Q+A - Thai stimulus spending and the bond market

BANGKOK, Sept 17 - Thailand's cabinet approved this month the first disbursement of its 1.43 trillion baht ($42 billion) economic stimulus plan and said it would ramp up government borrowing in the next fiscal year to help pay for it.

The borrowing plan has the bond market bracing for more government bond issuance. Complicating the outlook are doubts over how long Prime Minister Abhisit Vejjajiva will stay in power due to Thailand's protracted political crisis.

An early election could derail the three-year stimulus plan.

Here are some questions and answers about the programme based on data provided by the Finance Ministry and interviews with analysts and economists:

WHAT IS THE FINANCING PLAN FOR THE STIMULUS PLAN?

The government plans to spend 1.43 trillion baht over three years, beginning in the fiscal year starting Oct. 1, which the finance minister said is the equivalent of about 5 percent of gross domestic product a year.

In effect, it is the country's second stimulus plan after small 100 billion baht plan earlier this year. In the second quarter, Thailand emerged from its worst recession in 11 years.

More than half of the 1.43 trillion baht will be raised from five- to 30-year government bonds and other debt outside the normal budget process. About 12 percent will be raised on the budget books.

Another 12.5 percent will be provided by contributions from state enterprises, 1.9 percent from private investors and 16.4 percent from concessional loans from lenders such as the Asian Development Bank and Japan International Cooperation Agency, which provide financing for Thai infrastructure projects.

The government plans to borrow 801 billion baht in the next fiscal year, up from 683 billion baht planned for the current fiscal year. The borrowing is for the stimulus plan and regular budgetary needs.

WHAT IS THE LIKELY IMPACT ON THE BOND MARKET?

The yield on five-year Thai bonds rose 10 basis points on Wednesday in reaction to the government's borrowing plans for the next fiscal year. Ten-year yields rose 13 basis points.

RBS analysts say the government borrowing plans include an increase in issuance of longer-dated debt, a recognition that prompted a steepening in the Thai yield curve.

The spread between one-year and 10-year Thai government bonds swelled to 245 basis points, the widest in a month.

Analysts predict Thai bond yields will rise at least 100-200 basis points over the next 12 months. Apart from government borrowing pressure, inflation is expected to pick up and the central bank is seen starting to raise interest rates. Finance Ministry officials say they will be prudent on the timing of when they issue new long bonds to soften the impact.

WHICH SECTORS WILL BENEFIT FROM STIMULUS INVESTMENT?

The stimulus package is front-loaded with thousands of small "shovel ready" projects -- irrigation schemes, asphalt roads, upgrades of rural schools and district health clinics.

These will cost 300 billion baht, over a fifth of total spending, over the next 12 months. Analysts say the plan is designed to boost the prime minister's Democrat Party in the north and northeast, strongholds of rival former Prime Minister Thaksin Shinawatra.

Deputy Prime Minister Korbsak Sabhavasu has told Reuters that for larger infrastructure projects requiring private sector participation, the government would spend about 12 months fine-tuning details before even calling for bids.

Close to 40 percent of the overall stimulus money is earmarked for public and mass transport projects, following by water and natural resources at 17 percent and energy and renewable energy at just over 14 percent.

The plan will benefit construction materials and asphalt makers such as Siam Cement, Siam City Cement and Tipco Asphalt, analysts say.

Building contractors such as Italian-Thai Development, Ch Karnchang and Sino-Thai Engineering are expected to benefit from the transport plans.

WHAT ROLE WILL POLITICS PLAY IN THE STIMULUS PLAN?

Abhisit has until late 2011 to call a general election, but the slim majority his six-party coalition holds in parliament makes it unlikely he can put off the poll until then. Many analysts expect an election next year.

An early poll would be negative for the economy and financial markets even if Abhisit is returned to power, a highly uncertain prospect. If he loses power, stimulus projects could face months of delay and major adjustments from a new government.

Politics aside, analysts say governments have traditionally achieved only about 70 percent of their investment plans in any one year. ($1=33.95 baht)