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Thai Bond President Favors Cut as Controls Hurt: Southeast Asia

An interest-rate cut in Thailand may be the best option to slow inflows that drove the baht to a 16-year high as capital controls would deter investors and push up funding costs, according to the Thai Bond Market Association.

The central bank may lower the one-day bond repurchase rate by as much as 50 basis points at its May 29 review, Niwat Kanjanaphoomin, the TBMA president, said in a May 15 interview in Bangkok. Governor Prasarn Trairatvorakul has kept borrowing costs at 2.75 percent since October, even amid government pressure to reduce them as monetary easing in developed countries boosts the appeal of Asia’s higher-yielding assets.

Thailand is looking to attract investment as it plans to spend 2 trillion baht ($67 billion) to build high-speed rail links to major cities from Bangkok over the next seven years. Finance Minister Kittiratt Na-Ranong urged the central bank to cut rates and said May 7 that policy makers have prepared other measures to curb inflows that threaten exports. Niwat said the baht’s current level doesn’t warrant any controls right now.

“We recommend the government do nothing that will impact long-term investors,” Niwat said. “If they spoil the confidence of investors, the cost of financing will be higher.”

‘Serious Problem’

Foreign companies purchased $589 million more Thai government debt than they sold this month through yesterday after net inflows of $12 billion in the first four months of 2013, according to TBMA, a self-regulatory body that oversees the bond market in Southeast Asia’s second-biggest economy.

Rather than imposing currency measures, the central bank should lower interest rates and intervene in the foreign-exchange market “from time to time,” Niwat said.

The baht has retreated 4.3 percent since reaching 28.56 per dollar on April 19 and April 22, the strongest level since the 1997 Asian financial crisis. It traded at 29.80 as of 11:36 a.m. in Bangkok and is still Asia’s best-performing currency in 2013 after gaining 2.5 percent, data compiled by Bloomberg show.

Measures to cap the baht’s appreciation probably won’t come in until “we get a really serious problem” at around 28 per dollar, or when the gains start to hurt the competitiveness of Thai exports, Niwat said.

Finance Minister Kittiratt said in a May 10 interview that the central bank should cut the policy rate by more than a quarter of a percentage point. Derivatives contracts are pricing in such a move.

Swap Rates

The one-year onshore interest-rate swap dropped 27 basis points, or 0.27 percentage point, to 2.38 percent this quarter and reached 2.27 percent on May 3, the least since February 2011, according to data compiled by Bloomberg.

Thailand’s Tisco Securities Co. predicts the central bank will keep its benchmark rate unchanged this month given the baht’s recent retreat and because the level of borrowing costs is still stimulating economic growth.

In Indonesia and the Philippines, interest rates are higher at 5.75 percent and 3.5 percent, respectively, compared with almost zero in Japan and the U.S. Thai inflation has stayed below the policy rate in the last two months, official data show.

Bangkok-based Tisco is bullish on the Thai outlook, forecasting a government report on May 20 will show gross domestic product increased 5.7 percent in the first quarter, compared with the median estimate of 6 percent in a Bloomberg survey of 13 economists.

Policy Independence

Thailand’s GDP increased 18.9 percent in the final quarter of 2012 and 6.4 percent last year. That was more than full-year growth of 6.2 percent in Indonesia and near the 6.6 percent in the Philippines.

“I don’t think we need any rate cut to stimulate the economy,” Kampon Adireksombat, Tisco’s senior economist, said in a telephone interview on May 15. “There’s been talk over the rate cut and some investors already took positions on that. But if we see a rate cut, basically that means they take into account the pressure from the government and there may be some doubts about independence on monetary policy.”

The cabinet discussed four possible measures last week to stem capital inflows proposed by the Bank of Thailand, the Bangkok Post reported May 8, citing an unidentified lawmaker who attended the meeting. Those include mandatory hedging, barring foreigners from buying central bank bonds and setting a minimum three- or six-month holding period for government debt, the English-language newspaper said.

Sacrifice Opportunity

Thailand’s local-currency sovereign notes returned 1 percent last month, the best performance since October, according to an index compiled by HSBC Holdings Plc. Ten-year bonds are rallying for a fourth month.

The yield on the 3.625 percent securities due June 2023 dropped nine basis points in May to 3.32 percent, according to data compiled by Bloomberg. That was the lowest since the debt was sold in 2010. In Japan, yields on similar-maturity notes are 0.82 percent, while U.S. Treasuries pay 1.87 percent and German bunds 1.33 percent.

Niwat of the Thai Bond Market Association said that even if the central bank lowers interest rates, returns are still better than elsewhere, which will keep funds flowing in.

Demand for baht-denominated debt is sufficient to cover supply, Niwat said. Issuance of sovereign bonds maturing in 12 months or more is likely to be 700 billion baht this year, compared with about 686 billion baht in 2012, Niwat added.

The introduction of controls would mean “you take short-term benefit and sacrifice the longer-term opportunity,” he said.

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