After decree win, onus now on govt

The Constitution Court's February 22 verdict upholding the executive decree on the transfer of the Financial Institutions Development Fund's debt gave the government something to cheer about, but it will be seen as a true achievement only if the associated repercussions are properly addressed.

Aside from the impact of the higher financial burden on Thai banks' competitiveness against their regional peers, the chief problems concern the Bank of Thailand's operations in the foreign-exchange and money markets, the unclear structure of the proposed national development fund, and the lack of details about the government's post-flood investment plan.

On competitiveness, Thai banks are complaining that the higher deposit-protection surcharges would raise their operating cost and make them less competitive compared to banks in Asean. Financial authorities are adamant the additional surcharge of 0.07 per cent will pose a tiny burden. Still, there has been no official report on the comparative costs of banks in Thailand in Asean countries. What we know is that stock analysts expect this levy to take a toll on listed banks' net-interest margin, or NIM. Bualuang Securities said Krung Thai Bank's NIM would slip to 2.6 per cent from 2.8 per cent last year, on increased competition for deposits and the BOT's planned levies on bank deposits and bank-issued bills of exchange.

The issue at hand is rather how the transfer of the Bt1.14 trillion debt obligations from the Finance Ministry to the BOT would affect the central bank's operations. Under the decree, aside from collections from financial institutions, the BOT is to fund debt repayment through profits from operations and profits generated from reserve management.

Attending a Bank of Thailand-BIS Conference in Chiang Mai in December, Jaime Caruana, general manager of the Bank for International Settlements - the so-called central bank of central banks - expressed concern over economic conditions, which have forced advanced economies' central banks to expand their balance sheets. In his speech, he said, "It is of course the macroeconomic and financial stability of the country that should determine the policy decisions of the central bank, and not profit or loss implications for the central bank's balance sheet."

Danny Suwanapruti, senior rates strategist for Singapore-based Standard Chartered Bank, explained how the FIDF transfer could affect the BOT. In The Nation, he said it's no surprise the BOT's profit and loss account showed a loss in six of the past 10 years, as it bought dollars to stem baht strengthening. Such dollar purchases caused foreign-exchange losses and automatically injected baht into the system, and the BOT needed to suck out the excess liquidity through bond issuance (a process called "sterilisation") to avoid fuelling inflation. Danny estimated that the central bank paid 3 per cent per annum on the bonds, but earned only 0.2 per cent from dollar holdings. What would happen if the central bank had to focus more on raising profits? Forex intervention and sterilisation could be avoided, and that would simply let the baht appreciate and allow inflation to rise.

In Bangkok, Bank of America Merrill Lynch strategist for Asia-Pacific Ashok Bhundia said, "The Bank of Thailand could now be more determined to prevent the baht's appreciation" if it has to earn on foreign exchange to pay down the principal.

Winning the Constitution Court's approval, the government also won commercial banks' cooperation through a promise to charge specialised financial institutions (SFIs) the same rate of 0.47 per cent of deposits, to ensure a level playing field. But while commercial banks' contributions go to the Deposit Protection Agency (for later transfer to the central bank), SFIs' contributions will go to a national development fund.

Pleased with its ability to borrow more without hitting the debt service threshold of 15 per cent of annual expenditure, the government has no clear plan yet for the fund - most importantly, what its objective is. Investing the funds in needed infrastructure would be a positive step.

SFIs like the Government Housing Bank and the Small and Medium Enterprise Development Bank of Thailand have complained about the added burden. Yet, Deputy Prime Minister Kittiratt Na-Ranong has made it his mantra that banks will not delay deposit rate hikes or raise lending rates. It remains to be seen who will ultimately bear the burden.

The Yingluck government has won the first round, but it could be knocked out if the flood-investment plans come too late or are not properly designed.

The government now has a mandate, pending the timing of bond issuance to finance its projects. But according to a member of the government's committee on water-management strategies, the issue now is where to locate water-retention areas. Investment plans would then be developed. He expected that process to be completed this month.

The government is obviously working against the clock, and needs to spend wisely. Otherwise, the entire process could sink its mission to restore investor confidence.
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