The perceived risk of Thailand defaulting on its debt is at its highest since August last year, as anti-government protests prompt money managers to sell off Thai stocks and bonds.
The cost of protecting Thailand's debt soared after investors including Wells Fargo Inc pulled more than US$4 billion from Thai stocks and bonds since Oct 31, as rallies clogged up Bangkok roads and clashes left nine dead with 550 injured. Pacific Investment Management Co, Goldman Sachs Group Inc and Kokusai Asset Management Co reduced debt holdings before protests first erupted in late October, regulatory filings show.
"We sold the entire Thai position in our international bond fund through the end of last year," Lauren Van Biljon, an analyst in London at Wells Fargo's First International Advisors LLC unit, said in a Jan 17 telephone interview. "There seems to be a very wide gulf between the different political sides."
An anti-government protester holds a bag with donated money collected during the arrival of protest leader Suthep Thaugsuban to speak to his supporters in Bangkok on Jan 14, 2014. (Reuters Photo)
A resolution of the crisis has eluded caretaker Prime Minister Yingluck Shinawatra since she dissolved parliament in December and called a snap poll for Feb 2. Demonstrators want to remove her and end the influence of her brother, Thaksin Shinawatra, who was ousted by the army in 2006. Blasts rocked a protest site in Bangkok on Sunday. The baht has slumped on bets the central bank will cut borrowing costs this week as the turmoil crimps growth, and amid speculation about a coup.
"We have remained underweight on the baht since late last year as the prolonged political unrest hurt the currency outlook," Tatsuya Higuchi, a money manager at Kokusai Asset in Tokyo, said in a Jan 16 telephone interview. "There's no fiscal support as the politics are in chaos. The only support they can provide under such a situation is monetary easing."
Kokusai, Japan’s biggest mutual fund manager with $36 billion of assets, cut its Thai bond holdings last year and will keep its existing stake for now, he said.
Default Risk
Credit-default swaps insuring Thai debt against non-payment for five years rose to 153 on Jan 14 in New York, the highest level since Aug 28, according to CMA prices. The spread has widened 44 basis points since anti-government protest broke out on Oct 31, compared with increases of 19 basis points for Indonesia and 17 basis points for the Philippines.
The cost of protecting Thailand's debt may reach 200, the highest since November 2011, from 150 on Jan 17, according to Nordea Markets, a unit of northern Europe's biggest financial group, which had about 228 billion euros ($310 billion) of assets under management as of Sept 30.
"The upside risk to the CDS level is still pretty big, given the risk of military intervention," Amy Zhuang, a senior Asian markets analyst in Copenhagen at Nordea, said in a Jan 15 telephone interview. "The uncertainty is there, the turmoil is there. They are generally still calm but the risky and tricky parts haven’t fully played out at the moment."
Capital Flight
Global funds have sold $2.8 billion more local stocks than they bought and a net $1.4 billion of bonds since Oct 31, data from the stock exchange and the Thai Bond Market Association show. The baht fell 5.2% in the period and touched 33.148 per dollar on Jan 6, the weakest since 2010, while the SET Index of domestic shares dropped 10%.
The Bank of Thailand will lower its benchmark one-day repurchase rate to 2% from 2.25% on Jan 22, according to 14 of 21 economists surveyed by Bloomberg News. Seven predict no change. The central bank delivered a surprise 25-basis point cut at its last meeting on Nov 27.
The monetary authority has lowered its 2014 growth projection to about 4% from 4.8%, saying the unrest will hurt investment and business confidence. Thailand’s finance ministry on Jan 16 cut its forecast for the second time in a month, reducing it to 3.1% after cutting to 4% from 5.1% on Dec 26.
Bangkok Blasts
Yingluck’s administration has endured more than two months of street demonstrations aimed at erasing her family’s political influence. Her brother’s allies won the past five elections.
Sunday's blasts occurred at Victory Monument, one of seven key districts that have been blockaded by demonstrators in the capital since Jan 13, according to the Bangkok Emergency Medical Center. Violence over the past three days has killed one and wounded 67, the centre said on its website.
The protesters led by former Democrat Party MP Suthep Thaugsuban want Yingluck to step down and allow an unelected council to reform the electoral system before holding a fresh vote. The main opposition Democrat Party will boycott the Feb 2 poll, its leader and former Prime Minister Abhisit Vejjajiva said on Dec 21, 2013.
'Bad to Worse'
"Things are going from bad to worse," Nicholas Spiro, managing director of investment consultancy Spiro Sovereign Strategy in London, said in a Jan 15 e-mail interview. "The risk of another military coup is growing given the bleak prospects for a negotiated solution," he wrote, adding that "stability and democratic governance are being undermined at a particular inopportune time from a market standpoint."
Gen Prayuth Chan-ocha, the national army chief, last month refused to rule out the possibility of a coup. The country has had nine coups and more than 20 prime ministers since 1946.
For now, the blockades in Bangkok have not done enough damage to the economy to alter its sovereign rating, Steffen Dyck, an analyst at Moody’s Investors Service, said at a Jan 17 media briefing in Singapore. There are "very low" chances of a change to its ranking in the next 18 months, he said.
Thailand is rated Baa1 by Moody's and BBB+ by Standard & Poor's and Fitch Ratings, their third-lowest investment grades.
Moody's Outlook
"In terms of growth, I can't see it dropping below 3%," Dyck said. "Manufacturing is still going on. We have seen some weakening in foreign reserves as protests intensified, but the stock market is much higher compared to instances in 2006 or 2008."
Dollar-denominated debt sold by Thai companies handed investors a 1.2 p% loss since the crisis flared on Oct 31, according to JPMorgan Chase & Co's Asian Credit Index, making it the region's worst performer after Indonesia.
The average yield on the country's debt climbed 32 basis points, or 0.32 percentage point, in the period to 4.93% on Jan. 16. It reached 5.07% on Jan 9, the highest since Sept 18. The yield on Thai Oil Pcl's 4.875% note due Jan 2043 climbed to 6.31% from 5.98% on Oct 31.
The political stalemate is costing Southeast Asia's second-biggest economy as much as 1 billion baht ($30 million) a day as tourism suffers, the University of Thai Chamber of Commerce estimated as Singapore Airlines Ltd, Cathay Pacific Airways Ltd and PT Garuda Indonesia reduced flights to Bangkok.
"The biggest casualty of a further escalation in the crisis is Thailand's economy, which has already slowed dramatically," Spiro said. "Tourism and infrastructure investment are increasingly at risk, putting pressure on the central bank to trim rates again to help shore up growth."
