The Bank of Thailand (BOT) will start selling 50 billion baht (US$1.7 billion) worth of savings bonds this month in another move to drain excess liquidity brought about by enormous capital flows into Thailand.
According to Citi Research, the central bank probably absorbed 160 billion baht (US$5.3 billion) of excess liquidity between April and July.
The BOT savings bonds, the first series this year, come in two tranches: three-year bonds with floating rate, and seven-year bonds with fixed rate. Minimum subscription is 50,000 baht (US$1,671) and they will be on sale from August 26 until September 6. The coupon rates will be finalised on August 25.
BOT Assistant Governor Pongpen Ruengvirayudh hinted that the coupon rate might range from 3 to 5 per cent based on the 3.53-per-cent three-month Bangkok Interbank Offered Rate.
Since the interest rate on a three-month fixed deposit is 1.7-2 per cent, and the yield from government bonds is 3.57 per cent, the BOT savings bonds should be attractive for investors, she said. The bonds are also being launched to cash in new limits by Thailand's Deposit Protection Agency.
She said the bonds were low-risk financial instruments, and the timing was good for investors who might be concerned about risks amid inflation and the global economic instability.
Citi Research said that in July alone, the BOT might have absorbed 60 billion baht (US$2 billion) of liquidity, reflected in the expansion of its net forward positions. As of August 8, the net forwards, representing accumulated net "buy" foreign-currency swap contracts, posted another new high of US$26.6 billion (794 billion baht), which was US$7 billion higher than at the beginning of this year.
"This suggests persistent sterilisation by the BOT to drain liquidity that may have been aggravated by rising offshore portfolio investment flows," Citi said. "However, the sterilisation impact may have been muted by the liquidity effect of rising gross international reserves (GIR). From April to July, we estimate an additional 181 billion baht (US$6.1 billion) in liquidity contribution from GIR."
Citi is convinced that the forward positions will rise amid the persistent liquidity challenge. As of August 8, the forward ratio was 8 per cent of total foreign reserves, against 20 per cent in early February 2008. Citi expects the ratio to rise to 20 per cent or more if offshore portfolio investment flows strengthen, bringing the risk of an excess-liquidity situation.
As of August 8, Thailand's foreign reserves stood at US$186.7 billion. Including forward positions, the reserves totalled US$213 billion.
Meanwhile, Bank of Thailand's intervention in the spot market during these months may have "funded" the expansion of the forward book. BOT's spot purchases were swapped for baht liquidity in the onshore foreign currency market. From April to August 8, the forward book expansion amounted to US$5 billion.
