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Savings bonds and Japanese soft loans are proving more alluring than the international capital markets for Thailand. The government and state enterprises appear to be backing away from the US and Eurobond markets in favour of cheaper funding from domestic sources as local interest rates fall.
The Kingdom of Thailand had planned to raise up to $5 billion in global bonds, but this now seems to have been put on hold as it soaks up domestic savings and takes advantage of cheap Japanese money on offer.
US spreads have tightened for the existing Thai sovereign issue, due 2007, to around 210 basis points, having been flung out as far as 900bp during the Russian crisis earlier in the year, and there is also talk of a ratings upgrade, but all this has so far failed to convince Thailand of the need for fresh overseas borrowings.
The Thai authorities’ confidence took another hit with Malaysia’s $1 billion 10-year offering in May, scaled down from a previously announced $3 billion issue, which was launched at 330bp over treasuries, prompting talk of a “Mahathir premium” on the bond.
Thailand, like Malaysia, has a BBB minus Standard & Poor’s rating on its long-term debt, but market commentators believed it would be likely to get a better deal from the international markets than Malaysia. But Thailand is holding out, believing it can do better at home.
Standard & Poor’s Thai sovereign analyst, Takahira Ogawa, says of Thailand’s stance on international bond issuance: “They are always slow to move; always wait for the right time, and the timing never comes. They would always like to have a tighter spread, which the market cannot afford.” Ogawa dismisses any notion that the Mahathir premium ascribed to Malaysia’s recent bond issue would affect any Thai issue. “Their economic and foreign exchange policies are completely different,” he says, adding: “Thailand has always been the good boy of the IMF and World Bank school.” Standard & Poor’s currently has Thailand’s long-term sovereign debt at BBB minus, having upgraded its outlook from “negative” to “stable” in May.
However, the Bank of Thailand is concentrating on the home market, triumphantly announcing that it has raised Bt13.35 billion ($360 million) in the first few weeks of a Bt25 billion savings bond issue – the first such issue for nine years. The five-year bonds pay 6.75%, semi-annually, compared with an instant-access bank deposit rate of 4% from Bangkok Bank and 5% for one-year savings. And bank rates are tipped to fall even further in coming months. An overnight interbank rate of some 1.25% is a measure of the liquidity in the market, which the government is also hoping to soak up with its bond issue in a bid to halt the interest-rate slide.
Proceeds of the bond issue will be used to fund a budget deficit that ballooned to an estimated Bt26 billion in April, after edging into a surplus of Bt3.9 billion the previous month, because of a year-on-year 21% drop in tax revenue and the effects of the government’s economic stimulus package designed to put the ailing economy back on track.
The package is being jump-started by $250 million from the Overseas Economic Co-operation Fund, $600 million from the Japanese Export-Import Bank and $600 million from the World Bank.
The domestic government bonds are still subject to income tax on their interest, giving investors an effective return of 5.4%, based on a 15% tax rate, prompting calls for tax exemption for government issues, even if only for the elderly. Gill Baker
