The Finance Ministry proposes a debt shift to boost the economy amid tensions with the central bank. Thailand’s Finance Ministry seeks to offload ฿570 billion FIDF debt to the central bank. The ministry hopes to reduce public debt by 5 percentage points as economic indicators worsen. June interest rate cut may still be unlikely, potentially fueling further discord between the government and the Bank of Thailand.

Thailand’s central bank and the new Ministry of Finance under Deputy Prime Minister Pichai Chunhavajira remain at loggerheads. With some economists now suggesting that a June interest rate drop is looking unlikely, an intriguing new proposal has emerged from the ministry. It is reportedly seeking to offload a ฿570 billion debt under the Financial Institutions Development Fund (FIDF). This was created during the 1997 Financial crisis. This fund is currently administered by the Bank of Thailand and paid for by a levy on bank deposits. It is understood that such a proposal has been communicated to the central bank.

New Minister of Finance Deputy Prime Minister Pichai Chunhavajira took up his role last Tuesday. Already, there is a significant proposal from the ministry to the Bank of Thailand. The government is seeking to offload the Financial Institutions Development Fund (FIDF), which currently holds ฿570 billion in public debt obligations. The fund is administered by the Bank of Thailand and paid for by a bank deposit levy.

Reconciliation between the Bank of Thailand and the Ministry of Finance still appears to be far off. It comes as economic indicators darken, particularly in Thailand’s manufacturing sector.

Erica Tay, an economist at Maybank IBG Research, part of Malaysia’s Maybank banking group, thinks that a cut in interest rates by the central bank in June is unlikely. It comes with inflation moving into positive territory in April and with further prospects for it picking up.

Decline in the manufacturing sector is worrying analysts and also foreign investors. In particular, the decline in automotive output, down 22.1% in March

However, Thailand’s steep decline in manufacturing is troubling not only analysts but also investors. Factory utilisation in March was only 57%. The automotive sector was off by 22.1%, consumer electronics by 15.3%, appliances by 4.5% and construction materials by 9.9%.

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At the same time, Thailand currently has the lowest interest rate policy among Southeast Asian economies. Its 2.5% compares to the Philippines at 6.5%, Indonesia at 6.25%, Singapore at 3.4%, Malaysia at 3% and Vietnam at 3%.

Investors and market analysts troubled by Pheu Thai’s Paetongtarn Shinawatra’s attack on the central bank earlier this month questioning its independence

Despite this, there are calls from the financial sector in Bangkok and indeed across the board, for the central bank and finance ministry to patch things up.

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A speech given by Pheu Thai Party leader Paetongtarn Shinawatra at the start of the month has troubled investors. Speaking at a Pheu Thai event attended by Prime Minister Srettha Thavisin, Ms Paetongtarn openly questioned the desirability of an independent central bank.

Under the Bank of Thailand Act 2008, the Bank of Thailand is independent in that a sitting governor cannot be removed over policy.

Nonetheless, he can be removed for malfeasance or other egregious acts.

At the same time, the key policymaking body, the Monetary Policy Committee, comprises four out of seven members from outside the bank. In short, the committee includes government appointees.

In addition, the government has the power to appoint the Bank of Thailand governor when a vacancy arises.

Incoming Minister of Finance Pichai Chunhavajira last Tuesday said that both the Bank of Thailand and himself must work together in the same direction

New Minister of Finance Pichai Chunhavajira refused to rule out an attempt to rein in the central bank’s independence under the current legislation last week.

However, he did confirm that there were no plans by him or the ministry to amend the 2008 Bank of Thailand Act.

In addition, he made it clear that he must work with Bank of Thailand boss Sethaput Suthiwartnarueput.

‘It’s our duty and responsibility for me and the Bank of Thailand to work together to push both engines, monetary and fiscal policies, in the same direction,’ he declared.

Moreover, last Tuesday, as he took up office, he refused to be drawn on whether the government values the Bank of Thailand’s independence. 

Undoubtedly, he indicated that he would hold talks with Bank of Thailand Governor Sethaput Suthiwartnarueput.

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The 66th Finance Minister, who is 75 years old, faces a daunting task.

The Thai government is facing a declining tax base, increased demands for social welfare, and a faltering economy.

At the same time, it is witnessing rising public debt levels. This now stands at 63.4%.

Meanwhile, within hours of his taking up the role, United Thai Nation (Ruam Thai Sang Chart) Party deputy finance minister Krisada Chinavicharana resigned.

