The Public Debt Management Office has released Thailand's bond auction plan for Q1 2011. Total bond supply will be increased to Bt94.5 billion, up from Bt90 billion in Q4 2010. Key changes include reducing the size of 5-10 year bond auctions while increasing 30-year bond auctions. The PDMO may also issue more 50-year bonds depending on demand. Savings bonds of 7-12 years may be added, while developments to the primary dealer program are expected by March 2011.

1. KBank Capital Market Perspectives Market Updates
Macro / FX / Rates
News update for local bond supply in Q1 28 December 2010
Summary of Q2/FY2011 bond supply Nalin Chutchotitham - Kasikornbank
nalin.c@kasikornbank.com
The Public Debt Management Office (PDMO) has released its bond auction plan for the January-
March 2011 period (Q2 of fiscal year 2011) last week. Total supply for the quarter is increased to
Bt94.5bn from Bt90bn in Q1, inclusive of the Bt3.5bn of the new 50-year bond issue.
- In general, we expect that there would be ample liquidity to absorb the new bonds in
FY2011, especially as Bt160bn of government bonds mature during the course of the
year, indicating a net issuance for FY2011 of about Bt290bn (Fig 1), based on the PDMO-
th
Market Dialogue document dated September 17 .
- Based on the current implied yields, the sovereign yield curve is likely to see a bear-
flattening trend going forward (Fig 2), primarily due to the expectation of policy rate hikes
and the maintenance of high level of liquidity.
Disclaimer: This report
- Other important factors include the timing of rate hikes by BOT, which could be as early as
January and March. Inflation rates are expected to climb gradually but the danger is that must be read with the
the market has yet to fully price in price pressure from higher world commodity prices. Disclaimer on page 6
that forms part of it
Key changes to the Q1/FY2011 auction plan, according to the PDMO’s press release:
- Government’s Treasury cash at the end of the year is estimated at Bt250bn, hence there
would be no auctions of treasury bills in the month of January and February. (This is
expected to bring the treasury cash down to Bt75bn at the end of the quarter)
- The per-auction size of 5-10 year bonds are reduced from last year’s Bt12.5bn to Bt10bn.
While the per-auction size of 30-year bonds is raised from Bt3bn to Bt5bn. The supply of
7-year bonds is relatively unchanged from the initial plan, at Bt20bn in total for an auction
size of Bt10bn. There is a possibility that the smaller issuance of the 5-year issue and
relatively larger size of the 7-year issue would contribute to a widening yield spread
between the two tenors.
- The auction size of 50-year bond is raised from Bt1.5bn to Bt3.5bn. There is also a
possibility that the PDMO would issue more of the issue if demand turns out to be positive.
- We clarified with the PDMO with regards to changes to the initial plan (Table 3.) and
received the following response: there would be minor changes to the total issuance of
each tenor but nothing is final, pending on future market trends. Fore example, the total
issuance of 10-year bonds might be reduced from Bt70bn to Bt60bn and issuance of 12-
year bonds might be reduced from Bt40bn to Bt25bn.
Fig 1. Maturing bonds in FY2011 Fig 2. Implied bond yield curve shifts (3m, 6m, 12m)
%
Maturing Government loan bonds Implied bond yield curve shifts
bn baht 4.50
FY2011 maturing principal: Bt160bn
120
4.00
100
3.50
80
60 3.00
40 2.50
20 2.00
0
1.50
Q4/2010 Q1/2011 Q2/2011 Q3/2011 Q4/2011
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Principal Interest Dec-10 Mar-11 Jun-11 Dec-11 tenor (yrs)
Source: Bloomberg, KBank Source: Bloomberg, KBank
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2. In addition, the PDMO also stated the following changes that investors could expect as part
of the ongoing development of the bond market:
- Authorities are preparing for the eventual issuance of inflation-linked bonds in May 2011.
Prior to the first auction, the PDMO and other related organizations would hold meetings in
order to allow for greater understanding among key market participants.
- Savings bonds of tenor 7-12 year may be added to bond issuance of FY2011 (expected in
April). There was no initial budget allocated but the change might involve a total of Bt100bn
of savings bonds. It has been yet decided if fixed rate or step-up coupon would be used. The
primary purpose of these bonds is to restructure the short-term borrowings under the second
fiscal stimulus package or commonly known as TKK plan. In any case, we expect limited
impact from this lot, since the target investor group is senior citizens and other individuals.
