Foreign borrowing opportunity closed : MOF

The Finance Ministry said yes¬terday the cost of overseas borrow¬ing for the government and private sector shot up to a historical high as political turmoil amplifies the fiveyear foreign borrowing cost to 140 basis points over the London Interbank Offering Rate (Libor).

Pongpanu Svetarundra, direc¬torgeneral of the Public Debt Management Office, said the gov¬ernment's cost of borrowing in for¬eign capital markets, as seen by credit default swaps, has sharply escalated from around 100 basis points over Libor last month. The global market considers the wors¬ening political conflict as the rising risk factor of concern.

Credit default swaps are used to protect against or speculate on default. They pay the buyer face value in exchange for the underly¬ing securities if a borrower fails to adhere to its debt agreements.

"The foreign capital market is closed. The 140 basis points (of credit default swap) is the historic high level as far as I remember or at least after the (1997) economic crisis," Pongpanu said.

The private sector also has to carry a higher cost of foreign bor¬rowing. The borrowing cost of the public and private sectors would intensify if creditrating agencies revised downward their outlook from the current " BBB+".

On Tuesday, Standard & Poor's Ratings Services warned that the probability that the sovereign cred¬it ratings on Thailand could be low¬ered is rising following the events in the past two weeks.

A senior executive from Moody's Investor Service has said that mounting political uncertainties definitely pose a threat to both the government and longterm eco¬nomic stability.

"If the political situation gets worse and severe, there is a huge possibility that the creditrating agencies would adjust the country's outlook," Pongpanu said.

The Kingdom's foreign cost of borrowing had picked up when the US subprime market took a tum¬ble, but dropped to 7080 basis points before surging to 100 basis points over Libor last month.

Kanit Sangsubhan, director of the Finance Ministry's Fiscal Policy Research Institute, said credit default swaps had increased to 120 basis points from 40 basis points over Libor after the subprime cri¬sis broke out in the US because the risk in the world financial market had increased. The US is concerned about this issue. Therefore it must not let its financial institutions col¬lapse again, because its effect may expand to the global economic sys¬tem.

Pongpanu said the government's cost for megaproject investment, however, did not rise because the projects rely on foreign sources of public funds, like the Japan Bank for International Cooperation (JBIC), World Bank and Asian Development Bank.

JBIC promises to provide a loan at a 1.4percent interest rate for masstransit projects, while the WB would extend financing at Libor minus 6 percentage points.

However, he said the govern¬ment could not always depend on public sources of funds.

If the government tries to tap foreign capital markets now, its funding costs, including currency swap costs, would soar, he said.

The government plans to secure Bt460 billion in the 2009 fiscal year to finance the budget deficit and mega projects.

That would push public debt up to Bt3.8 trillion or 38 per cent of gross domestic product at the end of next year, compared with the cur¬rent level of Bt3.4trillion or 36 per cent.

Pongpanu said the rise in pub¬lic debt was manageable and pub¬lic investment should move for¬ward no matter which political party led the government amid the gloomy economic climate.

The private sector has given up investment expansion for years as the government has hardly initiat¬ed any investment project since the economic crisis.

However, all investment proj¬ects would be suddenly suspended if the political conflicts led to the coup, he said.

"If the government's investment is halted, the economy would slow down, absolutely," he said.

Bank of Thailand Governor Tarisa Watanagase said the central bank would step into the foreignexchange market when needed.

So far, no unusual foreign capi¬tal outflows have been detected, she said.

The baht rose 0.1 per cent to 34.42 against the dollar as of 11:27am in Bangkok yesterday, according to data compiled by Bloomberg. It slumped to 34.54 on Tuesday, the weakest level since August 23, 2007. The currency may fall to 35 over the next two weeks, said Tetsuo Yoshikoshi, a Singaporebased market analyst at Sumitomo Mitsui Banking Corp.

Tanti Kulanan, head of Kasikornbank's capital markets business division, forecast that if the political turmoil did not become worse, the baht would depreciate to Bt36 per dollar at the end of the year after reaching Bt35 next month.

The baht would gradually weak¬en, mainly from the appreciation of the dollar rather than the polit¬ical situation here.

"I think the central bank will continue to handle the baht to let it become weaker slowly. The baht remains in line with regional cur¬rencies," Tanti said.