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Thai bonds set for more decline, Aberdeen says

Apr 26. 2012
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By BLOOMBERG

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Thai bonds, Asia's worst-performing debt, will probably extend losses as the government increases sales to a record to fund rebuilding after the floods disrupted production last year, according to Aberdeen Asset Management Co.

Thailand’s local-currency notes dropped 0.7 per cent in 2012, the only market to have registered a decline among 10 nations tracked by HSBC Holdings. Indonesia, which was awarded an investment-grade rating this year by Moody’s Investors Service, is posting 3.8-per-cent returns, the best in the region.

Thai bond offerings will climb 16 per cent to about Bt520 billion in the fiscal year that ends September 30 to fund flood-prevention projects, the budget deficit and an increase in public servants’ salaries, according to the Finance Ministry. Prospects that inflation will accelerate as the economy recovers are also deterring Aberdeen Asset and ING Investment Management from buying Thai debt. The central bank forecasts 5.7-per-cent growth this year, faster than the 0.1-per-cent expansion in 2011.

“Increasing supply has been the main factor driving up yields,” Pongtharin Sapayanon, head of fixed income in Bangkok at Aberdeen, said recently. “The pace of recovery is faster than expected and inflationary pressure will definitely rise as domestic demand will continue to be strong throughout the year.”

Revised debt plan

Yields on benchmark 10-year debt advanced 46 basis points this year to 3.75 per cent on Wednesday and reached a six-month high of 3.85 per cent on April 2, according to data compiled by Bloomberg. Yields on similar-maturity notes in Indonesia dropped 11 basis points to 5.92 per cent.

The floods forced thousands of factories to suspend operations, causing asset losses amounting to Bt630 billion and economic damages of Bt795 billion, according to a Finance Ministry estimate in January. The Cabinet approved a revised debt-management plan for this fiscal year on March 13, which allows the government to borrow Bt800 billion from the local market, up from Bt350 billion announced in November.

About Bt400 billion will go towards financing the budget deficit, Bt350 billion for loans for flood-prevention projects and Bt0 billion for a flood-insurance fund, Harn Himathongkam, a deputy government spokesman, said  last month.

Patrick Chia, the Singapore-based head of Asian fixed income at ING Investment Management, said: “We are cautious on Thailand on the back of more supply to support spending on rebuilding.”

30-year debt

Nomura Asset Management Co bought Thai bonds maturing in 30 years or longer in the first quarter because insurance pay-outs and corporate tax receipts will boost the government’s ability to repay debt, according to Thomas Kemmsies, the Frankfurt-based head of fixed-income securities at the company.

Barclays Capital estimates total inflows to pay insurance claims will amount to between $10 billion and $15 billion (Bt308 billion to Bt463 billion). The yield on 5-per-cent government bonds maturing in June 2040 rose 30 basis points this year to 4.43 per cent, according to data compiled by Bloomberg.

“What this catastrophe did was allow a lot of Thai producers and companies to forcefully reinvest in hopefully state-of-the-art technology,” Kemmsies said.  “They have to start their investment upswing again with insurance money.”

Baht appreciation

Thai bonds are also attractive because policy-makers will probably allow the baht to appreciate to keep inflation at bay, Kemmsies said. Consumer-price gains accelerated last month for the first time since October, increasing 3.45 per cent from a year earlier, official data show. The Bank of Thailand raised its 2012 inflation forecast in March to 3.4 per cent from 3.2 per cent.

The baht has strengthened 2.1 per cent against the US dollar in the past three months, the best performance among Asia’s 11 most-traded currencies, according to data compiled by Bloomberg.

“We think any inflation threat will be countered through slightly increased toleration for currency appreciation than raising interest rates, at least until reconstruction is as much as completed,” Kemmsies said.

Change in policy

Aberdeen’s Pongtharin and Kokusai Asset Management Co in Tokyo say odds that interest rates will rise are deterring Thai bond investors. Pongtharin said he expected the policy rate to increase by at least 25 basis points in the second half and the 10-year yield to climb to 4 per cent in six months.

The BOT held its one-day bond repurchase rate at 3 per cent on March 21 after cutting it by a total of 50 basis points at the previous two meetings. The Finance Ministry said on March 26 that it expected the central bank to boost borrowing costs later this year.

“Yields, especially medium-to-long-term yields, have climbed this year not only due to rising supplies, but also a change in market views that the next policy move by the central bank would be a rate hike toward the end of this year,” said Takahide Irimura, head of emerging-market research at Kokusai Asset. “The pace of gains in yields will probably be slower from here as they have risen so much already.”

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