Thai government faces higher borrowing costs as foreign investors exit market for US government bonds, impacting liquidity and fund-raising.
The Rising Cost of Borrowing for the Thai Government
The Thai government is facing a higher cost of borrowing as foreign investors exit the local bond market. In the first quarter of this year, 34.3 billion baht of capital flowed out of the Thai bond market, leading to a drop in outstanding government bonds held by foreign investors.
The wide gap between local and US interest rates makes Thai government bonds less attractive to investors, with higher returns available on US government bonds.
Moreover, the Thai government has been facing rising borrowing costs due to several factors:
- Increased Borrowing: The Thai government plans to borrow about 2.4 trillion baht ($66.4 billion) for the fiscal year 2024. This is a 9% increase from the current year. More than 700 billion baht will be fresh borrowing and 1.7 trillion baht will be for refinancing or restructuring existing debt².
- Economic Stimulus Plan: The government has announced a 560 billion baht ($15.8 billion) economic stimulus plan. This plan includes direct transfers to consumers, reduction in energy prices, and a debt moratorium for some borrowers.
- Rising Bond Yields: The upward trend in the US Treasury yields and the Thai government’s plan to issue more bonds have led to an increase in the two-year and 10-year Thai government bond yields.
- Inflation and Interest Rates: Concerns over inflation and rising interest rates have added to the unease in the Thai markets.
Impact of Weakening Baht and Interest Rate Policies
The weakening of the baht has also contributed to capital outflows, as investors fear depreciation of Thai assets. The uncertainty surrounding a US interest rate cut further complicates the situation, as a high interest rate policy in the US and Europe translates to a higher cost of borrowing globally. This has implications for Thailand, affecting the government’s ability to raise funds to finance its budget deficit.
Challenges and Opportunities in the Local Bond Market
Despite these challenges, there is optimism about the local bond market‘s ability to raise funds. Corporate bond issuance is expected to reach 900 billion to 1 trillion baht this year, with most bonds being investment grade. Factors such as the emergence of India as an alternative investment destination and its inclusion in global bond indices may impact the Thai bond market. However, stakeholders remain confident in the resilience of the local market and its role in driving the economy.