However, it could reduce demand for the 7-12 year loan bonds among the saving
cooperatives, which are eligible for the primary market purchase of savings bonds.
- Development of Primary Dealers’ roles (PD) – PDMO is assessing the performance of PDs
and other parties involved in the trading of government debt instruments during the past 3
years for future development of the PD program. The eventual changes to the roles of PDs
would likely be finalized in March 2011.
nd
Update on fixed rate P/N auction on December 22
- Due to substantial demand from long-term investors such as pension funds and insurance
companies, the government has recently auctioned a new type of security - 12- and 18-year
fixed rate P/N. In the past, P/N had often been issued with floating rates. The issuance of
these notes can thus be seen as being targeted at specific investor group without changing
the supply plan of the loan bonds. At the same time, trading limitations of P/N as compared
to the LBs mean that the government is not increasing the accessibility of baht assets to
speculators but investors would have less liquidity. The only problem we see now is that
there might be some difficulties with marking-to-market of these securities, given the
absence of a secondary market.
- The initial B/C ratio is 1.13 for a total of Bt39.77bn issuance (initial FY2011 budget: Bt45bn)
is a little low but helps to substantiate the continued assessment that long-term investors’
demand for longer-term securities remained. Although actual yields have yet to be
announced, we expect 20-50bp of mark-up above the sovereign yields as compensation for
liquidity. Proceeds from the issuance would be used to refinance the short-term bank loans
made under the Bt400bn executive decree enacted last year.
Table 1. Announced loan bond auction calendar for Jan- Mar 2011 unit : million baht
Auction Float rate
Date LB15DA LB17OA LB21DA LB25DA LB316A LB416A LB616A LB14NA Total
05-Jan-11 - - - - - - - - 0
12-Jan-11 - - - 6,000 - - - - 6,000
19-Jan-11 - 10,000 - - - - - 8,000 18,000
26-Jan-11 - - 7,000 - - - - - 7,000
02-Feb-11 - - - - 6,000 - - - 6,000
09-Feb-11 10,000 - - - - - - - 10,000
16-Feb-11 - - - - - 5,000 - - 5,000
23-Feb-11 - - - 8,000 - - - - 8,000
02-Mar-11 - - 7,000 - - - 3,500 - 10,500
09-Mar-10 - - - - - - - - 0
16-Mar-11 - - - - 6,000 - - 8,000 14,000
23-Mar-11 - - - - - - - - 0
30-Mar-11 - 10,000 - - - - - - 10,000
Total 10,000 20,000 14,000 14,000 12,000 5,000 3,500 16,000 94,500
Source: PMDO
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3. Update on government’s revenues and expenditures
- Overall, the fiscal position remained relatively strong but fiscal balance (cash basis) had
declined as of end-November as the government quickened the pace of spending to help
boost the economy. Revenues remained on the rise but at a slower pace compared to the
expenditure, resulting in a budget deficit of Bt222bn (12-month running sum) as compared to
a deficit of Bt85bn at end fiscal year 2010 or September 30th.
- Caveats: government’s excise tax cut for diesel may worsen the fiscal position if it came
through. The Excise Department estimates that there could be a loss of Bt18bn of tax
revenue per year for a 1 baht cut in excise tax for fuels. At the same time, the government’s
extension for 4-measure subsidies to end-February 2011 (NGV, electricity, public buses, and
class-3 train fares) would also have similar negative impact on fiscal burden.
Fig 3. Government revenues and expenditure (12-m Fig 4. Government budget deficit (12-m moving sum) vs.
