Thai interest rates low for now, but for how long?
An ancient Chinese legend says that one cannot see a dragon's head and tail at the same time.
Well, at the moment, investors are finding it difficult to make either heads or tails of Thai interest rates.
This is because of uncertainty in two issues underlying this market: the central bank policy rate, and the supply of government bonds.
For much of last year, the trend for the Bank of Thailand’s policy rate was boringly predictable. Each policy meeting led to a 25 basis points (0.25 per cent) rate hike, and a statement noting that interest rates remained low. In the weeks leading up to the next meeting, senior central bank officials would repeat that tune ad nauseam.
All that changed with the devastating floods. In the last two policy meetings of the year, the central bank first held rates unchanged, and then, in a complete reversal of policy, cut its rate by 25 basis points.
What happens to the policy rate trend now is not so clear, though a cut of 0.25 per cent was announced after the last Monetary Policy Committee meeting, on January 25.
The economic impact of the floods remains unclear, and the global environment is still fragile.
And yet, the floods are likely to have only a short-term impact, with most economic figures showing a rebound by the middle of the year. Also, while Europe is facing a recession, most other major economies appear to be holding up reasonably well.
Once growth reverts back to normal, it appears likely that the central bank will go back to hiking interest rates towards the end of the year.
Perhaps one reason why the central bank has been reticent on monetary policy is because they have been focused on another issue – the very public debate with the Ministry of Finance on what to do with debts at the Financial Institutions Development Fund (FIDF).
The Finance Ministry had previously announced that government bond supply this quarter would be Bt161 billion, and that total issuance for the fiscal year should be around Bt540 billion. Given the (unusually low) Bt32 billion issuance in the last quarter of 2011, this implies further supply in the two coming quarters of more than Bt170 billion each.
These are hefty amounts – recently, normal bond issuance per quarter has only been around Bt100 to Bt120 billion.
However, expectations on upcoming supply have been clouded by uncertainties over the FIDF debt. At over Bt1 trillion, these comprise a big chunk of total public debt obligations, and include key outstanding government bond issues such as the LB176A and the LB193A.
These uncertainties have prevented the full impact of future bond supply from being priced into the yield curve – for now. Massive and unprecedented upcoming supply appears inevitable, given the government’s funding challenges and aggressive spending plans. Hence the current low rates across the yield curve may not be sustainable as the year goes on.
Parson Singha is chief markets strategist, Global Markets Department, HSBC Thailand.
