The Finance Ministry last week expressed reservations about a proposal to use some of the "excess" official reserves to finance mega-projects, saying the economic outlook remains hazy.

"We do not know what will happen next, capital could fly out of the country instead of flowing in," said ministry spokesman Somchai Sujjapongse.

Earlier, Ampon Kittiampon, secretary-general of the National Economic and Social Development Board, a state think-tank, suggested official reserves as a direct funding option. The country has accumulated reserves worth US$70.4 billion (Bt2.4 trillion). The Bank of Thailand does not need to hold that much in official reserves, he said.

Somchai insisted that the government must be very careful about the suggestion, because there are both positive and negative impacts if official reserves were siphoned off for infrastructure, including mass transit.

 "If the government needs more funds to finance budget deficits or mass-transit projects, it would be better to borrow from state-owned banks or commercial banks," he said, adding that plentiful reserves provided a buffer against possible economic instability.

The Finance Ministry is waiting for a decision from the Japan Bank for International Cooperation on whether it will extend a loan for mass-transit routes in Bangkok. It wants to know the answer before September as it is preparing to open bidding for construction of the first project, the Purple Line.

Though the government needs more money, as it plans to run a budget deficit both this and next fiscal year, borrowing from overseas or domestic sources is a better option than borrowing from the central bank, according to ministry officials.

Atchana Waiqwamdee, deputy governor of the Bank of Thailand, has said that if the government wants to tap the country's official reserves, it has to do so by issuing government bonds for the central bank to buy. This would ensure fiscal discipline on the part of the government, she said, adding that the central bank could not simply hand over its reserves.

She agreed that Thailand and other countries in Asia had piled up too many US dollars. With a combined $3.6 trillion, Asia holds two-thirds of the world's official reserves. While the greenback is sliding down against other currencies, holding dollar assets poses a risk to the balance sheets of central banks.

The surge of dollars into Thailand has also driven up the value of the baht and the price of Thai exports. This has eroded the country's international competitiveness, she said.

Some observers have suggested that other countries have tried to employ their US dollar holdings in constructive ways, as they anticipate further weakening of America's currency due to that country's twin deficits.

Vichit Surapongchai, CEO of Siam Commercial Bank, has said that some countries such as Dubai, which are loaded with petrodollars, are now investing in mega-projects as they are afraid that holding dollars too long would pinch their coffers.

Investment returns from these projects are not that great but, taking into account that holding onto depreciating dollar assets would pose a greater risk, investing now is the best option, he said.

Wichit Chaitrong

The Nation