Mr Krisada later issued a ommuniqué suggesting he was displeased with the new work regimen at the ministry.

Undoubtedly, it shows a determination by Mr Pichai to shake up the finance ministry and the country’s economic direction.

Meanwhile, the Bank of Thailand reports progress in its campaign to rein in private sector debt levels and address the chronic problem of household debt

Simultaneously, the Bank of Thailand is overseeing a credit crunch to scale back the country’s exploding levels of private sector debt.

In the first quarter, there are signs of progress, with thousands signing up for the bank’s expanding debt clinic service. Established in 2017, it offers intervention for approved borrowers. In turn, they benefit from lower interest rates and revised repayment plans.

At the same time, the National Credit Bureau (NCB) estimates that non-performing loans in the first quarter will be up by 15%.

Nevertheless, there is some positive news. Loans expanded at 2.9% in the first quarter to ฿13.6 trillion. In short, the banking system is operating normally and smoothly.

This is encouraging given the lacklustre growth in the wider economy excluding foreign tourism. Undoubtedly, it shows Thai borrowers facing up to the facts of the situation.

However, loan advances for housing were down 3.8%, auto loans down by 1.5%, with commercial and business overdrafts sharply down by 5.7% and 5%.

In short, household debt, last measured at 91.3% of GDP is, at this time, expected to fall in first quarter of 2024 data.

Ministry of Finance and government need higher GDP growth to boost taxation receipts. The spat between the central bank and government is highly damaging

Nonetheless, the government and the Minister of Finance need economic growth.

In short, it needs more tax revenue. At the same time, interest charges are a key cost. It is easy to understand why it wants lower interest rates.

Certainly, many observers question whether an economy with deep structural problems can be primed by stimulus into growth. At the same time, most economists agree that even a 50 basis point drop in interest rates will only have a negligible impact on growth.

Meanwhile, capital inflows and investment are undermined by the unedifying public spat between the Bank of Thailand and the government.

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Last week, Prime Minister Srettha Thavisin disclosed that the key to growth was foreign inward investment. However, this requires the right environment and significantly, stability.

Reports suggest an approach has been made to the Bank of Thailand to transfer a pivotal 1997 Financial crisis fund off the government’s public debt books 

On Saturday, a leaked report in the Bangkok Post gave some indication of what Mr Pichai’s Ministry of Finance might get up to next.

It concerns the Financial Institutions Development Fund (FIDF).

This was previously established in 1985 to help assist financial institutions in trouble. Afterwards, during the 1997 financial crisis, it became a pivotal vehicle for cash transfusions. This came as the government sought to deal with a financial crisis and failing institutions.

Currently, it has a debt of ฿570 billion. It is funded by a levy charged on the banks based on 0.47% of financial deposits.

It is administered by the Bank of Thailand. Nonetheless, under the Public Debt Management Act, this liability is treated as part of the kingdom’s public debt.

Presently, it is understood that tentative approaches to the Bank of Thailand have been made to shift this liability. If the central bank approves, it would reduce the country’s public debt level by 5 percentage points.

Under the State Fiscal and Financial Disciplines Act 2018, the Thai government is constrained in relation to public debt. The ceiling is currently 70%.

However, this was raised by the government of General Prayut Chan-o-cha from 60% during the pandemic crisis.

Ministry and central bank hope for lower US rates

While the government insists on lower interest rates, it can be argued higher interest rates make businesses and the economy perform more efficiently. In short, the value placed on money is higher. Certainly, this is a matter of economic philosophy.

The current strength of the US economy, with interest rates of 5.5%, seems to defy expectations and plays to this point.

Robust monetary policy in the United States and the United Kingdom in the 1980s eventually led to an economic boom. In effect, higher-priced money weeded out weaker players and sparked innovation. In addition, this was accompanied by cost-cutting in government.

Presently, both the government and central bank are hoping US policy will change.

In short, they hope the US Federal Reserve will begin easing interest rates. Following this, it may be easier for the two engines of the economy to work more in kilter. However, nothing is guaranteed.

In the meantime, the central bank must be on guard against capital flight out of the country. This could feed into a further depreciation of the baht and fuel inflation pressure.

Indonesia, in recent weeks, saw a massive capital inflow when it decided to raise its base interest rate.

At the same time, inflation must be kept under check. Thailand’s relatively low inflation rate is a plus for the economy. It should not be taken for granted.

Inflation rose to 0.19% in April after a long period of deflation. The final annual rate is expected to be between 1.1% and 1.5% for 2024.

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Further reading:

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