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REFILE-Thai government eyes 100% debt in local currency

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* Thailand to make all sovereign debt baht-denominated * Thai bond market now equal to Thai loan market * Offshore debt may still be used for infrastructure By Christopher Langner

TOKYO, Oct 11 (IFR) - The Kingdom of Thailand is planning toturn 100% of its debt into local currency by repaying upcomingyen and dollar maturities with money raised in the localmarkets, Chularat Suteethorn, director general of the PublicDebt Management Office told IFR in an exclusive interview onWednesday.

However, Suteethorn said that Thailand might still return tothe G3 market in the next five to seven years to fundinfrastructure projects.

"Our priority is to use the domestic market, but we willclosely monitor the international markets and evaluate" therelative cost of funding, said Suteethorn.

Sutheethorn met IFR in Tokyo for one of her first interviewswith Western media since taking over the position occupied byChakkrit Parapuntakul until a few months ago.

"Our bond market is growing quite rapidly in the past tenyears and now it is the same size as the commercial bank loanmarket at some THB8.2trn (USD267bn)," Suteethorn said, notingthe depth of the local market.

She noted as well that the daily average volume of tradingin government securities in the local market has grownexponentially from approximately THB20bn a day in 2007 to morethan THB80bn by September this year. Such depth allows theKingdom to contemplate the possibility of fully funding anexpected deficit of THB350bn next year solely in the localmarkets.

Suteethorn noted, though, that part of the reason thatallowed Thailand to rely solely on the local market was the factthat foreign investors have been increasing their participationand Thai government bonds onshore. That is also a strongargument against tapping the foreign currency markets, she said.Indeed, according to the Asian Bond Monitor published by theAsia Development Bank, foreign participation in Thailand's localgovernment bond market has gone from zero in April 2007 to13.15% by September 2012.

More important, though, is that recently foreign investorshave been buying more of the longer dated local currency bonds,said Tada Phutthitada, executive director of the policy andplanning bureau, who met IFR alongside Suteethorn. This fitsvery well into Thailand's strategy, as the debt management teamsaid they are planning to lengthen the average maturity of theThai debt portfolio.

"We want to extend our average maturity, which now standsaround seven years," Phutthitada said.

However, the official said that the Kingdom will do sopaying close attention to refinancing risk, hence they willavoid piling up too many maturities in the same year. To meetthat need, the sovereign is planning on issuing amortising bondsin the local market. The idea is still being hammered down, butthe debt management team said that they are looking at issuingbonds with maturities of 15, 20 and 25 years which wouldamortise in the last five years of the bond's life.

Such a bond would allow Thailand to lengthen its averagematurity but would not force investors to look at such long-termbonds given that they would look at actual durations aroundthree years shorter than the nominal maturities, which make theinvestment easier to look at.

Along the same lines, Thailand plans to issue longer datedinflation-linked bonds, after creating their first benchmarklast year. Debt officials expect to issue more on the 10-yearbond to increase liquidity and to potentially issue a new15-year inflation linked bond. They said that the Kingdom issuedthe first CPI-adjusted bond as a result of enquiries from localpension funds, which needed to meet statutory returns aboveinflation.

"Some investors were looking for something that coversinflation, so we promised something to cover inflation," saidSuwit Rojanavanich, deputy director general of the public debtmanagement office.

However, once the bonds were out, Thailand saw theadvantages of the security. Phutthitada said that now theKingdom intended to create very liquid inflation-adjustedbenchmarks that could also be used by policymakers to gaugeinflation expectations of the market. Besides, he said, "ourcentral bank has adopted inflation targeting for a while and wewant to send a message that our debt policy will go in the sameway."

According to Phutthitada, the government can afford to issueinflation-linked bonds as they have noticed that tax revenuesoutpace inflation. The official said that for every 1% ofinflation increase, tax revenues in Thailand would rise 1.14%.Ultimately, debt officials said that they expected that theincreased liquidity of inflation-linked bonds would allow localutilities to issue similar structures as well.

(Reporting By Christopher Langner; editing by Kit Yin Boey)

((christopher.langner@thomsonreuters.com))

Keywords: THAILAND LOCAL DEBT/IMF MEETING