Thai central bank chief says FIDF debt service a non-issue

Thailand's central bank will make absolutely sure that its new responsibility to service a massive 15-year-old mountain of debt dating back to the Asian financial crisis does not interfere with monetary or currency policy, its governor said on Wednesday.
Having recently been tasked with servicing interest payments on the 1.14 trillion baht ($37 billion) debt, a legacy of Thailand's bailout of banks in 1997, Governor Prasarn Trairatvorakul dismisses any talk the deal will require the Bank of Thailand to generate income from its management of the currency or its dollar reserves.
"It will never interfere with any monetary policy decisions," Prasarn said. "There is no inclination whatsoever to weaken the currency." Speaking to Reuters in an interview, Prasarn said the fragility of consumer and business sentiment posed a bigger risk to the economy, which has barely recovered from the impact of heavy flooding late last year.
Inflationary expectations were contained and policy rates were suitably loose at levels slightly below the headline inflation rate, he said. "The path of monetary policy at the moment can be accommodative, at least to enhance the recovery, make it firmer, make it faster. It's already accommodative," Prasarn said.
"Probably the critical time will be from the middle of the year and within the third quarter. Probably we may see some shift in the balance of risks to growth and inflation," Prasarn said.
The Bank of Thailand has cut rates twice since the end of November. At 3 percent, its policy rate is slightly below annual headline inflation, which was 3.38 percent in January. Prasarn acknowledged there were risks from inflation. The implementation of a minimum wage of 300 baht a day could add 0.2 percentage point to headline inflation, he said. Another government measure to raise the floor price for rice could add 0.3 point, while a lowering of fuel subsidies could push inflation another full point higher.
But pressure on growth, particularly from slower exports, would help contain price rises until the third quarter when the economy would be performing closer to full capacity, he said.
The central bank chief seemed confident this week's proposal on servicing the debt owed by the Financial Institutions Development Fund (FIDF) would leave no gaps on its balance-sheet. By transferring the servicing burden to the central bank, the government hopes to free up cash for building flood defences.
Under the proposal, Thailand's banks would pay a levy of 0.47 percent on deposits, up from 0.4 percent currently. Most of the levy would be diverted from a deposit protection agency to the central bank and used to service the debt.
Analysts estimate the approximately 45 billion baht that could be raised annually through the levy will fall short of the 60-65 billion interest payments on the FIDF debt.
The Bank of Thailand would either have to issue its own bonds or generate heavier profits on its $179 billion currency reserves, they reckon. The latter would entail letting the baht weaken substantially, or lighter intervention when it appreciates.
The Bank of Thailand's calculations present a different picture, Prasarn said. There is enough cash from existing provisions in the budget, from accrued balances with the deposit protection agency, and in the form of FIDF assets to bridge the gap. In addition, the debt would be refinanced gradually at rates far lower than those in 1997, he said.
"There won't be any serious gap for us," he said. Prasarn said the central bank would increase the composition of assets denominated in the Chinese yuan this year, given China had already given it permission to buy Chinese bonds in the interbank market.
Referring to the sharp jump in the Bank of Thailand's forward positions in baht, Prasarn said that intervention was aimed at evening out distortions in the swap curve spawned by the crunch in dollar funding markets globally. The Bank of Thailand's forward book jumped by more than 50 percent to $31 billion in 2011.
"We tried to stabilise and accommodate the dollar demand from the market," Prasarn said. Prasarn said the Bank of Thailand was in talks with Singapore's central bank on a liquidity management agreement like the one it agreed with its Malayian counterpart earlier this month.. It was also looking at similar arrangements with other Asia-Pacific central banks.