Global funds are ditching Thailand’s bonds due to political risks before the May 14 general election, but history suggests they may soon come rushing back.
Overseas investors have offloaded a net US$750 million of Thai debt this month, the biggest selloff in emerging Asia based on divergence from the 12-month average. Funds also sold the nation’s bonds prior to the previous elections in 2014 and 2019, but inflows then surged after the votes took place.
In the present “lame-duck session” before the elections, bonds and currencies face a level of uncertainty over how political parties plan to fulfil their populist pledges, said Kobsidthi Silpachai, head of capital market research at Kasikornbank Public Company Limited (KBank) in Bangkok. After the vote, there may be a relief rally depending on the formation of the coalition government, he said.
Global investors cut holdings of Thai bonds by an average $308 million in the three months leading up to the prior polls in 2014 and 2019, according to analysis by Bloomberg. Foreign inflows then surged to an average $1.4 billion in the three months after the elections were over.
While international investors cut holdings of Thai bonds in the run up to those previous votes, they boosted purchases of Indonesia and Malaysia debt over the same period, indicating the outflows from Thailand were not driven by any external catalyst.
Thai bonds could do with a return of inflows this year. The nation’s sovereign debt has handed a loss of 0.7% to dollar-based investors this month, the worst performer in Southeast Asia after the Philippines, according to a Bloomberg index.
- Spending pledges -
Investors will be watching for the election outcome, including public expenditure plans, as all the main political parties have announced various forms of populist spending. Still, there is not any immediate concern over the nation’s fiscal balances with banks such as Nomura Holdings Inc, saying the budget deficit for the fiscal year ending September 2023 may be lower than official estimates.
Thai bonds may get another boost once the Bank of Thailand (BoT) joins the peak-rate bandwagon by signalling its tightening cycle is over, joining its peers in Singapore, South Korea, Indonesia, India and Malaysia.
The BoT is expected to raise its benchmark rate by a final 25 basis points by the third quarter, according to a median of economists surveyed by Bloomberg, although chances are the hikes may end before that.
