Back to Bangkok Post
Back to index page

Go to top

Go to business news updates
Back to Economic Review index page

 

The huge cost of bailing out the financial sector, combined with deficit spending to boost the economy, means a balanced budget could be five years away

 

FISCAL POLICY

Debt bites deep into budget

WICHIT SIRITHAVEEPORN

Perhaps one of the greatest policy challenges facing the next government will be managing Thailand's growing public debt.

Four straight years of deficit spending and the massive cost of bailing out the financial sector will put greater constraints on fiscal policy than ever before, as debt service costs take an increasingly higher share of each year's budget.

Public debt which must be directly serviced from the central budget currently stands at around 1.01 trillion baht. In fiscal 2001, service costs stand at around 7.9% of the 910-billion-baht budget.

This year's budget already envisions a deficit of 105 billion baht, excluding refinancing costs for some 500 billion baht in bonds issued in 1998 for liabilities of the Financial Institutions Development Fund.

Sommai Phasee, deputy finance permanent secretary, doesn't expect to see Thailand's budget position balanced for at least five years. ''So what we have to do is look at ways to minimise the costs as much as we possibly can,'' he said.

At the Public Debt Management Office, various models show how precarious the situation stands.

For instance, if future governments approve a 10% rise in the budget deficit to spur growth, total debt from 2002-2006 will rise by 705 billion baht.

If combined with the projected additional losses by the Financial Institutions Development Fund, total debt in five years under a more expansionary fiscal policy would rise to 1.6 trillion baht, excluding interest.

The PDMO is drafting a five-year debt management plan based on spending priorities outlined in the ninth social and economic development plan running from Oct 2001 to 2006.

A first draft is expected to be completed by the end of the year, with revisions to be made later once the new government is formed and spending priorities defined.

Paying the bill

The largest portion of the public debt comes from losses incurred by the Financial Institutions Development Fund from its bail-out of banks and finance companies over the course of the crisis.

Current policy calls for principal losses to be paid through two sources. First, from proceeds gained through the privatisation of state enterprises, but over the past two years, poor market conditions and public resistance have slowed the privatisation process. To date, share sales have reaped the government only around 900 million baht in funds, primarily from the divestment of shares in Electricity Generating Co and PTT Exploration and Production.

The second source of revenue to repay the debt comes from profits gained by the Bank of Thailand, 90% of which must be turned over to a special fund to service expenses. With proceeds of around 30-40 billion baht per year, the funds are sufficient to cover interest expenses on the 500 billion baht in bonds issued in mid-1998.

The Finance Ministry says until economic prospects improve to allow the budget position to return to surplus, existing debt must be continuously rolled over.

Public debt, as a share of gross domestic product, stands at around 55%, high by Thai historical standards but considered serviceable by most experts.

Foreign debt increasingly is being refinanced through domestic borrowings to take advantage of lower interest charges and to minimise foreign exchange risks in the future.

Total outstanding foreign debt held by the government and state enterprises stands at $22 billion. The debt-service ratio, a projection based on export earnings and servicing costs, is estimated to remain stable at around 4% over the next 4-5 years, well below the 9% ceiling set by law.

As for the 800 billion baht in additional losses of the Financial Institutions Development Fund which remain to be fiscalised, a cabinet decision this year agreed to have the Finance Ministry guarantee bonds issued by the fund, rather than serve as the issuer itself.

Bond issues by the development fund will be staggered, to avoid imbalances in the local financial markets. The Finance Ministry will guarantee bond issues equal to the shortfall in the fund's capital funds, booked within 120 days after the end of the fiscal year in its audited accounts.

A high-level committee chaired by a deputy finance permanent secretary has been set up to assess the development fundû losses and financing options.

Mr Sommai says the main task for fiscal policymakers is to find a way to ''smooth'' management of the public debt. Transparent, open reporting of the debt burden is needed to help retain market confidence.

The Finance Ministry hopes to gain significantly greater flexibility in overseeing public coffers once the Public Debt Management Act becomes law sometime in 2001.

The new law will allow the ministry to refinance and restructure debt liabilities more easily, by clearing away obstacles such as the prohibition from new borrowings if the budget is in surplus and by setting up a new framework on government guarantees for state enterprise debt.

Guarantees for state enterprise borrowings are now made with little consideration of the credit rating of the enterprise. The new law will allow the ministry to charge a guarantee fee against state enterprises, based on their credit rating, encouraging agencies toward internal reforms.

The new act will also require agencies to submit reports on foreign borrowing plans to parliament, increasing oversight and transparency over the process.

A silver lining

While no one expresses happiness at Thailandû deteriorating debt position, one benefit has been increased opportunities for development of the domestic bond markets.

Many economists agree stronger bond markets could have mitigated much of the impact of the financial crisis. Currently some 70-80% of all financing needs are met through bank loans, although growth of the bond markets is expected to reduce this to around 50% within a few years.

Mr Sommai says it is a pity that for years before the crisis, when budget surpluses were the norm, little priority was given to the development of the bond market as an alternative to equities and bank loans when funding companies.

For fiscal 2001, the Finance Ministry plans to finance the budget deficit through short-term treasury bills, which will eventually help the development of interest rate benchmarks for the money market.

Back to Economic Review index page
Go to top of this page
Go to business news updates
Back to Bangkok Post front page