'Debt-happy' NCPO worries financiers

JAKARTA/SINGAPORE/KUALA LUMPUR — The junta’s recipe for “returning happiness” with economic stimulus is alarming bond investors wary of rising debt and a shift of funds to equities.

Baht-denominated sovereign notes dropped for the last three weeks and three fixed-income auctions since June 23 fell short of target as the prospect of a Bank of Thailand interest-rate cut faded. The SET index of shares has risen 5.6% since the military took power in a May 22 coup on bets the regime can revive an economy in danger of tipping into recession.

Junta leader Prayuth Chan-Ocha has restarted payments to rice farmers and vowed to accelerate state spending after gross domestic product fell 0.6% year-on-year in the first quarter as political turmoil restricted the ability of the previous government to borrow. Citigroup Inc said it has turned “bearish” on Thai bonds and Western Asset Management Co, which oversees $469 billion globally, is reducing holdings.

“The low-hanging fruit for the new leadership to raise growth in Thailand that stalled during the political impasse is to resurrect some of the infrastructure projects in railways and water,” Desmond Soon, the Singapore-based co-head of investment management for Western Asset, said in a June 26 interview. “That means the fiscal deficit would be higher and more likely you would see more Thai government bond issuance.”

Baht rallies

Since taking power, the junta has approved investment projects worth 122.8 billion baht, capped fuel prices and approved handouts to the tourism industry, efforts that it said would “return happiness to the Thai people.” Somkid Jatusripitak, a former finance minister and now an adviser to the military rulers, said on June 27 that gross domestic product will increase at least 1.5% this year.

After dropping 0.9% in the week after the coup, the baht rallied 1.1% in June, the most in Asia. The central bank held its benchmark at 2% on June 18, unchanged for a third month after 75 basis points of cuts in the previous year.

One-year onshore interest-rate swaps, the fixed payment demanded to receive a floating rate in exchange, have risen to 1.94% on June 30 from this year’s low of 1.72% on May 21, suggesting the market isn’t expecting a rate cut.

Stocks benefit

“Several investors have changed their perception of domestic interest rates to an upward trend after the economic outlook improved after the coup,” Chajchai Sarit-Apirak, a Bangkok-based fixed-income manager at Kasikorn Asset Management Co, which oversees about $31 billion, said in a June 25 interview.

Baht-denominated sovereign bonds have lost 0.2% since the May 22 coup, according to Bloomberg indexes. They are still up 3.2% this year, compared with a 5.4% advance for Indonesian notes and gains of 2.5% and 2.4% for Malaysian and Philippine securities. The SET index’s post-coup gains have taken its 2014 rally to 14%.

“More concrete plans on the economy or lifting of martial law would probably benefit stocks more than bonds,” Pareena Phuangsiri, an analyst at Kasikornbank Plc in Bangkok, said in a June 27 interview. Mutual funds “don’t see much upside from bonds due to fading rate cut speculation,” she said.

Citigroup, the world’s largest currency trader, said in a June 19 report it has turned bearish on Thai debt from neutral.

Debt inflows

“Government spending has resumed, infrastructure plans are back on track and the BoT monetary policy council has raised concerns about financial stability,” wrote Singapore-based strategists Gaurav Garg and Siddharth Mathur. “Along with supply concerns, a pickup in expected growth will weigh on fixed-income investors.”

Foreign investors still increased their holdings of baht notes in June, buying a net $1.4 billion.

Overseas funds hold just 16% of the debt, compared with 34% in Indonesia, official data show.

The cost of insuring Thai government notes using five-year credit-default swaps fell 11 basis points, or 0.11 percentage point, to 111 this month, according to CMA. That compared with a drop of three basis points to 84 in Malaysia and increases of two basis points to 87 in the Philippines and 18 basis points to 158 in Indonesia.

The military seized power after more than six months of political turmoil that led to an annulled election in February and the ouster of former Prime Minister Yingluck Shinawatra. Junta leader Prayuth has said it will take at least 18 months before elections can be held, while Charupong Ruangsuwan, interior minister in Yingluck’s government, set up a group last week that he said will push for a return to democracy.

Union Investment Privatfonds, part of Germany’s Union Investment Group that oversees about 212 billion euros ($289 billion), is still bearish on Thai debt.

“The fiscal measures announced don’t help to settle the deeply manifested political issues of the country,” Christian Wildmann, a fixed-income fund manager at Union Investment in Frankfurt, said in a June 24 e-mail interview. “This is why we didn’t change our defensive positioning as of now, and don’t plan to do so in the near future.”

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