Saturday 19 November 2011

BoT rejects bond swap US T-bills 'enjoy higher standing'

The Bank of Thailand dismissed the suggestion of investing foreign reserves by swapping them for government bonds to finance a flood prevention system.

Prasarn Trairatvorakul, the central bank governor, yesterday ruled out Thai government bonds as a better investment option than US Treasury bills for foreign reserve management.

"An argument against our policy is that US Treasury bills offer a low yield of just 1.9% to 2% for a 10-year term. But the T-bill's credit standing is different from that of the Thai government bonds in the market," he said.

One of the best options for the government to raise funds for financing this project would be through borrowing from the local market, as yields for bonds with long-term maturities have declined, he said.

"Yields for 10-year government bonds are now slightly higher than 3.44%. The cost is lower than for US-dollar-denominated loans, which are now at 4.3% for the same maturity. There is ample liquidity," Dr Prasarn said.

The low yield and depreciating trend of the dollar have become a concern among central bankers worldwide as they are forced to conduct most of their international trade and investment assets in that currency.

Economist Virabongsa Ramangkura, who serves as chairman of the Strategic Committee for Reconstruction and Future Development set up by the government, said earlier that the proposal to swap government bonds would offer a viable alternative for the central bank's official reserve management.

Dr Prasarn said the official reserves were adequately high to cope with the government's purchases of dollars from the market to finance imports.

"The government's domestic borrowing would in turn reduce the central bank's burden to issue bonds to absorb liquidity from the market and reduce pressure on our balance sheet," he said.

Dr Prasarn said commercial banks' interest-free deposits with the central bank stood at 2 trillion baht, underlining that market liquidity is high.

"Law prevents the Bank of Thailand from injecting baht into the system except in cases of monetary policy. But the central bank is currently absorbing liquidity from the market, not giving it out," he said.

Official reserves stood at $181.8 billion on Nov 11, unchanged from end of October. At the end of last year they stood at $172 billion. He added that the central bank reduced its intervention in the market as appreciation pressure on the baht subsided.

Teerana Bhongmakapat, dean of Chulalongkorn University's economics faculty, said the government should finance the investment with the budget or issue bonds to the market to ensure fiscal discipline.

"The government should avoid similar problems happening in some debt-laden European economies," he said.

"This happens when the central bank gets involved in public investment financing and blurs fiscal liability from government spending, undermining the central bank's ability to conduct monetary policy."

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