Thailand's investment climate is likely to be supported from the positive side of the political environment after His Majesty King Bhumibol Adulyadej has graciously given a royal command for the appointment of General Prayuth Chan-ocha as the 29th prime minister of Thailand.

The end of the political vacuum has led to an expectation that the new government's development plan will stimulate nationwide consumption and investment, especially unfinished infrastructure projects, which are expected to boost Thailand's economic growth this year.

In August, Thai government bond yields declined (prices went up) as a result of two main factors.

The first was decreasing US Treasury yields due to concern over the downside risks stemming from conflict in Ukraine, which encouraged some investors to move their funds to "safe haven" assets including the US bond market.

Greater demand for US Treasuries caused their yield curve to shift down, which partly contributed Thai bond yields dropping similarly.

The second factor was capital flowing into long-term (more than one year) bonds after the domestic political tension eased up and the situation became stable. Foreign investment in long-term bonds has been seen since June after the National Council for Peace and Order declared its road map to stimulate the economy. In addition, gross domestic product in the second quarter expanded more than estimated as local demand recovered.

All of these are positive signals of economic recovery in the upcoming period, which helps regain foreign investors' confidence and tends to attract foreign funds into the Thai bond market.

Regarding investment returns in the next period, short-term bond yields will tend to remain constant because of the market's expectation that the Bank of Thailand's Monetary Policy Committee will keep the key interest rate unchanged for the rest of this year.

One supportive factor is related to the movement of the inflation rate being in line with the policy rate.

Specifically, core inflation was 1.83 per cent in August, rising slightly from 1.81 per cent in July, both of which were within the target of 0.5-3 per cent.

Meanwhile, long-term bond yields may shift down, since an increasingly favourable domestic investment environment will probably promote continued foreign capital flows into long-term bonds.

There was about Bt41 billion worth of capital outflow from the Thai bond market throughout August's 19 working days.

However, when considered in terms of maturity, it can be seen that Bt58 billion worth of foreign capital flowed out of short-term bonds (less than one year), while Bt17 billion in foreign funds flowed into long-term bonds.

At the end of August, foreign investors' bond holdings stood at Bt737,454,000,000, divided into (1) Bt600,562,000,000 of government bonds (17 per cent of total government bonds' outstanding value), (2) Bt136,176,000,000 of Bank of Thailand bonds (5 per cent of total BOT bonds' outstanding value) and (3) Bt716 million of corporate bonds (0.04 per cent of total corporate bonds' outstanding value).

However, there are still many factors investors need to be concerned about in the Thai bond market, such as the US time frame for raising its interest rates and additional European Union economic stimulus packages. These issues are likely to have an impact on global financial markets and foreign fund flows, which in turn affect bond yields and the investment environment in the Thai bond market. Therefore, investors need to follow up continuously.

By Porpit Yodsang

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