Bank of Thailand: The corporate bond market is strong. However, the economy needs a long-term overhaul. Rollover risks of corporate bonds downplayed. With global factors at play, PM pushes a rate cut, BoT urges patience. Meanwhile, in the longer term, it is the women of Thailand who will decide. In reality, the country’s birth rate, in the coming decades, will become the most important economic metric.

This week, the Bank of Thailand moved to reassure the public that the corporate bond market is sound. Its spokespeople in a number of briefings also defined the bank’s interest rate policy. They made it explicitly clear the ailing Thai economy requires long-term structural reform. Meanwhile, the bank is moving to slowly rein in household debt. The economic debate sparked by a clash last week between Prime Minister Srettha Thavisin and Bank of Thailand Governor Sethaput Suthiwartnarueput comes into focus. At length, it is certainly not just a question of GDP growth versus financial stability. There is another metric which, in time, overrides all others. The country’s birth rate is an economic parameter that is increasingly in focus. Not just in Thailand, but across the world.

In a series of comprehensive briefings this week, the Bank of Thailand put forward its position on the slowly recovering but ailing Thai economy. It came after a meeting recently between Prime Minister Srettha Thavisin and Governor Sethaput Suthiwartnarueput. At length, the central bank seeks to maintain its elevated interest rate policies. It cites the need for financial stability and current market trends for this.

The Bank of Thailand (BoT) remains confident in the resilience of the local corporate bond market. In reality, it has been busy monitoring the situation since last week when the top firm Italian-Thai Development (ITD) postponed repayments on bonds due.

In short, the firm was due to pay out ฿14.45 billion on its bonds in 2024. A two-year deferment was announced.

Afterwards, it was reported the firm had successfully concluded negotiations with bondholders hammering out new arrangements.

Bank of Thailand reveals that ฿1 trillion worth of corporate bonds will mature in 2024, over 90% are gilt-edged high-grade investments. Market is sound

Explicitly, there is understood to be ฿4.7 trillion outstanding in corporate bonds relating to Thai concerns. In the meantime, ฿ 1 trillion is due to mature this year.

Over the last few days, The Bank of Thailand has suggested that most of these bonds are high investment grade and ultra-secure.

At a briefing of the Bank of Thailand on Monday, senior director Sakkapop Panyanukul explained that only 10% of these bonds are high-yield or more speculative investments.

Similarly, assurances have been received from within the financial sector. Significantly, Maybank, Malaysia’s largest bank, this week, assured investors that the Thai corporate bond market was sound.

The central bank’s effort to downplay concerns about rollover risks comes at the same time as elevated interest rates. 

Top central bank director downplays the systemic risk to the Thai economy following concern over corporate bonds. Spike of 19% in 2022 for bonds issued

Mr Sakkapop, who is the director for financial markets, shared a detailed analysis during a media briefing on Monday.

At length, he provided insights into the dynamics of the market. At the same time, he emphasised the mitigating factors against systemic risks in Thailand.

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The top official started by highlighting the growth trend of corporate bonds in recent years. According to BoT data, corporate bonds outstanding exhibited positive growth over the last three years. 

In effect, they increased by 9% year-on-year in 2023. Before this, 2022 saw a massive 19% rise in corporate bonds issued following an 11% expansion in 2021.

Previously, there was a 2% dip in 2020 attributed to the pandemic. 

The proportion of undersubscribed bonds, particularly high-yield bonds, has been marginal compared to total corporate bond issuance.

Especially, over the past two years. Mr Sakkapop provided a nuanced perspective. He explained: ‘The undersubscribed corporate bonds were largely high-yield bonds, offered by companies that had specific problems.’

The central banker further noted that investment-grade bonds faced under subscription only for 2-3 companies due to issuer-specific factors.

Local asset management firms have a very low exposure to more risky corporate bonds, similarly with banks

Addressing concerns about rollover risks, the BoT director confirmed that around ฿1 trillion worth of corporate bonds are due for redemption in 2024.

He emphasised that rollover risks for high-yield bonds are expected to be very limited. In short, this was the marginal proportion of high-yield or more risky bonds compared to investment-grade ones.

Mr Sakkapop emphasised the low exposure of local asset management companies and banks to high-yield bonds.

At length, he disclosed: ‘Local asset management companies investing in high-yield bonds represent only 0.1% of total bond investment.’

Furthermore, he reassured that banks’ exposure to high-yield bonds is only 0.23% of their total loan portfolio.

In the face of this data, the central bank remains optimistic about the limited risk posed by high-yield bond rollovers. In summary, the overall corporate bond market remains healthy.

Interest rates are less than half that of the United States. It comes with indicators, this week, that the Federal Reserve may maintain its current rates

The Bank of Thailand, which is under pressure politically over its elevated interest rates, also responded to this concern. In reality, the Bank of Thailand has been remarkably successful at keeping Thai rates low. They are presently less than half the borrowing rate in the United States.

Significantly, strong US data, this week, has led the US Federal Reserve to dampen speculation that it may ease interest rates this year.

In response, the baht slipped significantly against the US dollar by 2% and ended at ฿35.55 to the greenback.

Formerly the Bank of Thailand undertook a series of interest rate hikes, increasing its policy rate from 0.5% to 2.5% from August 2022. This marks the highest level in a decade. 

The decision to raise interest rates has been driven by the need to address inflationary pressures and maintain economic stability.

Bank of Thailand man notes that large Thai firms have already cannily locked in competitive bond rates

In response to the rising rates, Mr Sakkapop noted that several large private companies have taken advantage of the prevailing conditions. 

