Long-term interest rate is rising
Last week, we surprisingly saw two of the biggest Spanish football clubs - Real Madrid and Barcelona - crash out of the European elite football competition, the Uefa Champions League semi-finals.
The country itself learnt that Standard and Poor’s had downgraded its sovereign credit rating by two notches, from A to BBB+, sending its cost of a 10-year bond to above 6 per cent. It seems the euro debt crisis is far from over. However, the euro currency is resilient and the currency traded between US$1.30 to $1.35 per euro.
The euro debt crisis will force countries with a high debt-to-GDP ratio to implement serious austerity measures, which means cutting government spending and/or increasing tax, in order to bring down sovereign debt levels. Doing so would contract the economy. Those countries will reduce their imports, which in turn will affect the exports of trade partners. The situation would be more severe if China’s economy slowed down further. Currently, central banks in the US, the euro zone and Japan are pumping in liquidity into their economy, hoping that it would help keep their fragile economies going.
In Thailand, we experienced one of the most severe floods in history last year, which saw some large industrial estates being inundated. Our international trade figures showed signs of a slowdown and registered negative growth year on year in the last quarter last year to early this year. Only figures for February this year have shown slight positive growth. Some would make excuses that the factories, which got inundated, would need some time to restore their capacities, start production and do business as usual. International trade would then start to recover. However, some said that the recovery period would take longer than expected given the fact that investors need government assurance about its water management plan. The other factor is the economic slowdown in our trading partners, which would drag down our international trade growth. Last week, the Ministry of Commerce reported that in March, we registered a US$4.58-billion trade deficit, and export contracted by 3.92 per cent.
If our main engine of growth – international trade – is not functioning, then we need to increase domestic consumption and investment to revive our economy. The government plans to invest heavily in a water management system and other development projects. Market participants, therefore, anticipate that the government would borrow from the market to fund those projects. In the past few months, we have seen the long-term rates start to rise. The 5-year government bond yield rose from 3.1 per cent in early 2012 to 3.6 per cent currently and the 10-year government bond yield rose from 3.2 per cent to 3.7 per cent in the same period. In short, the interest rate yield curve has been rising steeply. In this situation, we have seen some Thai corporates or the subsidiaries of foreign companies borrow offshore foreign currency and do cross-currency swap back to the baht. The offshore borrowing, together with the swap, is called a synthetic baht borrowing. The flow is the reverse of what we have seen in the past years when corporates borrowed the baht and swapped with the foreign currency.
This article is my personal opinion. It may not reflect the bank’s opinion toward the story
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