Rice Bond Flop Adds to Yingluck Protest Misfortune: Asean Credit

The failure of a bond sale for subsidized rice purchases adds to Prime Minister Yingluck Shinawatra’s challenges as she rounds up support to counter protesters occupying government offices.

The finance ministry sold 37 billion baht ($1.2 billion) of three-year notes on behalf of Bank for Agriculture & Agricultural Cooperatives on Nov. 25, short of its 75 billion baht goal. The yield of 3.53 percent was 39 basis points above that on similar-maturity sovereign debt, according to the Public Debt Management Office. That compared with a 30 basis point premium at the last offer on Oct. 31, Thai Bond Market Association figures show.

Rising borrowing costs are another blow for a program that has already eroded investor confidence and drawn criticism from the International Monetary Fund, which says the expenditure could jeopardize Thailand’s goal of balancing its budget by 2017. The Bank of Thailand unexpectedly cut interest rates this week amid slowing growth and a monthlong effort to oust Yingluck and dismantle the network of her brother, former premier Thaksin Shinawatra.

“This growing political tension might have made it more important for them to raise funds for the rice scheme,” Kobsidthi Silpachai, Bangkok-based head of capital markets research at Kasikornbank Pcl, the country’s fourth-biggest lender, said in a Nov. 26 interview. “In the event of an election, they need to make sure their supporters are satisfied.”

Farmer Support

Parties linked to Thaksin have won the past five elections on support from rice-growing areas in the north and north-east of Thailand that are poorer and more populous than the rest of the country.

The government spent 689 billion baht in the two years through September buying 44 million tons of rough rice from farmers at above-market rates, official data show. The program spurred the buildup of record reserves of the grain and dethroned the country as the world’s largest exporter. The IMF said in a report this month the purchases should be dropped in favor of budget transfers to low-income households.

“The rice-purchasing scheme is already putting a severe strain on Thailand’s public finances and augurs badly for the credibility and transparency of fiscal policy,” Nicholas Spiro, London-based managing director of Spiro Sovereign Strategy and a former consultant at Medley Global Advisors LLC, said in a Nov. 26 interview. “The government is treading on very thin ice right now and has lost credibility.”

Protests, Growth

Protesters started rallying last month to oppose a proposed amnesty bill that they said was aimed at allowing Thaksin to return to Thailand, and demonstrators broke into a compound housing the Ministry of Finance on Nov. 25. Protest leader Suthep Thaugsuban rejected an offer by Yingluck, who survived a no-confidence vote in parliament yesterday, to hold talks. The biggest opposition party plans to step up support of the demonstrations, Democrat party leader Abhisit Vejjajiva said yesterday.

Thailand’s economy grew by 2.7 percent in the third quarter from a year earlier, the least since the first three months of 2012, official data show. The central bank cut its 2013 expansion forecast this week to around 3 percent from 3.7 percent. Exports fell 0.7 percent year-on-year in October following a 7.1 percent decline in September, customs data show.

Global funds pulled a net $1.3 billion from Thai bonds and $1.5 billion from local stocks this month, according to official figures. That’s contributed to a 3 percent decline in the baht in November, with only Indonesia’s rupiah dropping more among emerging-market Asian currencies.

‘Dovish Tone’

The Bank of Thailand cut its benchmark interest rate by 25 basis points to 2.25 percent on Nov. 27, a decision that wasn’t predicted by any of the 19 analysts surveyed by Bloomberg. The yield on the 3.125 percent government bonds due December 2015 fell 23 basis points since the rate reduction to a three-year low of 2.65 percent, data compiled by Bloomberg show.

“With the dovish tone and the bias going forward, it should provide quite a bit of support for the bond markets,” Santitarn Sathirathai, an economist at Credit Suisse Group AG in Singapore, said in an interview yesterday. “There’s more risks and uncertainties surrounding this program and that loss could be larger for longer,” he said, referring to the rice buying.

At least four bond sales to fund the rice purchases failed to achieve their targets in July and August, according to the Thai Bond Market Association. The Finance Ministry will sell the remainder of the debt not sold this week around January, Chularat Suteethorn, head of the ministry’s Public Debt Management Office, said on Nov. 25, adding that authorities were satisfied with the spread over sovereigns given the offer’s “poor timing.”

Rice Prices

Krungsri Asset Management Co., which oversees $5.8 billion, didn’t buy any of the notes this week because it was concerned they would be difficult to trade on the secondary market, said Porntipa Nungnamjai, a fund manager.

“Investors will seek higher returns until they reach some particular level, which can offset the standalone risk in comparison to government bonds,” she said in an interview yesterday from Bangkok.

The price of Thai 5 percent broken white rice, an Asian benchmark, has fallen 24 percent this year to $442 per metric ton, data compiled by Bloomberg show. Yingluck backtracked on a plan to lower purchase prices by 20 percent in July after protests from rice growers, opting to keep them at a maximum of 15,000 baht, or $466, a ton for unprocessed grain.

Losses from the program are credit negative for Thailand’s sovereign rating, Moody’s Investors Service said in its Credit Outlook report in June.

Payment Delay

The cost of insuring Thailand’s bonds against non-payment for five years using credit-default swaps climbed 22 basis points this month to 127, according to data provider CMA. That compares with an increase of one basis point, or 0.01 percentage point, to 104 in neighboring Malaysia.

Farmers from many provinces have yet to receive any payments for the harvest season that started on Oct. 1, Prasit Booncheuy, president of the Thai Rice Farmers Association, said in a phone interview on Nov. 26. The process usually takes about 10 days, he said.

“From a political survival point of view, the rice scheme is very important,” Steffen Dyck, assistant vice president at Moody’s, said in an interview in Singapore on Nov. 27. “In the current situation of anti-government protests, I think the government would find it hard to face protests from the farmers.”

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