Thai govt considers issuing US$1 billion foreign currency bonds

The Thai government recently announced its consideration to issue foreign currency-denominated bonds valued at US$1 billion, approximately 36 billion baht, an announcement which has sparked debates over the worth and risks associated with such an undertaking. As part of this move, the Public Debt Management Office (PDMO) under the Finance Ministry is examining the feasibility of offering these bonds in several currencies, including US dollars, yuan, and yen.

Should the bonds be released in US dollars, it would be a landmark occasion as the first such issuance by the Thai government in 20 years. Interestingly, the last instance of foreign currency bond issuance took place in 2005, when the government released 48 billion yen (US$318,794,400) worth of three-year Samurai bonds to refinance a maturing loan from the Japan Bank for International Cooperation, said PDMO director-general Patchara Anuntasilpa.

“The most likely choice is dollar-denominated bonds as it’s a widely used currency and a benchmark.”

The PDMO stated that the funds from any international bond sale would likely be used to finance sustainability-linked projects that add value to the economy. Despite the Thai authorities’ preference for raising the billions of dollars required annually to bridge a budget gap and fund local investments due to low-interest rates, they have indicated that there is more than enough liquidity available in the Thai market for fund mobilisation.

Patchara noted that the Thai bond market has evolved considerably since the 1997 Asian financial crisis and has become a crucial funding source for governmental and corporate sectors, reported Bangkok Post.

Nevertheless, the authorities believe that issuing overseas bonds would allow the government to diversify its investor base and exploit fewer credit constraints in more liquid foreign bond markets. According to ministry officials, with significant development needs and reduced access to concessional financing as Thailand transitions from low to middle-income status, international bonds present an attractive financing alternative.

Overseas bond

However, issuing bonds overseas does not come without its drawbacks. For instance, it exposes Thailand to exchange rate risk, making the repayment of international debt more costly if the baht devalues. The cost of borrowing would also increase based on interest rates. As an example, 10-year US Treasury notes carry an interest rate of 4.6%, whereas domestic bonds of a similar maturity period only carry an interest rate of 2.5%.

The government’s foreign currency debt is only 1.4% of the total government debt portfolio, mostly consisting of loans from multilateral agencies. Thailand’s overall bond issuance cost in any currency will exceed local rates as it includes risk premiums, foreign exchange, and additional fees such as the conversion into domestic currency.

Meanwhile, the Thai government has been vocal about its plan to issue foreign currency bonds, but nothing has materialised so far. The PDMO had to postpone a planned dollar bond offering in 2022 due to market volatility. The newly appointed Prime Minister Srettha Thavisin proposed overseas bond sales to fund sustainability projects.

Deputy Finance Minister Julapun Amornvivat stated that the government aims to issue bonds within the next one to two years. Despite the higher borrowing cost of dollar-priced bonds compared to the local market, the cost would be cheaper or equivalent to local costs if the bonds were denominated in yen or yuan, Patchara said.

“If the issuance proceeds, the funds raised will be invested in environmental, social and corporate governance projects as they add value to the economy.”

However, some market observers have expressed doubts over the worthiness of issuing US$1 billion in foreign currency-denominated bonds.

“If Thailand needs foreign currency funds, why only US$1 billion? The authorities could easily mobilise that amount from the domestic market,” said a market observer who requested anonymity.