Empty Hotels Drive Thailand to Best Sovereign Gain: Asean Credit

Beach in Krabi
A tourist walks at Railay beach in Krabi, Thailand. Photographer: Brent Lewin/Bloomberg

Thailand’s sovereign bonds are beating their Asian peers on bets interest rates will be cut as anti-government protesters block roads and scare off tourists during the peak Chinese New Year holiday period.

Local-currency debt returned 1.5 percent in the past three months, Bloomberg indexes show. That compares with drops of 6.2 percent in Indonesia, 4.3 percent in the Philippines and 1.2 percent in Malaysia. The Bank of Thailand may have to cut its 2.25 percent benchmark rate as early as its next meeting on March 12, according to Barclays Plc and ING Groep NV.

The runup to the Feb. 2 elections saw 10 people killed, left Bangkok hotel rooms empty over the weekend, dragged consumer confidence to a two-year low in December and forced Prime Minister Yingluck Shinawatra’s government to cut its 2014 growth forecast twice in less than a month, to 3.1 percent from 5.1 percent. While the baht has declined and bond risk surged, Neuberger Berman Group LLC and Aberdeen Asset Management Plc have taken the opportunity to add to government debt holdings.

“Given the political unrest in Thailand, it provides some room for monetary policy to remain more accommodative,” Porntipa Nungnamjai, a fund manager in Bangkok at Krungsri Asset Management Co., said in a Jan. 31 interview. “We’ve started to gradually reduce portfolio duration during the protests on a higher chance of a rate cut,” she said, adding that Krungsri is still slightly overweight against the benchmark.

Weekend Election

Thai voters cast ballots across almost 90 percent of the country in the general election, although the results may not be certified for several months. Suthep Thaugsuban, a former Democrat powerbroker who has led the campaign to oust Yingluck, said the election will be annulled because his group blocked candidates from registering in some provinces and shut down polling stations during advance voting.

“The three-month-long crisis is starting to take its toll on Thailand’s already weak economy,” Nicholas Spiro, managing director of investment consultancy Spiro Sovereign Strategy in London, said in a Feb. 2 e-mail interview. “Things are looking very ugly in Thailand right now.”

The Bank of Thailand unexpectedly left its benchmark interest rate unchanged at 2.25 percent on Jan. 22 after delivering a surprise reduction in November. Fourteen of 21 analysts surveyed by Bloomberg forecast a reduction by 25 basis points last month, with the rest predicting no change.

Yields Drop

Two-year bonds, the most sensitive to the interest-rate outlook, completed a fifth monthly gain in January. The yield on the 3.125 percent notes due December 2015 was steady at 2.44 percent today and dropped 15 basis points, or 0.15 percentage point, this year, data compiled by Bloomberg show. That compares with a 20-basis-point increase to 2.93 percent for similar-maturity Philippine debt today, taking its advance this year to 41 basis points.

“We think the domestic economy deserves an easing in the policy rate but financial stability and political uncertainty clouds the timing,” Pongtharin Sapayanon, the Bangkok-based head of fixed income at Aberdeen Asset, which oversees about $321 billion of assets globally, said in a Jan. 29 interview.

Occupancy rates at some five-star hotels in areas of Bangkok affected by the protests have probably been just 20 to 25 percent in January, compared with 80 to 85 percent normally, Surapong Techaruvichit, president of the Thai Hotels Association, said in an interview today.

“The protests have clearly affected the tourist arrivals, with hotels reporting that occupancy levels are below seasonal averages,” Hakan Aksoy, an emerging-markets fund manager in London at Pioneer Investments, said in an e-mail interview yesterday.

Flights Canceled

The anti-government protests, which have shut down parts of Bangkok since Jan. 13, may cost the local travel industry 22.5 billion baht ($684 million) this quarter, the Tourism Council of Thailand said Jan. 23, a day after Yingluck imposed a state of emergency in the capital. Tourism contributes about 10 percent to Thailand’s gross domestic product.

Bangkok attracted almost 4.2 million arrivals from China, Hong Kong and Taiwan in 2013, and many of these visit during the lunar new year holiday. Singapore Airlines Ltd. will cancel 43 flights between Singapore and Bangkok between Jan. 14 and Feb. 27 and Thai Airways International Pcl will scrap 25 flights between Hong Kong and the capital, the carriers said last month.

‘Political Stalemate’

“We expect Thai economic growth to remain weak as the current political stalemate will hurt both consumption and investment over the next several months,” Prashant Singh, the Singapore-based lead portfolio manager for local emerging-market debt at Neuberger Berman, which oversees $242 billion globally, said in a Jan. 30 e-mail interview. There is a “significant probability” of a rate cut in March and Neuberger Berman is now overweight on Thai bonds, he said.

The baht fell 5.3 percent to 32.871 per dollar as of 11:32 a.m. in Bangkok since the protests began on Oct. 31, data compiled by Bloomberg show. That’s the worst performance among Asia’s 11 most-traded currencies after Indonesia’s rupiah and Malaysia’s ringgit.

The Thai currency may drop to 34 per dollar this quarter because of the political deadlock, Toru Nishihama, an economist at Dai-ichi Life Research Institute Inc. in Tokyo, said in an interview yesterday. One Asset Management Ltd. sees the baht reaching 35 this year, according to Win Udomrachtavanich, chief executive officer in Bangkok.

Default Swaps

Manulife Asset Management, which oversees $258 billion globally, sees a fifty-fifty chance of a rate cut in the first half, said Vasu Suthiphongchai, a Bangkok-based fund manager, adding that he is still “bearish” on Thai bonds because of Federal Reserve stimulus cuts and the risk of the baht weakening further.

“If they cut the rate too fast, then the baht will depreciate too fast,” Vasu said in a Jan. 30 interview.

Credit-default swaps insuring Thai debt against non-payment for five years rose 40 basis points this year to 169, according to CMA prices, as the Fed said it would move ahead with the second $10 billion reduction of its monthly bond-buying.

Slowing growth in China, a devaluation of the Argentinian peso and political crises from Turkey to Ukraine have prompted investors to reasses emerging-market investments in recent weeks. The average yield on developing nation local-currency debt has climbed 38 basis points in three months and six basis points last week, Bloomberg indexes show.

Fund Inflows

Global funds added $154 million to Thai central bank bills due in one year or less during the week ended Jan. 17 in anticipation of a rate-cut at the Jan. 22 meeting, according to data compiled by HSBC Holdings Plc. Outflows from longer-dated government bonds reached $281 million over the period.

“While many countries are raising or expected to boost borrowing costs, Thailand is one of a few where investors can expect an additional rate cut,” Takahide Irimura, the Tokyo-based head of emerging-market research at Kokusai Asset Management Co., which runs Japan’s biggest mutual fund, said in a Jan. 30 interview. “So we may see some fund inflows to short-term notes closer to the next Bank of Thailand meeting.”

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