Thai government eyes 100% debt in local currency

* 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

Oct 11 (IFR) - TOKYO, Oct 11 (IFR) - The Kingdom of Thailand is planning to turn 100% of its debt into local currency by repaying upcoming yen and dollar maturities with money raised in the local markets, Chularat Suteethorn, director general of the Public Debt Management Office told IFR in an exclusive interview on Wednesday.

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

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

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

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

She noted as well that the daily average volume of trading in government securities in the local market has grown exponentially from approximately THB20bn a day in 2007 to more than THB80bn by September this year. Such depth allows the Kingdom to contemplate the possibility of fully funding an expected deficit of THB350bn next year solely in the local markets.

Suteethorn noted, though, that part of the reason that allowed Thailand to rely solely on the local market was the fact that foreign investors have been increasing their participation and Thai government bonds onshore. That is also a strong argument against tapping the foreign currency markets, she said. Indeed, according to the Asian Bond Monitor published by the Asia Development Bank, foreign participation in Thailand's local government bond market has gone from zero in April 2007 to 13.15% by September 2012.

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

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

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

Such a bond would allow Thailand to lengthen its average maturity but would not force investors to look at such long-term bonds given that they would look at actual durations around three years shorter than the nominal maturities, which make the investment easier to look at.

Along the same lines, Thailand plans to issue longer dated inflation-linked bonds, after creating their first benchmark last year. Debt officials expect to issue more on the 10-year bond to increase liquidity and to potentially issue a new 15-year inflation linked bond. They said that the Kingdom issued the first CPI-adjusted bond as a result of enquiries from local pension funds, which needed to meet statutory returns above inflation.

"Some investors were looking for something that covers inflation, so we promised something to cover inflation," said Suwit Rojanavanich, deputy director general of the public debt management office.

However, once the bonds were out, Thailand saw the advantages of the security. Phutthitada said that now the Kingdom intended to create very liquid inflation-adjusted benchmarks that could also be used by policymakers to gauge inflation expectations of the market. Besides, he said, "our central bank has adopted inflation targeting for a while and we want to send a message that our debt policy will go in the same way."

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

(Reporting By Christopher Langner)