Asia Crisis Haunts Thailand With Clash Over $35 Billion Debt

Thailand’s government will today press the central bank chief to take on $35 billion of legacy debt from bank bailouts as Prime Minister Yingluck Shinawatra looks for fiscal scope to finance flood defenses.

Bank of Thailand Governor Prasarn Trairatvorakul meets with cabinet members in Bangkok over the proposal to shift the debt to the BOT’s balance sheet. Deputy Prime Minister Kittiratt Na-Ranong said yesterday the step would save the government as much as 65 billion baht ($2 billion) in annual interest costs that could be used to fund anti-flood measures.

The push risks deepening concern that Yingluck’s administration is infringing on the central bank’s independence, after Kittiratt in October said the BOT should lower interest rates to help businesses cope with the country’s worst flooding since 1942. The government itself lacks unanimity on the move, with Finance Minister Thirachai Phuvanatnaranubala warning it could hurt investor confidence and stoke inflation.

“The weakening of the baht in the last few days may come from this concern about inflation,” said Somprawin Manprasert, an economist at Tisco Securities in Bangkok. “It’s not a good thing to do at all and will hurt both fiscal and monetary discipline. People will start to think that if the government can do it one time, they can do it again when debts pile up.”

The baht yesterday fell the most in two months to 31.75 per dollar, the weakest level since Aug. 16, 2010, according to data compiled by Bloomberg. It was unchanged today as of 8:46 a.m. in Bangkok, set for its biggest annual loss since 2005. The benchmark SET Index has dropped 1.8 percent over the past six days, the worst performer in Asia after Vietnam in that time.

‘Quite Strange’

Thailand’s Cabinet resolved earlier this week to study moving 1.1 trillion baht in debt incurred bailing out financial institutions 14 years ago onto the central bank’s balance sheet. Prasarn said this week it was “quite strange” that the government didn’t discuss the debt transfer officially with the central bank before bringing the issue to the Cabinet.

“Our losses on the balance sheet will be higher and that may affect confidence,” Prasarn told reporters on Dec. 28.

The Financial Institutions Development Fund racked up a 1.4 trillion baht debt during the 1997 Asian financial crisis on loans aimed at rescuing struggling lenders. The government closed more than 60 non-bank financial companies and seized half of the nation’s 14 commercial banks that received help from the fund.

Under a repayment agreement in 2002, the finance ministry makes interest payments while the central bank pays down the principal whenever it earns a yearly profit. The Bank of Thailand has reported annual net income once since 2004 and last year reported a net loss of 117 billion baht, mostly due to losses on foreign exchange.

Proud to Repay

Since 1997, the principal on the debt has fallen by 300 billion baht, or about 21 billion baht per year. During that time the government has paid as much as 65 billion baht in interest annually, according to Kittiratt, who said yesterday the central bank would report a “record high profit” for 2011.

“The central bank should be proud that they can take care of part of the nation’s debts,” he told reporters in Bangkok yesterday. “If we transfer the debt to the Bank of Thailand, it will help reduce the government’s concerns.”

The move would reduce the public debt-to-gross domestic product ratio by 10 percentage points from 40 percent now, providing room for more government borrowing, Kittiratt said. Thailand’s Cabinet this week approved a proposal to borrow 350 billion baht to set up a fund for long-term water-management projects following the floods.

‘Amend the Bible’

The government’s move has more to do with sidestepping restrictions on budget deficits than its ability to borrow, said Sethaput Suthiwart-Narueput, managing partner of Advisor Co., a Bangkok-based corporate advisory, and former executive vice president of Siam Commercial Bank Pcl. Yingluck’s government could spend more by passing a stimulus bill as the previous administration did in 2009, he said.

Thailand’s Budget Procedures Act passed in 1959 prevents the government from borrowing more than 20 percent of approved annual budget expenditures plus 80 percent of expenses allocated to government debt payments.

The government is “trying to get more spending out without having to issue a new law,” he said. “They certainly don’t want to amend the budget law because to do that it would be seen as ‘Oh my God, they are undermining the fiscal discipline our forefathers put in place.’ It’s like trying to amend the Bible.”

Printing Money

Thirachai, the finance minister, suggested allowing the use of interest from the country’s $167 billion in foreign reserves, amounting to 25 billion baht this year, for debt payments. His predecessor under the previous government, Korn Chatikavanij, said such a move would “retain the prudency and accountability and transparency of the current structure.”

The debt “is a burden for sure, but what would be worse is trying to push it off the government balance sheet and pretend it doesn’t exist,” Korn said in a telephone interview. “It would also be detrimental to the central bank, which would have no way to repay the debt except printing fresh money.”