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INFRASTRUCTURE INVESTMENT

BOT chief suggests baht bonds to fund anti-flood projects

THE NATION

Bank of Thailand Governor Prasarn Trairatvorarkul suggested that the government issue baht bonds to finance its massive investment in flood-prevention infrastructure rather than dipping into foreign reserves.

He said yesterday that using foreign reserves could create side effects in the financial market.

Virabongsa Ramangkura, chairman of the Recovery Strategy Committee, has said he does not favour financing the investment with foreign loans.

He suggested the diversion of foreign reserves as well as a change in the public debt structure to boost Thailand's borrowing capacity.

Virabongsa, during an interview on Wednesday, also suggested that the central bank should steeply lower the policy rate to boost the economy. He said the rate should not be more than 50-100 basis points above the US benchmark rate, which is now 0.25 per cent.

The BOT's Monetary Policy Committee, which will convene on November 30, has been pressured by the business community for a rate cut of as much as 50-100 basis points from 3.50 per cent at present.

Prasarn said the baht bonds would be the best strategy.

A massive bond issue might lead to a crowding-out effect and push up interest rates, but the central bank is ready to step into the secondary bond market to stem such rate increases.

He ruled out the possibility that the bonds be directly issued by the BOT, as that is prohibited by the Bank of Thailand Act, BE 2551.

Participation in the primary market is permitted only to inject liquidity, but the economy is now flooded by liquidity, he said.

"If the central bank is told to purchase the bonds in the primary market, the result would be to inject liquidity into the system. This would be against current monetary policy," Prasarn said.

He added that by law, foreign reserves must be invested only in bonds denominated in foreign currencies. In this circumstance, baht bonds are an exception.

And if the government issues bonds in foreign currencies, it is unsuitable for the central bank to buy the bonds and count them as foreign reserves. The purchase is likened to "passing money from one pocket to the other".

Prasarn noted that the government also needed to take into account the interest rates of the countries where the foreign bonds are to be issued. At present, based on Thailand's credit default swap rate of about 2 per cent, its dollar-denominated bonds would be more than 4 per cent on top of the 10-year US Treasuries yield of about 3 per cent.

Thailand's bonds at the same maturity are about 3-4 per cent.

"Wouldn't it be better to issue baht bonds?" he asked.

Prasarn also urged the government to take into account the portion of investment in Thai baht and foreign currencies if it is to issue foreign-currency bonds.

Foreign bonds should not be issued to cover baht-denominated expenses, as that would mean excess inflows to the country and could affect foreign-exchange rates.

-- The Nation 2011-11-18