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The effects of political unrest on the Thai bond market

The political unrest in Thailand continues to have an impact on investor confidence and aspects of the domestic economy such as exports, foreign direct investment and growth in gross domestic product.

This is clearly seen from several estimates that economic growth could be lower than 3 per cent this year, especially by the Bank of Thailand, which forecasts only 2.6 per cent, and the Fiscal Policy Office with 2.7 per cent.

Moreover, the political vacuum has started to have a negative influence on sovereign credit ratings, as the Japan Credit Rating Agency has lowered its outlook for Thailand from "stable" to "negative" because of the political unrest.

These political and economic factors affected the Thai bond market in the first quarter in many ways. First, because of the weak economy, the BOT cut its policy interest rate from 2.25 per cent to 2 per cent, causing the yield of short-term government bonds (less than one-year maturity) to shift down in the range of 20-25 basis points, corresponding to the rate cut in March.

Second, because of the political vacuum, some of the government's investment projects needed to be postponed, which contracted the number of new government bond auctions. The lower supply of new government bonds, especially the benchmark bonds (three-, five- and 10-year), while the demand from investors, especially local institutional investors, was still high, caused the yield of long-term government bonds in the first quarter to dropped by 10-15 basis points (turn to a higher price).

Third, lower confidence caused by the political issues and the fluctuation of international capital flows after the United States tapered its quantitative easing programme, and non-resident investors sold Bt32 billion worth of long-term bonds. Even though they still bought Bt35 billion in short-term bonds, that just replaced the bonds that expired during the period. In the end, a total of Bt30 billion flowed out of the Thai bond market in the first quarter, but this didn't affect bond yield because of the large demand by local institutional investors, who continued buying.

The situation in April turned more positive when there was more discussion between the protest leaders and other organisations. Even though many of the latest economic data still showed weak signs, non-resident investors seemed to have more confidence and became net buyers of Bt45 billion in the Thai bond market (Bt38 billion in short-term and Bt6 billion in long-term bonds), while around Bt20 billion of short-term bonds held by non-residents expired in April. So a total of Bt25 billion flowed into the Thai bond market in the first month of the second quarter.

At the end of April, non-resident investors' bond holdings stood at Bt705 billion, or 7.7 per cent of total outstanding value.

However, it seems the current political issue is not capable of being solved by an election or the parliamentary system, and this will continue to affect both the economy and the sovereign credit rating. The consequences to the Thai bond market could be both negative and positive. The economic slowdown leads to a lower policy rate, a positive for the bond market, while the political vacuum and political violence lead to the possibility of a downgrade in the country rating, negatively affecting investor confidence.

Porpit Yodsang, Thai Bond Market Association. He can be reached at Porpit@thaibma.or.th,

02-252-3336 Ext.114


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