Rising political risk in Thailand has kept international investors hesitant about the country’s bonds, even though they returned to the market in May for the first time in six months.
Global funds purchased $511 million in Thai bonds this month, although this sum pales in comparison to their purchases in Indonesia, India, and South Korea, Asian counterparts that offer updated foreign flow data. A measure of international standing in relation to historical trends similarly places Thailand at the bottom of the regional pack.
Escalating tensions between the Bank of Thailand and the government are exacerbating the danger in local markets. A judicial issue that threatens Prime Minister Srettha Thavisin’s authority, as well as concerns about excessive government borrowing, have already placed doubt on 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 Krungthai Bank strategist told the Bangkok Post.
Asian bonds and currencies
Renewed expectations on US Federal Reserve interest rate cuts this year, following weaker-than-expected US economic statistics, boosted developing Asian bonds and currencies in May. However, Thai bonds received little benefit from the global rally, with the benchmark yield rising six basis points this month. It is currently about 2.82%, which is close to the year’s high.
Foreign positioning in baht notes remained low due to withdrawals over the past year, at 1.1 standard deviations below the five-year average. The gauges for Indonesia, India, and South Korea are higher, indicating more foreign investment in their domestic bonds.
Political tensions are rising in Thailand after the Constitutional Court granted a petition by a group of senators in May trying to fire Mr Srettha on ethical grounds for choosing a cabinet minister with a criminal record, despite the fact that the minister later resigned. A royal defamation action against paroled former Prime Minister Thaksin Shinawatra, the de facto leader of the ruling Pheu Thai Party, is also raising concerns.
Economy Needs Boost
Separately, the government is contemplating methods to increase its grip over the central bank, according to sources familiar with the situation, raising concerns about the monetary authority’s independence.
Worries over debt supply are further diminishing the attraction of Thai bonds, with the economy in need of a boost after expanding at the slowest rate in Southeast Asia in the first quarter. In late May, the government indicated that it would aim for a larger fiscal deficit this year and a higher public debt to pay its 500-billion-baht digital wallet cash handout in the fourth quarter.
US investment bank Goldman Sachs “continues to be bearish both Thai rates and currencies” as it forecasts a larger fiscal deficit increasing financing needs this year and next, strategists wrote in a report last week. The bank also anticipates that the significant Thai-US rate disparity and structural difficulties in the economy will weigh on the baht.
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