The Thai government is facing a daunting task juggling a budget deficit aggravated by rising oil prices, while also providing relief measures for businesses and consumers impacted by high fuel prices and an economic slowdown.
The Anutin Charnvirakul administration continues to run large fiscal deficits, like successive governments of the last few years, pushing public debt close to an alarming 70% of GDP.
In November last year, Prime Minister Anutin’s previous Cabinet approved the Finance Ministry’s proposal to set annual expenditure for fiscal year 2027 at 3.788 trillion baht, with a deficit of 788 billion baht, equivalent to 3.9% of GDP.
The newly appointed Cabinet may, however, need to increase spending to shore up the economy during the oil crisis created by the US-Israel war on Iran. The government now faces rising borrowing costs as bond yields surge, further complicating efforts to finance these deficits.
The fallout of the oil crisis is likely to limit the government’s tax revenue collection. The only viable option appears to be continued borrowing to fund the budget.
Surge in bond yields
Due to the oil crisis sparking fears of stagflation worldwide, bond yields have risen sharply in Thailand and in many other Asian countries.
Somjin Sornpaisarn, president of the Thai Bond Market Association (ThaiBMA), said the benchmark 10-year bond jumped 55 basis points to 2.21% as of March 31st, while the two-year government bond yield rose 25 basis points to 1.38%.
Fears of higher inflation and economic slowdown prompted foreign investors to dump Thai government bonds to the tune of 36.4 billion baht last month. Thailand’s inflation is expected to turn positive after several months in negative territory.
According to Bloomberg news, the surge in Asian bond yields in March has triggered an increase in debt buying across the region, as governments seek to limit the spill-over from higher energy prices to local borrowing costs.
Bond yields have been marching higher across the region as the outbreak of the Iran war on February 28 sent oil prices soaring. The Philippine 10-year yield surged more than one percentage point in March, while South Korea’s has risen by almost 50 basis points and Indonesia’s by more than 40 basis points.
Governments and central banks, from South Korea to India and Indonesia, are pouring funds into their bond markets to try to cap yields that have already risen to multi-year highs. Yields have been climbing on concerns that local economies will suffer from higher oil costs as they are net energy importers.
South Korea’s government announced recently that it would buy a combined 5 trillion won (US$3.3 billion) of sovereign bonds over two trading days, while the Reserve Bank of India said it was purchasing 1 trillion rupees (US$10.6 billion) of debt from the open market this month. Bank Indonesia has signalled continued intervention in government bonds.
Despite efforts by authorities to boost sentiment, investors are largely exiting their positions. Global funds sold a net US$1.6 billion of Indonesia’s bonds in March, which is—on track for the largest outflows since October, while offloading about US$730 million of Indian debt.
Hard to predict the future
The trajectory of the yields, which will translate into higher or lower borrowing costs for both government and firms who issue bonds, remains uncertain as the US-Israel war against Iran escalates. “Nobody can predict what US President Donald Trump will do next,” says Ariya Tiranaprakij, executive vice-president of ThaiBMA.
Bond yields will also depend on supplies, as the Thai government is expected to issue more bonds to finance oil price relief measures, said Somjin. He remains optimistic though that financing costs will not rise too much, as the local bond market is relatively stable now.
“Thai bond yields are not that high compared with much higher yields in neighbouring countries,” says Somjin, referring to government and corporate bond yields in March.
Despite many Asian countries intervening in their bond markets, “Thailand may not need to rush to intervene in the market in order to pull down bond yields,” says Somjin. He is not overly worried about capital outflows from the Thai bond market. “Capital outflows from the bond market in March were not abnormal,” he notes.
Advice for bond investors
Somjin sees no major risks for individuals wishing to hold bonds until maturity, but those who plan to sell in the secondary market must consider potential capital gains or losses and coupon rates, on bond yields in particular.
Ariya adds that investors interested in US Treasuries should factor in exchange rate risk. Earlier, a stronger baht against the US dollar led to investment losses from currency fluctuations.
Currently, the US dollar has become stronger due to the war and market expectations that the US Federal Reserve may maintain or even raise its policy rate to combat inflation.
