Thailand may struggle to sell a 75 billion baht ($2.36 billion) bond to fund its rice intervention scheme, fund managers said on Monday, risking further delays on payments to farmers.
The state Bank of Agriculture and Agricultural Cooperatives (BAAC) needs money from the bond, its biggest ever, to pay farmers for rice bought at above market prices in a subsidy scheme that has cost the government 680 billion baht so far.
Farmers, a key support group for the government of Prime Minister Yingluck Shinawatra, have threatened to join growing anti-government protests as they have not been paid for their rice since the scheme was renewed in October.
Underwriters began sounding out institutional investors on Friday and will set the price on Monday when book-building ends. The bond will be issued on Nov. 29.
"The bond is really big and I think it may not be sold out," said Chajchai Sarit-apirak, first senior vice president at Kasikorn Asset Management, which holds BAAC bonds.
"If the government wants to sell it all, they have to offer a high spread."
Thailand's finance ministry said last week it would borrow from banks or allow them to bid on the unsold portion if institutional interest fell short.
BAAC, which funds the rice scheme, has sold about 123 billion baht ($3.9 billion) of debt this year but had to cancel three auctions last month. BAAC officials were not immediately available to comment.
The latest bond, a three-year note guaranteed by the government, will be used to pay for the main harvest while a second smaller issue will be needed for the subsequent crop.
"I've talked to other fund managers and they also think although the bond is guaranteed by the government, they don't want to support the rice buying scheme because it's not transparent," said a bond dealer at a domestic bank.
Thailand buys rice at 15,000 baht a tonne, well above market rates. The subsidies are popular among farmers whose support swept Shinawatra to power in 2011 in a landslide election.
They are the cornerstone of economic policies aimed at lifting rural incomes to stimulate consumption in the mould of her brother, ousted prime minister Thaksin Shinawatra. He funneled money into villages through cheap loans and a debt moratorium for farmers while in power from 2001 to 2006, creating a knock-on effect on the whole economy.
But the government has failed to pay farmers for rice collected since October, when the scheme was renewed for a third year, leading to the risk that its core supporters could turn against it.
On Sunday, about 100,000 anti-government protesters gathered in Thailand's capital, as simmering tensions between Bangkok's middle classes and the mostly rural supporters of Thaksin threatened to boil over.
Chajchai at Kasikorn Asset Management said the spread between the latest BAAC bond due November 2016 and sovereign paper would need to widen to as much as 40 basis points to be attractive. If they buy it, "we will probably have to hold it to maturity," he said.
In the secondary market, the yield on three-year government bonds rose 11 basis points to 3.26 percent on Friday, as prices fell, partly in response to the BAAC offer. It was at 3.23 percent on Monday.
The government had spent up to 680 billion baht ($21.4 billion) on the rice-buying rice programme and has said it would spend another 270 billion baht in the 2013/14 crop year from Oct. 1.
The multi-billion dollar cost of the scheme has led to a warning from rating agency Moody's and a rebuke from the International Monetary Fund about the fiscal impact.