupon rate might range from 3 to 5 per cent based on the 3.53-per-cent three-month Bangkok Interbank Offered Rate.

Since the interest rate on a three-month fixed deposit is 1.7-2 per cent, and the yield from government bonds is 3.57 per cent, the BOT savings bonds should be attractive for investors, she said. The bonds are also being launched to cash in new limits by the Deposit Protection Agency.

She said the bonds were low-risk financial instruments, and the |timing was good for investors who might be concerned about risks amid inflation and the global economic instability.

Citi Research said that in July alone, the BOT might have absorbed Bt60 billion of liquidity, reflected in the expansion of its net forward positions. As of August 8, the net forwards, representing accumulated net "buy" foreign-currency swap contracts, posted another new high of US$26.6 billion (Bt794 billion), which was $7 billion higher than at the beginning of this year.

"This suggests persistent sterilisation by the BOT to drain liquidity that may have been aggravated by rising offshore portfolio investment flows," Citi said. "However, the sterilisation impact may have been muted by the liquidity effect of rising gross international reserves [GIR]. From April to July, we estimate an additional Bt181 billion in liquidity contribution from GIR."

Citi is convinced that the forward positions will rise amid the persistent liquidity challenge. As of August 8, the forward ratio was 8 per cent of total foreign reserves, against 20 per cent in early February 2008. Citi expects the ratio to rise to 20 per cent or more if offshore portfolio investment flows strengthen, bringing the risk of an excess-liquidity |situation.

As of August 8, foreign reserves stood at $186.7 billion. Including forward positions, the reserves totalled $213 billion.

Meanwhile, BOT's intervention in the spot market during these months may have "funded" the expansion of the forward book. BOT's spot purchases were swapped for baht liquidity in the onshore foreign currency market. From April to August 8, the forward book expansion amounted to $5 billion.