This government is not thinking ahead

The government has finally stuffed the 1997 legacy debt of Bt1.14 trillion down the throat of the Bank of Thailand.

This will give the government more room to create massive new debt of Bt2.27 trillion, earmarked for "New Thailand" mega-projects between 2012 and 2016.

As a result, Thailand's public debt profile will be significantly changed. It could be a replay of the Greek tragedy.

This transfer of the Financial Institutions…. (FIDF) debt to the central bank is a breach of both fiscal and monetary discipline. On the fiscal side, the Finance Ministry, which collects taxes and other revenues, is not doing its job. It is responsible for paying off the country's public debt.

On the other hand, the Bank of Thailand is an institution set up to manage the country's monetary policy. It does not collect tax and is not responsible for public debt repayment.

The Finance Ministry has been allocating about Bt45-Bt60 billion a year to pay for the interest cost of the FIDF debt. The Bank of Thailand assumes the principal debt of the FIDF. If the Finance Ministry finds the FIDF debt a burden to pay off, it should not rush to create new debt. It will take about 30 years to pay off all the FIDF debt, a financial sin that all Thai taxpayers are now painfully shouldering.

On the monetary side, the Bank of Thailand could slip into the practice of money printing if it were to assume all the burden of the FIDF debt. If it can't come up with enough money from its own operation, its foreign reserves management, its regulation to force commercial banks to contribute to the FIDF debt payment, the central bank will inevitably have to print money to pay for the FIDF obligation.

Printing money will undermine confidence in the baht. Capital could head to the exit door. Inflation would surge. Thailand, again, could lose its foreign reserves in a hurry, like in 1997.

The transfer of the FIDF debt to the Bank of Thailand comes amid the heavy-handed debt creation of the Yingluck government.

Firstly, of the Bt2.38 trillion budget for the 2012 fiscal year, the government has projected revenue of Bt1.9 trillion plus. This means that it will be running a deficit of around Bt400 billion.

Secondly, a quasi-government committee headed by Dr Virabongsa Ramangkura is planning to raise Bt350 billion to invest in flood prevention projects.

Thirdly, the Bank of Thailand will have to come up with Bt300 billion in a flood relief fund, which would, through the commercial banks, offer low-interest loans to small- and medium-scale enterprises hard hit by the floods.

Finally, a national insurance fund of Bt50 billion will be created to help cushion the rising cost of insurance premiums of factory operators or companies. Global insurers have lost a lot of money from the Thai floods. They are now demanding prohibitive insurance premium on coverage of possible future floods.

A quick calculation is that Bt1.1 trillion is being raised for fresh spending for the reconstruction of the Thai economy, which has been damaged by the floods to the tune of Bt1.4 trillion. This amount does not include big-ticket spending of another Bt2.27 trillion on the "New Thailand" project, which will focus on improving the physical infrastructure of the country.

It is obvious that the government wants to create massive debt for Thailand in a hurry. Right now the country's public debt is about Bt4 trillion, representing 40 per cent of the gross domestic product. The public debt to GDP ratio could rise quickly to 60-70 per cent because of the spending spree by this government. And we all know that government spending is heavily associated with corruption.

The danger is that once the debt profile of the country deteriorates, it will be extremely difficult to repair. At present, Thailand's fiscal and monetary strength is the envy of the world. The fiscal positions of most European countries, the US as well as Japan, are practically insolvent. Government debt to GDP ratios of these countries have risen by more than 100 per cent to GDP, making it almost impossible to service the debts. That's why the European Union is in deep financial turmoil, which could break up the euro zone this year.

With the threat of a deepening euro-zone crisis, a slowdown in China and prolonged US weakness, plus growing confrontation between US allies and Iran in the Middle East, the government should instead adopt a prudent fiscal policy. All tax money must be spent carefully in anticipation of hard times ahead. Additional debt should be discouraged. This will help Thailand muddle through the 2012 crisis and beyond.