Banks seek clarity on FIDF debt

Banks seek clarity on FIDF debt

The great flood of 2011 has already cost the country plenty, both in terms of lives and property. Could the next casualty be Thailand's long-term economic health?

The government last week passed four executive decrees ostensibly aimed at rebuilding the country and ensuring that a similar tragedy will not be repeated. One of the decrees transfers responsibility for 1.14 trillion baht in bailout debt from the 1997 economic crisis from the central government back to the Bank of Thailand.

Cabinet ministers reasoned that the move is needed to free up room in the budget, both today and tomorrow, to allow for new investment in water management and basic infrastructure through the next decade.

The existing version of the bill dilutes significantly from the previous one. The cabinet's machinations left just one week for discussions with the central bank. None of its officials have yet seen an official version of the decree.

The government says the decree does take into account the central bank's concerns, with amendments made to several sections from earlier drafts, particularly section 7 related to the use of the country's official reserves.

But even so, the entire framework of the draft raises several key questions about the management of the bailout debt and the role of the FIDF going forward.

The Financial Institutions Development Fund was created in 1985 following talks between the Finance Ministry and the central bank. The ministry entrusted the central bank with overseeing the FIDF in its role of addressing problems in the financial sector. As a result, it was the central bank which in practicality had oversight over the 1997 debt. The new FIDF debt bill empowers the central bank to collect an annual fee from banks up to 1% of their deposits, with penalties levied for banks that do not meet their obligations.

It seems logical that the government wants banks to share the fiscal burden from the 1997 crisis. But the approach raises the question of how much this will affect the local financial landscape, amid already stiff competition and expected pressure in the future from liberalisation.

Policymakers say that for the near-term, the 45 to 55 billion baht in interest expenses paid on government bonds issued to finance the FIDF debt will be funded with little to no additional cost to the public. Some 30 billion baht alone will come from transferring the existing 0.4% levy on bank deposits now paid to the Deposit Protection Agency, to the FIDF.

Other funds will come from a new levy on bank bills of exchange and revenues from the management of assets controlled by the FIDF.

The principal debt is another matter. Over the past decade, the principal debt has fallen by just 230 billion baht, compared with over 600 billion paid in interest.

A 1998 decree passed by the Chuan Leekpai government assumed that the principal would be partly paid through the central bank's operating profits and revenues received from state enterprise privatisation.

A later decree passed in 2002 under the Thaksin Shinawatra government called for the FIDF debt to be paid through returns generated from the management of the country's official reserves.

Where did this debt come from? Of the initial 1.4 trillion baht in liabilities, 550 billion came from the blanket guarantee on deposits and creditors for ailing financial institutions ordered by the Chavalit Yongchaiyudh government. Another 650 billion baht in liabilities came from losses in the loan assets taken from failed banks. Another 170 billion baht in losses came from the declining value of bank stocks held by the FIDF.

The central bank's failure to pay down the FIDF principal debt stems from technical obstacles regarding how profits and losses are booked under the bank's accounts. Efforts to address the accounting obstacles have met with political resistance by past _ and the current _ government, owing to social sensitivities regarding any move that may affect the country's reserve accounts. Nor has any government made any genuine effort to rethink financing alternatives, say by opening a parliamentary debate to consider what other means are possible for dealing with a debt burden equal to over 10% of the country's annual economic output.

No wonder that local banks are nervous they ultimately will be saddled with the responsibility of paying for past mistakes. At a meeting last Friday, members of the Thai Bankers Association asked the central bank for clarity in its repayment plans for the FIDF debt, which may take as many as 30 years into the future. Another point of possible contention is whether the FIDF charges unfairly benefit specialised state-owned banks, such as the Government Savings Bank or Government Housing Bank, which already are exempt from having to contribute to the Deposit Protection Agency as a result of the implicit guarantee of full protection from the state due to their special legal status.

The market share of specialised banks has also grown sharply in recent years as a result of government-directed policy programmes in areas such as agriculture and community development.

In any case, the central bank has insisted it will not monetise the FIDF debt by simply printing money, nor will it tap the country's foreign reserves. Instead, regulators will have to walk a tightrope in setting the FIDF charges, knowing well that while a high levy may help reduce the debt further, local banks would certainly pass on the charges to the public in terms of lower interest on deposits and/or higher rates for credit.

For the government, meanwhile, any decline in the FIDF debt will result in added borrowing room for the future. Herein lies the danger. No one questions that the FIDF debt is an issue that needs a solution. But arguing that the debt transfer is necessary today to allow new spending, without considering the efficiency and priority of how existing budget funds are used, is duplicitous.

The government stated that it would focus on short-term measures to improve the country's water management to ensure that any flooding that may occur this year is contained. It argues that a rapid solution is necessary to help secure investor confidence.

Perhaps. But the 1997 debt, which will be paid for by generations to come, accumulated rapidly within the span of only a few years, as a result of ill-considered policies enacted in the midst of a crisis. Thailand would do well to avoid repeating the same mistakes.

Parista Yuthamanop is a senior business reporter for Bangkok Post.

Parista Yuthamanop

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