Thai Default Risk Soars as Funds Pull $4 Billion

Thai Default Risk Soars as Funds Pull $4 Billion: Southeast Asia

The risk of Thailand defaulting on its debt is the highest since August as anti-government protests prompt money managers to sell the nation’s assets. The cost of protecting the nation’s debt soared after investors including Wells Fargo Inc. pulled more than $4 billion from Thai stocks and bonds since Oct. 31, as rallies clogged up Bangkok roads and clashes claimed eight lives. 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.”

A resolution of the crisis has eluded Prime Minister Yingluck Shinawatra since she dissolved parliament in December and called a snap poll for Feb. 2. Protesters want to remove her and end the influence of her brother, Thaksin Shinawatra, who was ousted by the army in 2006. 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 42 basis points since anti-government protest broke out on Oct. 31, compared with increases of 22 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 148 on Jan. 16, 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 $1.3 billion of bonds since Oct. 31, data from the stock exchange and the Thai Bond Market Association show. The baht fell 5 percent 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 percent.

The Bank of Thailand will lower its benchmark one-day repurchase rate to 2 percent from 2.25 percent on Jan. 22, according to nine of 12 economists surveyed by Bloomberg News. Three 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 percent from 4.8 percent, 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 percent after cutting to 4 percent from 5.1 percent on Dec. 26.

Unelected Council

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.

The demonstrators led by former lawmaker 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 Dec. 21.

“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.”

Thailand’s 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.

Moody’s Outlook

For now, the blockades in Bangkok haven’t 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.

“In terms of growth, I can’t see it dropping below 3 percent,” 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 1.3 percent 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 nation’s debt climbed 35 basis points, or 0.35 percentage point, in the period to 4.96 percent on Jan. 16. It reached 5.07 percent on Jan. 9, the highest since Sept. 18. The yield on Thai Oil Pcl’s 4.875 percent note due Jan. 2043 climbed to 6.31 percent from 5.98 percent on Oct. 31.

Cost of Stalemate

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.”

To contact the reporters on this story: David Yong in Singapore at dyong@bloomberg.net; Yumi Teso in Bangkok at yteso1@bloomberg.net