Banks are expected to start raising interest rates next year

The government, state-owned banks, commercial banks and private sector are expected to line up at the liquidity trough towards next year.

The Finance Ministry will be thirsting for Bt800 billion during the fiscal year starting next month to cover the budget deficit of Bt350 billion, debt restructuring of Bt180 billion and investment of Bt270 billion in projects under the Strong Thailand economic stimulus pack¬age.

Usara Wilaipich, senior economist of Standard Chartered Bank (Thai), said yesterday that the fundmobilising approach of the government had raised eyebrows. Usually, the government uses four channels. One of them is government bonds and floating rate notes, of which Bt380 billion worth would be offered to institutional investors.

The other three channels, which would siphon liquidity out of commercial banks, were government savings bonds worth Bt170 billion, promissory notes worth Bt161 billion and bank loans worth Bt100 billion, for a total of Bt431 billion.

"Bt430 billion is the government's demand for liquidity from the money market. Does anyone think about the private sector's liquidity demand?" she asked.

Stateowned banks have been ordered by the government to expand their loan portfolios by Bt300 billion via a fasttrack lend¬ing scheme. To support the credit expansion, the government would recapitalise the state-owned banks with Bt30 billion, so the net amount to be pulled from the market would be Bt270 billion.

Commercial banks would likely face flat loan growth this year, but 5 per cent next year, or Bt425 billion from total outstanding loans of Bt8.5 trillion this year.

Companies on average issue corporate bonds of about Bt250 billion each year.

Combining liquidity demand from the government, stateowned banks, commercial banks and business, the total demand in the system will be about Bt1.4 trillion, which will inevitably put pressure on the liquidity in the market and interest rates will rise, she said.

The government usually cites total excess liquidity in the system as Bt1.5 trillion, but actually it was more like only Bt600 billionBt700 billion after deducting shortterm bonds, which were used for provisioning by banks, she said.

"Everyday commercial banks will manage their excess liquid assets by lending in the interbank market, while the rest will be deposited with the central bank. This should be a good indicator of liquidity in the system. As I observe the figures from these two sources, the excess liquid assets in the system are only Bt600 billionBt700 billion," she said.

If there were no injections of fresh money from overseas, the liquidity in the country would evaporate over six months. Although some of the loans that would be invested in projects would end up returning to banks as deposits, there would be a lag especially when the economic situation was uncertain.

"Therefore, during the first half of next year commercial banks will likely increase interest rates ahead of the increase in the policy interest rate of the central bank," she said.

However it also depends on political factors, which might delay the fundraising exercise of the government. There is no upward pressure on the policy interest rate, as inflation is still dormant, while the economic recovery overseas is still uncertain.

One more point is the stronger baht, which will also delay the need for a policy interest rate increase because it already acts to tighten monetary policy, she added.

Prasarn Trairatvorakul, president of Kasikornbank, said recently that when measuring excess liquidity in the system, one needs to consider the growth of bonds on a net basis, because some matured bonds would be rolled over.

However liquidity, which would be soon absorbed by the government's spending, was only compensated by the private sector, which is hardly investing in new projects, he said.

Besides, bond issues would not be scheduled all at the same time, so they would not trigger a sudden drop in liquidity. The economic recovery is still riding on existing production capacity and is unlikely to be Vshaped, while both the global market and Thailand are still flush with liquidity.

Given this scenario, KBank considers the appropriate loantodeposit (L/D) ratio as 95 per cent. If the bank had too much liquidity, its net interest margin would be too thin.

Interest rates should be adjusted in the second half of next year, he added.

Metha Pingsuthiwong, executive vice president for treasury and private banking at Tisco Bank, said the government knows that its bond issues would sap liquidity from the system, so it was concerned about the timing of the issues.

He believes treasuries would go on the market gradually and not push up market interest rates immediately. However that depends on next year's loan demand from the private sector.

But businesses were not supposed to recover rapidly from the economic crisis, so banks would not lose all their liquidity in a short period of time. Interest rates were expected to trend up in the second half of next year, he added.