moving sum) 2-10 bond spread
Bt bn 12-month moving sum of fiscal balance (cash basis)
200 0
2,200
100 50
2,000
0 100
1,800
-100
150
1,600 -200
1,400 200
-300
1,200 -400 250
1,000 -500 300
800 -600 350
Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 03 04 05 06 07 08 09 10
Revenues (left axis) Expenditures (left axis) 12mth budget balance, THB bn, left axis 2-10s, bps, right axis, inverted
Source: CEIC, KBank Source: CEIC, Bloomberg, KBank
Fig 5. Government loan bond supply comparison Fig 6. Yield curve movement
Bt bn Loan bond issuance bp Government bond yield change %
500 45 4.5
Inflation-linked bonds (7-15Y)
450 40
Floating-rate bonds (4Y) 4.0
400 Non-benchmark bonds 35
350 Benchmark bonds 30 3.5
300
25
250 3.0
20
200
150 15 2.5
100 10
2.0
50 5
0 0 1.5
FY2008 FY2009 FY2010 FY2011 0.3 0.5 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 15.0 20.0 yrs
Spread (left axis) 27-Dec-10 18-Dec-10
Source: PDMO, KBank Source: Bloomberg, KBank
Fig 7. Substantial bond-swap spread remains Fig 8. Foreign holding of local debt securities stable
% % Bt bn Foreign holding in Thai GBs & fixed income year-to-date Bt bn
3.0 3.0 250 60
200 50
2.5 2.5 40
150
30
2.0 2.0 100
20
50
10
1.5 1.5
0 0
1.0 1.0 -50 -10
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
IRS 1Y 1Y bond Bibor 3m Holding (bn baht, left axis) Outright trading volume (4wk-avg, bn baht. right axis)
th
Source: Bloomberg, KBank Source: Thai BMA (a jump in Dec 24 week is due to an additional data source), KBank
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4. Table 2. The initial PDMO FY2011 Financing Plan Unit : in billions of baht
FY2010 FY2011 Change
Treasury bills -127.0 50.0 177.0
Benchmark bonds 313.0 349.5 36.5
5Y 121.6 100.0 -21.6
7Y - 65.0 65.0
10Y 74.0 70.0 -4.0
15Y 47.0 45.0 -2.0
20Y 50.4 45.0 -5.4
30Y 20.0 20.0 0.0
50Y - 4.5 4.5
Non-benchmark bonds 75.0 40.0 -35.0
2Y - -
3Y - -
7Y 55.0 -
8Y 12.0 -
12Y 8.0 40.0
14Y - -
Floating-rate bonds (4Y) 47.0 55.0 8.0
Inflation-linked bonds (7-15Y) 0.0 9.0 9.0
Total Loan Bonds 435.0 453.5 18.5
Savings bonds 82.0 0.0 -82.0
P/N 106.2 115.5 9.3
(5Y and above) 106.2 70.5
Restructuring (12-20Y) - 45.0
Bank loans 178.0 -30.0 -208.0
2-4Y 178.0 60.0
Restructuring - -90.0
Other tools (tba in April 2011) - 120.0 120.0
Grand Total 674.2 709.0 34.8
Source: PDMO, KBank
Table 3. LB auction plan for FY2011 (Q3 and Q4 estimates based on the initial PDMO document) unit : billion baht
Expect PDMO
tenor Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Q1 Q2 Q3 Q4 Total Budget
5Y 13 - 14 - 10 - 13 - 14 - 20 - 27 10 27 20 84 100
7Y - 12 - 10 - 10 - 12 - 9 - 9 12 20 12 18 62 65
10Y - 10 - 7 - 7 - 13 - 10 - 13 10 14 13 23 60 70
12Y 8 - 8 - - - 6 - 6 - 6 - 16 0 12 6 34 40
15Y - 6 - 6 - 8 - 8 - 6 - 8 6 14 8 14 42 45
20Y - 6 - - 6 6 - 10 - 6 - 6 6 12 10 12 40 45
30Y 3 - 3 - 5 - 3 - 3 - 5 - 6 5 6 5 22 20
50Y - - - - - 3.5 - 1.5 - - 1.5 - 0 3.5 1.5 1.5 6.5 4.5
4Y FRN - 7 - 8 - 8 - 7 - 10 - 10 7 16 7 20 50 55
CPI linked - - - - - - - 3 - - 3 - 0 0 3 3 6 9
Total 24 41 25 31 21 42.5 22 54.5 23 41 35.5 46 90 94.5 99.5 122.5 406.5* 453.5
Source: PMDO, KBank (red block denotes actual schedule)
*Note: Difference between total estimated supply and the initial PDMO budget of Bt453.5 comes from a smaller-than-expected supply in Q2
*Please note that the last column is pending on changes by PDMO as the year progresses
