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FIDF DEBT

Govt defies critics, passes on Bt1.14 tn debt to BOT

Wichit Chaitrong

The Nation

Central bank tasked with repaying FIDF debt, but decree omits clause giving the govt a greater say in the bank's operations; Opposition slams decision to pass executive decrees

The government has passed four executive decrees to address public debt and borrow huge amounts of new funds to finance post-flood reconstruction projects.

The government made some changes to the original draft decree for managing debt of the Financial Institutions Development Fund (FIDF) following sharp criticism from the central bank, opposition MPs and the public on the issue of fiscal and monetary discipline.

Finance Minister Thirachai Phuvanatnaranubala said yesterday that the Cabinet approved an executive decree requiring the Bank of Thailand (BOT) to pay both the principal and interest cost of the Bt1.14 trillion FIDF debt.

Annual debt servicing has crippled the government from spending more on investment as about Bt65 billion is paid as interest cost for this amount of debt, he said.

The government has repaid a total of Bt670 billion of the FIDF debt, Thirachai said.

The FIDF debt was incurred during the 1997 financial crisis following the rescue of financial institutions.

Under the debt decree, the central bank has three sources of funding for debt repayment: profit from its operations, profit generated from the central bank's reserve management and annual premiums collected from financial institutions, said Thirachai.

The controversial clause in the original draft decree, authorising the Cabinet to prescribe funding from other sources, was removed. Instead it is the central bank that has sole authority regarding its asset management.

"I have asked the central bank governor to report to the Finance Ministry a timetable for debt

repayment…it would not take a short period of time for debt payment as higher premiums collected from financial institutions would create a burden on them," said Thirachai.

Deputy Prime Minister and Commerce Minister Kittiratt Na-Ranong said ministers attending the meeting suggested that annual premiums collected by the Deposit Protection Agency (DPA) from banks may be reduced to 0.1 per cent, or even lower from 0.4 per cent of total deposits currently. This would make room for a large part of the premiums to be used for debt payment, he said. The decree requires banks to pay more annual premiums but not more than 1 per cent of total deposits.

Kittiratt defended the decrees, saying the government shoulders high debt servicing up to 12 per cent of annual expenditure, close to its legal limit of 15 per cent, so the government had to ask the central bank to repay the FIDF debt.

Kittiratt said following the issue of the executive decrees, the government will elaborate its investment plans for post-flood reconstruction to foreign investors during the Board of Investment Forum on Saturday.

He said of the Bt350 billion fund, Bt300 billion would be used to finance development projects of Chao Phraya River, Bt40 billion to finance development of 17 other rivers and Bt10 billion for infrastructure projects under the responsibility of the strategic formulation committee for reconstruction and future development chaired by Virabongsa Ramangkura.

Previously the Cabinet had approved priority projects worth Bt17.1 billion for flood prevention, to be implemented in this and the next fiscal years, he add.

Opposition MPs have opposed the decrees. Sansern Samalapa, Democrat MP, said it amounted to forcing the Bank of Thailand to print money. Moreover, the central bank's reserves should not be utilised by the government, he said.

The decrees might also breach the Constitution's article 184 as there is no emergency for issuing the decrees, he said.

"The opposition would consider whether to petition the Constitution Court," he said. Sansern, however, agreed with the government plan to set up an insurance pool to support the industry, which was hit by floods last year.

Former finance minister Korn Chatikavanij also strongly opposed the decrees, arguing the government's debt policy damaged fiscal and monetary discipline and investor confidence.

Bank depositors, borrowers, bankers, exporters or all of us inevitably will have to shoulder the cost of the executive decrees, some economists said.

Somchai Jitsuchon, research director at the Thailand Development Research Institute (TDRI), said that someone has to shoulder the burden of the FIDF debt. If the central bank collects more premiums from banks, then bankers would shoulder the cost. The bankers could also pass on the cost to depositors and borrowers. If the central bank allows the baht to appreciate against the US dollar to cut losses from exchange rate intervention, exporters would complain, as they would find their products more expensive than those of competitors.

"If the central bank chooses to print more money to pay off the debt it would lead to higher inflation and it would hurt everybody [due to the diminishing value of the baht]," he said.

Somchai and other economists have long suggested that the government increase tax rates, such as introduce a new tax on property and land or other taxes that target landlords or wealthy persons.

Though the government removed the controversial clause that authorised the government to intervene in the central bank to a great extent from the final decree, but as the government is still forcing the central bank to pay the debt, there is a high risk to fiscal and monetary discipline, he added.

-- The Nation 2012-01-11

[thaimate]

Maybe now the baht will drop a little?

[khunken]

Maybe now the baht will drop a little?

It already has & probably will some more. Unfortunately, we seem to be back in the TRT days of 'ruling by decree', the favourite method of dictatorships.

[anterian]

Maybe now the baht will drop a little?

Wishful thinking, the Baht does not obey normal economic rules.

[Kaysom]

Saturday mornings "explanation" should be interesting. Anyone getting feelings of deja vu ? Crca 1996 ?

Anyway, not to worry, looks like happy days are here again for some, especially if they have an overseas source of income.

