Rice scheme hits bonds sale

Interest rate govt pays to borrow money increasing under burden of financing the rice subsidy program for farmers.

BOND MARKETS & RICE 

Rice eating hole in budget, swells bank spread

Bloomberg

16/08/2013 

The rising burden of the rice-buying programme has undermined demand for bonds issued by the Bank for Agriculture and Agricultural Cooperatives (BAAC).

The state-owned bank for farmers has sold about 90 billion baht of debt this year, the biggest local-currency issuer in Southeast Asia, with most of the funds used to buy rice at above-market rates to boost rural incomes.

The lender's last four auctions have not been fully sold and the spread between its government-guaranteed notes due February 2016 and sovereign paper maturing December 2015 widened eight basis points this year to an unprecedented 34 basis points on Aug 13.

Prime Minister Yingluck Shinawatra's administration lost 137 billion baht in the first year of the programme through September 2012 as it sold the grain, government estimates show. Export rice prices fell 14% this year as global stockpiles climbed to a 12-year high. The losses are credit-negative and could jeopardise the goal of balancing the budget by 2017, Steffen Dyck, assistant vice president at Moody's Investors Service in Singapore, said last month.

"Appetite to absorb this kind of financing, which has become a bit of a controversial issue, basically declined,'' said Santitarn Sathirathai, a Singapore-based economist at Credit Suisse AG, Switzerland's second-largest bank, said in an Aug 13 interview. The bank is a quasi-fiscal instrument and its financial health is very much tied to the government.

After a run of eight successful auctions from October through June, the BAAC failed to meet its sales target at the last four offers, according to data on the Thai Bond Market Association website.

Ms Yingluck backtracked on a plan to lower rice-purchase prices by 20% last month after farmer protests, opting to keep them at a maximum of 15,000 baht a tonne. Around 337 billion baht was spent on buying rice in the first year of the program, and 317 billion baht is expected to be spent in the second year, according to BAAC.

The price of Thai 5% broken white rice, an Asian benchmark, was $505 per metric tonne on Aug 14, compared with $584 at the end of last year, data compiled by Bloomberg show. The 15,000 baht the government pays for rough rice translates into a milled white-rice price of around $750 a tonne, according to estimates by exporters and traders in Thailand.

The rice-buying programme has impaired fiscal transparency and hampers progress toward deficit reduction, Moody's Dyck said. Thailand's debt as a percentage of gross domestic product is 43%, according to data compiled by Bloomberg. That's higher than Indonesia's 25%, although lower than 51% in the Philippines and Malaysia's 54%.

"We stopped buying this issuer as we have concerns about the potential loss amount on the government rice scheme,'' Porntipa Nungnamjai, a fund manager at Krungsri Asset Management said in an Aug 13 interview. "The spread may widen further from here if the bank continues to issue more bonds.''...

...The yield on BAAC bonds due February 2016 has risen 19 basis points to 3.15% since the end of May, according to data compiled by Bloomberg. Because the lenders debt is government guaranteed, the increase will be limited, Teerasan Dutiyabodhi, a senior fund manager at TMB Asset Management, said in an Aug 13 interview.

The yield difference is more than for other state-backed bonds. Bangkok Mass Transit Authority's three-year securities and Government Housing Banks notes due 2015 both yield 20 basis points more than similar-maturity government debt, according to data compiled by Bloomberg.

Sentiment surrounding this bank is not strong due to the huge burden from the rice scheme, Nalin Chutchotitham, an analyst at Kasikornbank Pcl, Thailand's fourth- largest lender by assets, said in an Aug 14 interview. "The spread may widen further.''

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