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5. Table 4. Monthly Key Economic Indicators Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10
Manufacturing index 180.0 185.0 194.2 190.1 183.7 201.5 191.6
% YoY 23.4 15.9 14.2 13.1 8.4 8.1 6.2
Industrial capacity utilization rate (%) 58.3 64.3 65.4 64.8 63.6 64.4 64.1
Retail sales (% YoY) 12.0 8.1 11.8 12.2 8.5 8.5 8.5
Total vehicle sales (units) 57,128 62,205 70,557 65,672 65,724 68,261 72,012 78,874
Motorcycle sales (units) 143,988 138,558 168,389 175,926 153,256 147,932 145,916
Unemployed labor force ('000 persons) 451 586 459 346 353 343
Unemployment rate (%) 1.2 1.5 1.2 0.9 0.9 0.9
Consumer prices (% YoY) 3.0 3.5 3.3 3.4 3.3 3.0 2.8 2.8
core 0.5 1.2 1.1 1.2 1.2 1.1 1.1 1.1
Producer prices (% YoY) 8.5 8.0 11.5 11.1 10.7 9.1 6.3 5.9
External Accounts (USD mn, unless specified otherwise)
Exports 13,832.0 16,436.0 17,878.0 15,475.0 16,292.0 17,955.0 17,046.0
% YoY 34.7 42.5 47.1 21.2 23.6 21.8 16.6
Imports 14,022.0 14,137.0 15,342.0 16,266.0 15,440.0 14,712.0 14,604.0
% YoY 44.0 53.5 38.3 36.5 41.8 15.7 13.0
Trade balance -190.0 2,299.0 2,536.0 -791.0 852.0 3,243.0 2,442.0
Tourist arrivals ('000) 1,108 815 953 1,258 1,268 1,220 1,360
% YoY 2.1 -11.8 -0.2 14.7 12.5 1.9 6.3
Current account balance -289.0 1,172.0 814.0 -1,001.0 280.0 2,767.0 2,909.0
Balance of payments 3,749 -989 2,166 1,412 3,589 4,270 5,822
FX reserves (USD bn) 147.6 143.4 147.1 151.5 154.7 163.1 171.1
Forward position (USD bn) 11.9 13.0 12.2 11.0 12.1 11.1 12.6
Monetary conditions (THB bn, unless specified otherwise)
M1 1,182.5 1,261.9 1,180.2 1,173.0 1,181.4 1,175.5 1,202.3
% YoY 11.5 14.4 15.1 15.8 11.4 11.7 11.4
M2 10,831.8 11,001.5 10,846.4 10,887.1 10,968.1 11,116.1 11,321.4
% YoY 5.4 6.7 6.9 8.7 8.4 9.8 11.1
Bank deposits 9,975.6 10,229.1 9,983.3 9,974.5 10,015.9 10,091.6 10,204.1
% YoY 4.6 7.0 6.2 7.6 6.6 7.8 8.5
Bank loans 8,995.4 9,101.2 9,196.7 9,219.7 9,299.8 9,432.7 9,580.5
% YoY 6.0 7.3 8.5 9.1 9.8 10.8 12.1
Interest rates (% month end)
BOT 1day repo (effective) 1.12 1.12 1.12 1.12 1.12 1.12 1.12 1.12
BOT 1 day repo (target) 1.25 1.25 1.25 1.50 1.75 1.75 1.75 1.75
Average large banks' minimum lending rate 5.86 5.86 5.86 6.00 6.00 6.00 6.00 6.00
Average large banks' 1 year deposit rate 0.68 0.68 0.68 0.98 0.98 1.11 1.11 1.11
Govt bond yield 1yr 1.60 1.52 1.56 1.91 1.99 2.01 1.98 2.11
Govt bond yield 5yr 3.12 3.06 2.99 3.08 2.69 2.56 2.83 2.98
Govt bond yield 10yr 3.67 3.49 3.33 3.44 3.01 3.12 3.18 3.59
Key FX (month end)
DXY US dollar index 81.87 86.59 86.02 81.54 83.20 78.72 77.27 81.20
USD/THB 32.40 32.52 32.45 32.24 31.27 30.35 29.94 30.21
JPY/THB 34.46 35.63 36.62 37.29 37.14 36.34 37.18 36.11
EUR/THB 43.07 40.02 39.71 42.08 39.65 41.38 41.76 39.22
Source: Bloomberg
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6. Disclaimer
For private circulation only. The foregoing is for informational purposes only and not to be considered as an offer to buy or
sell, or a solicitation of an offer to buy or sell any security. Although the information herein was obtained from sources we
believe to be reliable, we do not guarantee its accuracy nor do we assume responsibility for any error or mistake contained
herein. Further information on the securities referred to herein may be obtained upon request.
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