Thailand: Billions flow into bonds

Financial markets in Thailand are experiencing rising levels of capital inflow, drawn by the economy’s solid performance and sustained political stability. However, there are concerns this flood of funding could cause overheating and create bubbles in some segments, including the stock and property markets.

As of mid-March, more than $7.3bn had flowed into the Thai bond market, according to a report by banking and investment firm BNP Paribas. A recent bond auction attracted bids three times above the offered $1.37bn, with more than half the bids coming from overseas. According to the Bank of Thailand (BoT), more than 15% of government bonds are now held by overseas investors.

External factors are also playing a part in the increasing tide of capital flowing into the economy from abroad. Prasarn Trairatvorakul, the governor of the BoT, on March 20 cited investor uncertainty over Malaysia’s pending general election and Indonesia’s current account deficit as reasons for the heightened appeal of local stocks and bonds.

The increased inflows have helped push up the value of the baht, Thailand’s currency, which has gained more than 3% against the dollar thus far in 2013, an appreciation that has pleased importers but could impact exports if the trend continues. At least for the moment, the BoT has indicated it is not planning to step into the market to take any of the heat out of the baht. In mid-March, Prasarn said the appreciation was a result of the strength of the domestic economy, not from overheating.

Kittiratt Na Ranong, the minister of finance, said the financial markets will, for the time being at least, be left to their own devices, as micro managing could have a negative effect on the economy in the longer term.

“We have no thought of using unnatural strategies to prevent the baht from getting stronger, just the normal measures, such as fiscal measures, investment planning and the interest direction policy of the monetary policy committee,” he said on March 20.

The stock market has also steadily grown since the global economic crisis, now trading around the 1600-point mark, four times its value in 2009. Again, political stability, an increase in state investments – particularly in infrastructure to support the economy – and expanding GDP have all underpinned the performance of the exchange.

As a result, in early March, ratings agency Fitch lifted Thailand’s long-term foreign currency issuer default rating to “BBB+”, three levels above “junk” status and in line with the assessment of Standard & Poor’s and Moody’s. The upgrade came four years after Fitch lowered its rating on Thailand, in the wake of then-Prime Minister Abhisit Vejjajiva’s government imposing emergency rule, following large-scale opposition protests.

It was the extended absence of political and social unrest, along with solid economic growth, that brought about the upgrade from Fitch, with the agency saying in a statement issued on March 8 that the country was far more resilient to external shocks than in the past.

“Fitch has revised its assessment of the risks to policy predictability and the investment environment from political and social tensions,” the report said. “The investment rate has accelerated in recent years.”

Despite the vote of confidence, Fitch has also sounded a note of warning. Andrew Colquhoun, head of Asia-Pacific Sovereigns for the firm, said on March 17 that with rising asset and stocks prices, there was a possibility the economy could overheat. Without appropriate corrective action from the regulators, overheating would affect Thailand’s economic stability and the financial sector, he said.

The regulatory authority also has some concerns. On March 18, Virabongsa Ramangkura, chairman of the board of the BoT, warned that a surplus of hot money could lead to overheating, followed by a rapid cooling as the year comes to a close. It was vital that all involved parties find ways to prevent an economic bubble, given Thailand’s risk as a liberalised market, he said. “Foreign money flows in due to the higher interest rate. If a bubble bursts, everything that we see as good will come to an end or will not happen,” Virabongsa said.

While there are concerns over the temperature of the economy and the capital markets, as long as the government can maintain the atmosphere of political and social stability that has prevailed in recent years, the forecast should remain positive.

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