THAILAND

Pridiyathorn, Korn say decrees could be unconstitutional; urge government to give assurances to depositors

The Bank of Thailand (BOT) has little room for manoeuvre when it comes to the Financial Institutions Development Fund (FIDF) debt, as any drastic action by the bank could adversely affect the economy, two prominent critics of the government's handling of the issue said, adding that the Finance Ministry must make clear to depositors that their savings are protected.

Former finance minister and ex-central bank governor Pridiyathorn Devakula and shadow finance minister Korn Chatikavanij also warned that the Constitution Court might strike down three executive decrees related to the government's plan as the issue is not an emergency. Of the decrees, one covers the management of the Bt1.14-trillion FIDF debt, one authorises the government to borrow Bt350 billion, and one requires the central bank to provide soft loans of Bt300 billion for post-flood reconstruction.

Pridiyathorn yesterday said the BOT should not collect too-high premiums from banks, as they would pass the costs on to depositors or borrowers, which would adversely affect the economy.

"Bankers will not let their banks fail, so they will pass costs on to depositors or borrowers if the central bank collects more premiums from them," he said of the executive decree requiring the central bank to pay debts of Bt1.14 trillion owed by the FIDF since the 1997 financial crisis.

Currently, banks have to pay annual premiums of 0.4 per cent of total deposits to the Deposit Protection Agency (DPA). The DPA's duty is to pay compensation to depositors if their banks collapse.

Under the executive decree, the DPA's funds could be used to pay the debt of the FIDF. Pridiyathorn suggested the Finance Ministry should make clear that it would step in to provide adequate funding for the DPA in the case of a bank run.

"We should maintain the concept of limited guarantee under the DPA's operations, as it is necessary to impose discipline on both banks and depositors," said Pridiyathorn, referring to past governments' blanket guarantees, which resulted in high costs for taxpayers, particularly costs incurred from the rescue of financial institutions during the 1997 financial crisis.

Pridiyathorn also said that part of the bank's international reserves might be managed for investment in order to generate returns for use in the debt payment.

He said that although the international reserves are currently worth about $190 billion (Bt6.04 trillion), the central bank faces exchange-rate losses. The bank uses about $125 billion-$130 billion to intervene in the foreign-exchange market, largely to keep the baht weak against the US dollar in support of the export sector. The operation results in losses whenever the baht appreciates against the dollar.

Of the reserves, about $41 billion is currently used to back up baht printing for circulation in the economic system, he said.

"There is little room to make use of the reserve…$28 billion might be available for investment [to generate returns for use in debt payment]. The Finance Ministry and central bank have to consult with each other," he said.

But when the economy expands, the central bank needs more foreign assets to back up the printing of more baht for circulation, Pridiyathorn said.

As the debt of the FIDF remains a public debt under the final decree, Pridiyathorn said it may not be necessary to issue an executive decree in relation to the FIDF debt. There is a strong possibility that the Constitution Court would cancel it, he said.

Meanwhile, Korn said the opposition would next week petition the Constitution Court to interpret whether the decrees relating to the FIDF debt and to borrowing new funds are in violation of the Constitution. He said the opposition did not see a reason for issuing the decrees, adding that the government should present a bill on new loans to Parliament to ensure transparency.

Korn said he did not agree with the government's decision to issue a decree requiring the central bank to provide soft loans of Bt300 billion to flood victims, either. The government could assign the Government Savings Bank to do that job, he said. The executive decree would force the central bank to print money, which would affect investor confidence and could lead to higher inflation, he said.

"Insights from those who are well-versed in these issues - Pridiyathorn and Korn - would provide crucial information for the Constitution Court to consider whether the executive decrees breach the Constitution," said Prasit Kowilaikul, a member of the Council of State, the government's legal advisory body.