In brief, they secured funds through bond offerings. He highlighted: ‘Regarding higher financial costs related to the interest rate hikes, several private companies recently locked in cheap costs through bond offerings.’

The BoT’s assessment of the local corporate bond market is set against a backdrop of global economic uncertainty. The problems besetting China’s economy severely impacts Thailand’s ability to do business.

Central bank tries valiantly to tackle household debt

Nevertheless, the bank is also trying to deal with chronic problems like household debt. As it reins in borrowing, it has begun to point to slow and yet painful progress on that front.

However, the level of household debt still hovers at 90% of GDP.

Meanwhile, a lack of credit feeding into the system is beginning to hurt confidence and will continue to do so.

Many business leaders are under no illusion. The country is facing a tough economic journey in 2024.

This week, China’s economic outlook came under scrutiny. That country reported a growth rate of 5.2% in 2023. In essence, this economic data is suspect with external indicators pointing to a fall in output and internal demand.

The quoted figures slightly surpassed the official target. In brief, this data originates from officials under the supervision and control of China’s Communist Party.

However, even so, concerns are openly expressed at a shaky recovery. China’s economy continues to be impacted by a deepening property crisis, deflationary risks and tepid consumer demand.

BoT confirms the negative trend in China

Commenting on the Chinese economic situation, this week, Mr Sakkapop noted: ‘Expectations that the world’s second-largest economy would stage a strong post-Covid bounce quickly fizzled as the year progressed.’ Undoubtedly true but the situation is far graver.

The central bank director referred to the observations from China Beige Book International. 

This confirmed the recovery from COVID-19 was disappointing. At the same time, it made clear a significant acceleration in 2024 would be unexpected. In short, this would require either a major global upside surprise or a more active government policy.

The economic challenges have not gone unnoticed by the Thai government. 

Briefings by the Bank of Thailand, this week, made clear its economic thinking. Interest rate policy cannot directly prompt growth or otherwise

Prime Minister Srettha Thavisin has engaged with the BoT, urging a reduction in the policy rate to stimulate economic activity. While in Davos this week, the PM saw its signature Digital Wallet stimulus plan go up in smoke. 

This came with a National Anti-Corruption Commission (NACC) warning that key elements involved could be illegal.

Digital Wallet plan blown out of the water by corruption body on Tuesday warning of illegality

However, the BoT’s assistant governor, Piti Disyatat, pushed back against the PM’s thinking.

In particular, that interest rate adjustments alone can comprehensively address the economic recovery.

Despite negative headline inflation for three months through to December, the central bank contends that falling prices do not indicate deflation.

Negative inflation, it counters, is primarily driven by government subsidies. In addition, it points out that growth is expected to be more balanced in 2024.

Assistant Governor tells reporters that Thailand needs structural change and a ‘holistic’ approach to economic recovery. This will take time and patience

Piti highlighted that Thailand’s ‘uneven’ economic recovery is rooted in structural issues and requires a holistic approach. Moreover, not only holistic but also long-term. There are no easy answers to Thailand’s ailing economy.

It will require considerable time and patience.

He stated: ‘The fact that the economy has not recovered comprehensively, these are all things that monetary policy cannot easily solve as a quick fix because many things require treatment that matches the root of the problem.’

In truth, the problems are immense. A poor education system, lack of market access, lack of inward investment, lack of confidence due to two coups in two decades, an ageing crisis and a world-beating record of personal debt.

At the same time, the country has some things going for it. In addition to its valuable foreign tourism industry, it has a resilient workforce and a lack of dependency on the government. Certainly also, it has financial stability.

In contrast, for instance, to Argentina.

This was built up by successive governments and the Bank of Thailand since the 1997 Asian Financial crisis.

Argentina compared to Thailand is a lesson for the kingdom’s economic planners but also for the world’s

Actually, a comparison with Argentina would explain how significant this is.

Argentina defaulted on its debt and sought IMF help even as recently as last week. However, that country’s GDP per capita was $13,700 in 2023 compared to only $7,297 for Thailand.

On the one hand, that is not the real story. 

Since 2018, the Argentinian currency, the peso, has lost 50% of its value. Consequently, the population has experienced economic devastation and hardship.

On the other hand, the country still has a growing population with 1.9 births per woman compared to only 1.34 in Thailand. At the same time, this is still below the population sustainability rate of 2.1.

In essence, this shows that GDP growth and the metric itself can be illusory. Certainly, it should not be the sole force behind economic policy.

In the future, the birth per woman metric may become most significant. Especially, over the coming decades, as the world must come to terms with this unavoidable reality. 

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Further reading:

Government closely monitoring Thailand’s corporate sector bond market. Fears of a pending crisis

PM again attacks central bank on interest rates as deputy Finance Minister raises bond concerns

PM takes aim at the Bank of Thailand over interest rates despite Thailand’s lower borrowing costs

Thai economy is stable but is being strangled by personal debt. Fixing it could see pain before any gain

Steady as she goes growth and economic stability driven by a growth in US exports is all good news

Economy at crossroads: World Bank calls for structural reform to avert two decades of low growth

Former Deputy PM warns Srettha that if he does not listen, he may spark a real economic crisis in Thailand

Fragile, weak economy sees central bank holding interest rates and reducing 2023 growth to 2.4%

Srettha’s crisis is not just an economic one, it is a ‘3D debt crisis’ that is strangling GDP growth

Zombie Thai firms holding back economic growth as they struggle just to pay interest on bank debt

Incoherent government economic policy clashes with Bank of Thailand’s efforts to rein in debt

Srettha outlines Digital Wallet as his government begins to flounder with a faltering economy and confusion