A2-trillion-baht loan bill to finance seven-year infrastructure projects will gradually reduce the excessive liquidity in the country's financial system without leading to a spike in domestic interest rates, says one expert.
Commuters get off the Chao Phraya Express Boat at Nonthaburi pier last Thursday evening. Construction of the mass transit Blue Line, which crosses the Chao Phraya River from Bang Pho to Charan Sanitwong Road, is proceeding. CHANAT KATANYU
Roong Sanguanruang, chief market analyst at the Bank of Tokyo-Mitsubishi UFJ's Bangkok branch, last week said the government's megaproject investment will not dry out liquidity amid the current liquidity surplus.
But robust economic growth together with a likely fall in excess liquidity may prompt a rise in the country's policy rate next year, she said.
Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong earlier said the loans for financing infrastructure megaprojects will be sought mainly from domestic financial institutions.
A potential reversal of capital inflows after the US Federal Reserve ends its quantitative easing measures and a hefty fund-raising plan for infrastructure investment should help to mop up liquidity.
"Under that scenario, we predict the central bank will start increasing the policy rate from next year by a quarter point each," said Ms Roong.
"But it's too early to forecast the total hike, as it depends on the economic environment at that time."
The Kasikorn Research Center estimates the government will borrow 350 billion baht this year and next to fund infrastructure and water management projects.
"Borrowing for the 2-trillion-baht infrastructure plan will begin by this year's fourth quarter at the earliest," it said.
"Our view is the government's fund-raising from 2012-13 will gradually tighten liquidity rather than pressure the market so much that interest rates spike significantly."
Kampon Adireksombat, a senior economist at Tisco Securities, predicts that with the excessive liquidity now, "a crowding-out effect won't occur".
Crowding out describes when a government borrows in such large amounts that it pressures interest rates, discouraging individuals and businesses from borrowing money.
Mr Kampon said negative real interest rates and strong economic growth will be the main factors forcing the central bank to resume normalising the policy rate.
The Monetary Policy Committee (MPC) will meet on Wednesday to set the benchmark rate, which economists expect will be kept unchanged at 2.75% for the fourth straight meeting.
Tisco Securities forecasts the MPC will raise the policy rate by 25 basis points twice in the second half.
Kittiya Todhanakasem, a first senior executive vice-president of Krungthai Bank, said the banking industry has already prepared liquidity for business expansion, taking the government's borrowing plan into account.
The special deposit products of Thailand's second-largest bank by assets are normally due each month and rolled over to maintain liquidity and the existing customer base.
"If an upward trend in interest rates occurs next year, it won't result in higher funding costs, as rates will be raised for both deposits and lending," said Ms Kittiya.
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Writer: Somruedi Banchongduang & Wichit Chantanusornsiri