[Roadman]

Maybe now the baht will drop a little?

Wishful thinking, the Baht does not obey normal economic rules.

It seems to be at the moment. It is falling steadily against our currency the NZ$ and we are in the position of having good pools of money both in Thailand and here that we wish to move either way depending on where it is going to go. I am seeing most economic forecast sites predicting the thai ฿ is going to nose dive, but agree with you that at times it defies the rules.

Whats the general view from the TV economics wizards?

[rakman]

When will world wide politician learn: When you're digging a (economic) hole, QUIT DIGGING!

This, like the PIIGS (Portugal, Ireland, Italy, Greece and Spain) will not end well.

[anterian]

Maybe now the baht will drop a little?

Wishful thinking, the Baht does not obey normal economic rules.

It seems to be at the moment. It is falling steadily against our currency the NZ$ and we are in the position of having good pools of money both in Thailand and here that we wish to move either way depending on where it is going to go. I am seeing most economic forecast sites predicting the thai ฿ is going to nose dive, but agree with you that at times it defies the rules.

Whats the general view from the TV economics wizards?

For over 2 years people have been predicting a fall in the Baht, it has not happened rather there has been just a slight slow decline of a few percentage points. It is clear that the Baht exchange rate is being kept artificially high although it is not clear how or why.

The exchange rate is set by two factors, international demand for that currency and manipulations by the central bank of Thailand. The demand is clearing going down which means the bank is fighting to maintain the present exchange level.

The only people who benefit from this are the old landed elite, not the new business elite and the ordinary people, however it is these old landed elite who are the majority shareholders and ultimate controllers of the bank.

[whybother]

For over 2 years people have been predicting a fall in the Baht, it has not happened rather there has been just a slight slow decline of a few percentage points. It is clear that the Baht exchange rate is being kept artificially high although it is not clear how or why.

The exchange rate is set by two factors, international demand for that currency and manipulations by the central bank of Thailand. The demand is clearing going down which means the bank is fighting to maintain the present exchange level.

The only people who benefit from this are the old landed elite, not the new business elite and the ordinary people, however it is these old landed elite who are the majority shareholders and ultimate controllers of the bank.

Wouldn't incoming business investment affect the exchange rate? (which is not the same as demand for the currency)

[anterian]

For over 2 years people have been predicting a fall in the Baht, it has not happened rather there has been just a slight slow decline of a few percentage points. It is clear that the Baht exchange rate is being kept artificially high although it is not clear how or why.

The exchange rate is set by two factors, international demand for that currency and manipulations by the central bank of Thailand. The demand is clearing going down which means the bank is fighting to maintain the present exchange level.

The only people who benefit from this are the old landed elite, not the new business elite and the ordinary people, however it is these old landed elite who are the majority shareholders and ultimate controllers of the bank.

Wouldn't incoming business investment affect the exchange rate? (which is not the same as demand for the currency)

Incoming direct investment would have to be in Bahts, indirect investments such as the direct transfer of plant, equipment and materials would be subject to tax and import duties and these would be paid in Bahts.

[whybother]

Incoming direct investment would have to be in Bahts, indirect investments such as the direct transfer of plant, equipment and materials would be subject to tax and import duties and these would be paid in Bahts.

And where do they get their Baht?

[anterian]

Incoming direct investment would have to be in Bahts, indirect investments such as the direct transfer of plant, equipment and materials would be subject to tax and import duties and these would be paid in Bahts.

And where do they get their Baht?

They have to buy them, either directly or indirectly and this helps to maintain the value of the Baht. I see where you are going, you are saying that investment in Thailand is maintaining the Baht. Are you saying that there is enough investment to maintain the Baht and will it continue? The latest news seems to be of investors looking elsewhere, there are too many risks and disincentives in Thailand, both politically and environmentally. Much proposed government infrastructure is in construction, flood control, moving parliament etc. probable beneficiaries are companies like Sino-Thai, Italo-Thai etc this will cause an outflow of Bahts.

[lannarebirth]

You never know but I'd guess it's a Baht neutral development for the time being. They have moved an "on balance sheet" liability "off balance sheet", which unless currency speculators really investigate they won't know about without some serious digging. On the other hand they've taken on a whole lot of new debt and seem to be paring their foreign reserves which ought to be Baht negative. Their rhetoric indicates they believe they will grow their way out of this new debt obligation and Debt/GDP (which isn't all that important IMO) won't change dramatically. I doubt that but it will take a few quarters to see I'm guessing.

[whybother]

You never know but I'd guess it's a Baht neutral development for the time being. They have moved an "on balance sheet" liability "off balance sheet", which unless currency speculators really investigate they won't know about without some serious digging. On the other hand they've taken on a whole lot of new debt and seem to be paring their foreign reserves which ought to be Baht negative. Their rhetoric indicates they believe they will grow their way out of this new debt obligation and Debt/GDP (which isn't all that important IMO) won't change dramatically. I doubt that but it will take a few quarters to see I'm guessing.

I would think that the currency speculators would be quite aware of where the debt has been moved.

The currency will probably start moving once the government start borrowing money and depending on exactly how they spend it.