FIDF DEBT

Top economist calls for compromise

SEETALAVAJIT SABAYJAI

THE NATION

Standard Chartered Bank (Thai)'s senior economist has suggested that the government and the Bank of Thailand should compromise on the handling of the Financial Institutions Development Fund's Bt1.14-trillion debt to prevent any negative impact on the central bank's creditability and foreign investor confidence.

This issue requires more time to be resolved, Usara Wilaipich said yesterday.

"Both [the government and the BOT] should sit down and talk with a view to seeking proper ways out that are acceptable to both," she said.

The debt of the Financial Institutions Development Fund (FIDF) was incurred as a result of a Cabinet resolution during the bail-out of financial institutions following the 1997 crisis.

If the management oversight of the entire FIDF debt-is transferred to the central bank, the first question from foreign investors to the government and the central bank would be over the latter's debt-repayment capability, Usara said.

That could also affect its capability to manage the country's monetary policy, she added.

"We need the government to take a step back and give itself more room and time for other alternatives to solve the debt issue, and the central bank could also take a step back to ponder over more flexibility in its accounting method," Usara said.

Currently, the BOT has suffered losses on its income statement as a result of the interest burden from absorbing liquidity in the financial system, and mark-to-market losses from foreign exchange.

The central bank now uses the mark-to-market method to realise forex losses from its investment in assets like US Treasuries and gold, but it does not use the mark-to-market gains from the investment of the country's foreign reserves.

Usara suggested the central bank should adjust its conservative accounting practices for parts of its forex gains and losses in order to help swing its income statement from red to black and resolve at least some aspects of this knotty issue.

"What the central bank could do is to use the mark-to-market method in both gains and losses from reserves management," the economist said.

If the central bank's income statement contains some profit, it may be able to make repayment of the principal of the FIDF debts, which has to be completed by 2031.

To avoid any negative impact on the BOT's creditability, the government could also transfer FIDF debt handling to the central bank at a gradual pace, she added.

To lower pressure on the overall public debt, she suggested the government employ the public-private partnership model to finance its public investment, such as in water-resources management projects.

There is also some room - about 20 per cent of gross domestic product, or Bt2 trillion - for more borrowings for public investment before reaching the nation's debt ceiling of 60 per cent.

The current public debt is about 40 per cent of GDP.

"Public debt is now not critically high," Usara said, pointing out that it was very low compared to that of the Kingdom's regional peers and Organisation for Economic Cooperation and Development countries.

In response to the government's planned spending of money from the Deposit Protection Agency, Usara cautioned that some bankers had questioned the fee rise inherent in such a plan, which she said would likely become an additional burden on consumers.

"If the government continues in its plan to push this, it could undermine market sentiment," she said, adding, "There is still uncertainty about this."

As regards the country's international reserves, Usara said the central bank may need other alternatives to deal with the FIDF debt issue than dipping into the reserves, as part of the reseerves contain borrowed assets through foreign direct investment and portfolio inflow.

This part of the international reserves is required to give some liquidity to foreign investors when they need to move their capital out of the country.

The foreign-currency reserve is also needed to back up the baht, she added.

-- The Nation 2012-01-10

I thought Standard Chartered is a Foreign bank, and they are working for their Farang share holders.

Conflict of interest?