Inflows into Thai bond market defy oil shocks

Foreign investors bought Thai government and central bank bonds worth 30 billion baht in the first six months of the year, according to the Thai Bond Market Association (ThaiBMA), amid economic uncertainty caused by the Middle East conflict.

Accumulated bond market capitalization reached 18.3 trillion baht, equivalent to 90 per cent of gross domestic product at the end of the second quarter.

Private companies issued corporate bonds worth 409.7 billion baht, up 2.7 per cent year on year.

“Capital outflows from Indonesia might have contributed partly to a rise in capital flows into Thailand,” says Ariya Tiranaprakij, managing director of the ThaiBMA.

She notes, however, that Indonesia may face only a short-term shock, as the country’s long‑term economic growth is promising. The country does not have structural issues like Thailand, such as an ageing society and lagging economic growth.

Bloombergnews agency recently reported that Indonesian President Probowo Subianto was clamping down on oligarchs, leading to capital outflows from the country, as both international investors and local high net worth individuals were worried about heavy-handed intervention in the free market economy.

No worries about Thai credit rating

This apparently contrasts with investor sentiment toward Thai markets.

“Foreign investors who were previously worried about a potential credit rating downgrade for Thailand are now less concerned, as international rating agencies have affirmed Thailand’s credit rating,” says Ariya.

Foreign ownership of Thai government bonds, however, accounts for just 947 billion baht, or 5.2 per cent of total bond market capitalization, compared with their double‑digit share in Indonesia.

“As foreign ownership of Thai government bonds makes up only a small portion, we are not very worried should they pull their funds out. In contrast, foreign ownership in Indonesian bonds used to be as high as 20–30 per cent. When they pulled out, there were large capital outflows,” says Ariya.

“Foreign investors have shown their confidence in Thai government bonds, and average bond maturity held by them increased to about eight and a half years, up from 8.1 years at the end of last year,” she adds.

Thailand’s institutional investors and domestic retail investors hold the vast majority of Thai government bonds.

Consequence of fiscal deficits

The supply of government bonds remains high, as Thailand has been running a persistent fiscal deficit for many years, which in one way threatens fiscal sustainability.

The Constitutional Court has just given the green light to the government to borrow 400 billion baht in emergency loans to fund a consumption scheme and an energy transition package following the oil shock stemming from the Middle East conflict.

The new borrowing will push Thailand’s public debt close to 70 per cent of GDP, the threshold set by the government for fiscal discipline.

Investors are closely watching how much the government will need to borrow to finance extra economic relief measures as well as to fund the annual budget, which has suffered from large deficits in recent years.

‘AomPlus’ savings bonds

Part of this new debt will be in the form of savings bonds named in both Thai and English as “AomPlus”, earmarked for retail subscribers beginning late this month.

Deputy Prime Minister Ekniti Nitithanprapas pledged that the Finance Ministry would issue 4 billion baht of AomPlus bonds every month starting from late July. These will provide a risk‑free investment tool for the public and are part of the government’s financial inclusion project.

The coupon rate will be attractive, according to Ekniti, with three-year and 10-year maturity.

The first tranche of 2 billion baht will be sold via the Paotang application on a first‑come, first‑served basis, with a minimum investment of 100 baht.

The next 2 billion baht will be distributed via commercial banks and brokerage firms, with a minimum booking of 1,000 baht.

Influence on interest rate

According to a ThaiBMA survey, the Bank of Thailand’s policy rate will remain at 1 per cent throughout the year.

However, bond yields are expected to inch higher, albeit not by much.

In the first half of the year, the government bond yield curve was characterized as bear steepening, where the yield curve widens because long-term interest rates rise faster than short-term interest rates.

Investors were worried about the threat of high inflation due to the Middle East war that had caused oil prices to surge.

At the end of the second quarter, bond yields for two‑year, five‑year and 10‑year maturities had increased to 1.16 per cent, 1.6 per cent and 2 per cent, respectively.

Government bond yields with 10‑year maturity may see a slight increase in the second half of the year by around 20–30 basis points, according to a market survey conducted by the ThaiBMA.

Potential risks

Investors are advised to look closely at some names in the corporate bond market regarding potential default, but Ariya says she does not expect any surprises.

“The Thai economy is still in a K‑shaped recovery, with some sectors expanding while others contract. It will be a challenging time for some companies if the government’s economic relief packages do not stimulate growth as expected.”

The outlook for capital flows is difficult to predict due to both external and internal risks, she adds.