Thai government bonds and their impact on the Thai economy

The Thai government has only recently issued its first lot of savings bonds worth Bt 80,000 million, aimed for sale to senior citizens, with a second lot aimed for sale to general savers. The bonds have a maturity period of five years with a yield rate of 3% in the first two years, 4% in the third year and 5% in the fourth and fifth years. The value of the third lot of bonds, destined for sale to institute buyers, has not yet been concluded, though Thailand’s finance minister has revealed its yield rate to be less than those of lots one and two.

The government savings bonds are distributed through seven Thai commercial banks: Krung Thai Bank (KTB), Bangkok Bank (BBL), Kasikornbank (KBank), Siam Commercial Bank (SCB), Thai Military Bank (TMB), Bank of Ayudhya and Siam City Bank. On the first selling day, savers started lining up at 4 pm, although some senior citizens reached their banks at 1 am, and the entire stock of bonds was fully subscribed within one hour.

Many may question the effect of the government bonds on Thailand’s economy. In order to analyze this effect, I think that we must conceptually divide the entire economy into the three groups of savers, financial institutes, and the business sector.

Firstly, savers will benefit from an increased rate of return offered by the government bonds. The gap between the government bond yield rate and the interest rates on fixed deposits is obviously huge. After calculating, I found that the average rate of return on government bonds is 4.37% throughout five years, while the Bangkok Bank’s present interest rates are 0.5% on savings deposits, 0.75% on 3-month fixed deposits, and 1.25% on 24-month fixed deposits. The big benefit from this considerable interest rate gap is reflected in the phenomenon of banks inundated with buyers.

A sub-group focus shows senior citizens receiving the most benefit, since they live on unearned income. The young generation may receive less benefit since most of their income is earned income and they also have many investment choices with higher rates of return – education, for instance. Though the government bonds are very beneficial to senior citizens, only some senior citizens benefit from them, as the supply of bonds is limited.

Government bonds seem to have an adverse effect on the second group, being financial institutes (including commercial banks), as savers must withdraw their bank deposits in order to buy bonds. Consequently, not only is bank stability exacerbated due to loss of reserves, but in order to attract their money back, banks may also be forced to raise interest rates on savings and fixed deposits, with this higher fund thus also raising costs.

In fact, whether the above scenario comes true or not depends on liquidity in the banking system, being the gap between loan issues and the value of bank reserves. Currently, the liquidity in Thailand’s banking system is as high as THB 2.2 trillion, according to Bank of Thailand statistics. Thus, I doubt that the issuance of saving bonds alone, worth a mere THB 80 billion can affect the current liquidity of the country’s banking system. My opinion also aligns with those of senior executives in the Bank of Thailand and Thailand’s private banks.

Since bond issuance does not affect liquidity, commercial bank interest rates will remain the same - good news for bankers, bad news for savers!

The last group is the business sector, requiring household savings for their investment, usually through financial institutes. According to the Federation of Thai Industries (FTI), this group may be worse off due to its possible competition with the government to attract household savings. In Economics, a situation in which government spending uses up the financial resources that would otherwise be used by the private sector is called the crowding out effect. However, due to the banking system’s current huge liquidity, I do not think that the crowding out effect will be caused by bond issuance.

The real problem for the business sector is the now greater strictness in loan issuance by commercial banks, despite a huge liquidity. Since economic recession increases the probability of non-performing loans (NPLs), commercial banks tend to invest in other choices which are, though low-return, less risky. According to the Bank of Thailand, Thai commercial bank behaviour in Q1/2009 changed from that of Q4/2008. The growth rate of commercial bank loan issuance decreased significantly, from 11.6% in Q4/2008 to 4.8% in Q1/2009, while the growth rate increased for interbank loans, government bond buying and the buying of Securities.

Table 1: Commercial Bank Behaviour Change

The growth rate of…	Q1/2009	Q4/2008
Interbank loans	15.6%	12.5%
Government bond buying	9.9%	8.9%
Securities buying	15.6%	14.9%
Loan issuance	4.8%	11.6%

Source: Bank of Thailand

Therefore, I think that debt securities issuance may be the best solution for the business sector in its current context. The phenomenon of government bonds being “sold out” within ten minutes may reflect a current interest rate that is truly unacceptable; if there are savings choices that offer higher returns with acceptable risk, savers will be more than willing to immediately take the leap and invest in them. Economics views this phenomenon as an excess supply of financial resources and predicts that the interest rate of debt securities will decrease in the future. In fact, the government has revealed that the third lot of government bonds will offer interest rates that are more reduced than those of the first two lots – good news for entrepreneurs, showing that in the dark there is always a light at the end of the tunnel.

Dr Kriengsak Chareonwongsak
Senior Fellow, Harvard Kennedy School , Harvard University
kriengsak@kriengsak.com, kriengsak.com, drdancando.com