It is likely that the budget deficit during the fiscal year 2022-2023 will remain higher than pre-pandemic levels. On January 4, 2022, the Cabinet approved a fiscal 2023 budget, with a deficit of THB696 billion, down from a deficit of approximately THB700 billion for the fiscal 2022 budget, but still higher than pre-pandemic levels. Of that total, a big portion will likely be mobilized through the issuance of more government bonds and treasury bills. However, the impact on liquidity in the overall Thai bond market may be limited as the Bank of Thailand (BOT) is expected to reduce the limit of its bond issuance in 2022, and redeem some of its bonds, with the aim of releasing more liquidity into the market, and offering room for the issuance of more government bonds per the government’s borrowing plans to facilitate its COVID-19 rehabilitation measures.
Although there are ways to ease the impact of the government’s increased borrowing on liquidity in the bond market, KResearch views that the Thai government bond yields may increase during 2022, driven by two factors. They are the upward trend in the US Treasury yields, and the fact that the Thai government is scheduled to issue more bonds. As a result, the two-year and 10-year Thai government bond yields are expected to increase to 0.80%, and 2.20% in 2022, over the 0.66% and 1.90%, as of the end of 2021.
KResearch expects that liquidity in the commercial banking system in 2022 will remain at an elevated level or increase slightly (albeit not as fast as seen in 2021), because of the limited growth anticipated for commercial banking lending amid the protracted COVID-19 pandemic while there is sufficient liquidity in the form of deposits. Moreover, the BOT will likely reduce the issuance of bonds to avoid a liquidity squeeze in the system. Therefore, liquidity in the Thai financial system will likely rest with the potential capital outflows during 2022, particularly from 2Q22 onwards as the US Fed may press ahead with its tight monetary policy following the end of the QE program. Nevertheless, the BOT’s Monetary Policy Committee is expected to keep its policy rate steady at 0.50% for most of 2022, with the aim of supporting the Thai economic recovery.
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