Public debt looms large on horizon

Wichit Sirithaveeporn
Bangkok Post 2000 mid-year Economic Review

Fiscal concerns about the sustainability of the country's public debt dominated policy discussions in the first half of this year. Financial sector restructuring and the need to maintain fiscal stimulus programmes to support recovery have caused public debt to rise to its highest levels in decades. At the end of April, central government domestic debt totalled 661.2 billion baht, and foreign debt $9.05 billion, or more than one trillion baht combined. In contrast, government debt at the start of the crisis in June 1997 totalled 176.5 billion baht.

By far the lion's share of the debt stemmed from the government's decision early in the crisis to bail out depositors and creditors of ailing financial institutions. Under the International Monetary Fund-sponsored economic reform programme, the government agreed to fiscalise losses taken by the central bank's Financial Institutions Development Fund for its assistance given to banks and finance companies. In 1998, the government began to absorb the losses of the fund with the first of medium- and long-term bond issues ultimately totalling 500 billion baht.

Under the agreement with the IMF, interest on the bonds would be paid through the central budget, while principal would be met through central bank profits and proceeds from the privatisation of state enterprises and intervened financial institutions. The bond issues helped to dramatically lower financing costs for the fund, which had previously relied on costly short-term borrowing from the money market to raise funds for its liquidity support to financial institutions.

Other costs related to financial sector restructuring come under the August 1998 financial recapitalisation programme, which approved the issue of state bonds totalling 300 billion baht to help finance companies and banks raise new capital. As of March, funds tapped under the programme totalled 49.9 billion baht, although this excludes nearly 20 billion baht in state support approved for Thai Military Bank in May.

Foreign debt has increased by more than 200 billion baht in the past three years, the result of borrowing by the government to fund stimulus and reform programmes from agencies such as the Asian Development Bank, the World Bank and Japan's Miyazawa fund. While the total costs of financial restructuring remain in question, what is evident is that paying interest on the debt will take an increasingly higher share of the overall budget in years to come.

The Finance Ministry estimates that if additional financial sector losses total 800 billion baht, debt service costs would reach 17.1% of the budget by fiscal 2004. If financial sector losses total 1.2 trillion baht, a figure claimed by the Bank of Thailand, total service costs on the public debt would reach 19.2% of the fiscal budget by 2005.

Direct government borrowing as a percentage of gross domestic product would reach 29% in 2003, assuming financial sector losses of 800 billion baht.

Using the more pessimistic figure of 1.2 trillion baht in losses, direct government borrowing would be 34.4% by 2005.  Both estimates, however, do not yet factor in the 132 billion baht raised for the Financial Institutions Development Fund after reserve accounts at the central bank are consolidated.

At the end of 1999, public debt, including state enterprises, totalled around 2.4 trillion baht, or 51.4% of GDP. Officials estimate the public debt to peak around 60% of GDP.

All these projections are based on several assumptions, including current expenditure growth, excluding interest, of about 5% per year, investment growth of 6.5% per year, an exchange rate of 38.5 baht to the US dollar and assumptions on nominal GDP growth and new borrowing from 2000 to 2007.

Finance Ministry officials say exercising fiscal discipline will be crucial for ensuring that the debt burden does not spiral out of control. An increase in current expenditures from 5% to 6% per year, for instance, would raise government borrowings by 18 billion baht, or 0.2% of GDP, as well as increase the budget deficit by 47 billion by 2007.

Reducing total losses by the Financial Institutions Development Fund is also a crucial element in managing the public debt burden in the next decade. The sale of three state banks to foreign institutions _ Nakornthon to Standard Chartered, Radanasin to United Overseas Bank and Bangkok Metropolitan Bank to HSBC _ all include loss sharing arrangements on bad loans.

Maximising the value of these distressed assets will ultimately help reduce the total losses borne by the development fund. Other gains could come from the fund's shareholdings in the three sold banks, as well as its stake in Krung Thai Bank, Siam City Bank and BankThai.

A reduction of the total fund losses by 100 billion baht, for instance, will help reduce annual service costs by around eight billion baht. Total direct government borrowing would also fall 1.3% of GDP, or 110 billion baht, through fiscal 2007.

To help promote fiscal discipline, the Finance Ministry expects to reduce the foreign debt ceiling on new borrowings and review existing spending programmes. Reviewing tax collection policies to reduce evasion and broaden the tax base will be another key strategy for easing fiscal constraints over the next several years.

Of course, officials agree that the best measure for dealing with the public debt will be a resurgent economy and higher employment, which in turn will help reduce the need for new spending programmes as well as increase tax revenues.

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