Thai bank funding for record agricultural supports:
Will it add fire to the credit crunch?
International funding will soon become
more difficult for large Thai companies because of the ongoing global
financial crisis and credit
crunch.This means there will be more competition for domestic funding from banks and financial markets within Thailand.
Large corporations, SMEs, and households will all be competing for these limited funds.
Unprecedented high levels of government borrowing for agricultural price support programmes also threatens to use up domestic funds.
The Bank for Agriculture and Agricultural Co-operatives (BAAC) traditionally funds agircultural price supports, but the BAAC already has too much of this debt (40 billion) and can't handle any more. The financing will distributed across other banks as follows:
40 billion baht - Krung Thai Bank
(government owned)
40 billion baht - Government Savings Bank (GSB)
15 billion baht - Thai Military Bank (TMB)
15 billion baht - Siam City Bank (SCIB)
--------------------------------------------------------
110 billion - Total
40 billion baht - Government Savings Bank (GSB)
15 billion baht - Thai Military Bank (TMB)
15 billion baht - Siam City Bank (SCIB)
--------------------------------------------------------
110 billion - Total
This is the first time the government has had to call on so many banks for help:
This is the first time in
the history of the rice-buying scheme
that state banks will finance the plan instead of the BAAC. This is
partially because the government has obligations of 40 billion baht
outstanding to the BAAC due to delays in repayments,
affecting the
state bank's ability to support lending to farmers and rural
communities under other development programmes.
In the past, the BAAC financed the upfront costs and sought reimbursement later from the government, which settled its obligations using revenues gained from the sale of government rice stocks accumulated from the mortgage programme.
Deputy Finance Minister Pradit Phataraprasit said the pledging programme needs to proceed despite losses over the last three to five years, as farmers are the key food and energy crop producers and play a key part in the country's economic system.
In the past, the BAAC financed the upfront costs and sought reimbursement later from the government, which settled its obligations using revenues gained from the sale of government rice stocks accumulated from the mortgage programme.
Deputy Finance Minister Pradit Phataraprasit said the pledging programme needs to proceed despite losses over the last three to five years, as farmers are the key food and energy crop producers and play a key part in the country's economic system.
The price support funds will be distributed over crops as follows:
97 billion - rice (8.5
million tonnes)
13 billion - corn and cassava
-----------------------------------
110 billion baht
13 billion - corn and cassava
-----------------------------------
110 billion baht
Massive agricultural subsidy programmes may well be crowding out private sector investment. Some banks will sell their investments in the capital market to generate the necessary funds:
The bank would move
investments in the capital market worth a total of 240 billion baht.
The GSB invested its excess liquidity in the repurchase market, which offers interest rates of only 3.75%, much lower than those of the pledging programme, he said....
The suggested interest rate is the minimum lending rate (MLR) minus two percentage points. The final rate has not yet been decided, but will probably be based on that of Krung Thai Bank.
The GSB invested its excess liquidity in the repurchase market, which offers interest rates of only 3.75%, much lower than those of the pledging programme, he said....
The suggested interest rate is the minimum lending rate (MLR) minus two percentage points. The final rate has not yet been decided, but will probably be based on that of Krung Thai Bank.
The government has to sell its existing rice stocks quickly to repay debts for large amounts of rice accumulated in the past:
Since 2006,
the government accumulated 4.3 million tonnes of milled rice through
intervention schemes.
The government will focus on selling 3.1 million tonnes from state stockpiles, 2.1 million tonnes of milled rice from old stock and another one million from new rice the government recently bought from the second crop...The rice is slated for export....
Chookiat Ophaswongse, the president of the Thai Rice Exporters Association, said the purchase proposals by exporters were likely to be small, such as 100,000 tonnes, because the government's conditions for the rice sales call for each exporter to retain purchase prices for 30 days, making them highly subject to price fluctuation risks.
The government will focus on selling 3.1 million tonnes from state stockpiles, 2.1 million tonnes of milled rice from old stock and another one million from new rice the government recently bought from the second crop...The rice is slated for export....
Chookiat Ophaswongse, the president of the Thai Rice Exporters Association, said the purchase proposals by exporters were likely to be small, such as 100,000 tonnes, because the government's conditions for the rice sales call for each exporter to retain purchase prices for 30 days, making them highly subject to price fluctuation risks.
Payouts to farmers will be limited to 500,000 baht per farmer in an attempt to limit the program to small farmers.
The government's Public Debt Management Office has also stated that "the financing scheme will be immediately booked as public debt." Hopefully, this will make the programme more transparent. As Shadow Finance Minister Korn Chatikavanijon has pointed out: "The problem, however, is that the government refuses to acknowledge the subsidy for what it is. This means there is no provision made in the budget and it means the government ends up with a huge stockpile of products it dares not sell - for fear of registering losses" (See previous article).
(Source: Bangkok Post, business, WICHIT CHANTANUSORNSIRI and PHUSADEE ARUNMAS, link)
Vocabulary:
credit crunch - when businesses and households can't get loans anymore, banks suddenly stop lending and bond market liquidity disappear after investors and holders of capital seek to avoid risk (See glossary)unprecedented - has never happened before, this is the first time
agricultural price support programmes, mortgage programmes, pledging programmes - government programmes
can't handle - problem too big or too difficult for them to solve
Bank for Agriculture and Agricultural Cooperatives (BAAC) - the Thai government owned bank used for most agricultural lending
Krung Thai Bank - the second-largest bank in Thailandholding assets worth approximately US$28 billion (As of April 2005, the bank's largest shareholder is the Thai Financial Institutions Development Fund (FIDF), which holds 56 percent of all shares. Since the FIDF is controlled by the Ministry of Finance and the Bank of Thailand, Krung Thai Bank effectively remains under state control) (See Wikipedia)
Government Savings Bank (GSB) - the oldest government run bank started in 1913 (See history)
Thai Military Bank (TMB) - bank founded by Field Marshall Sarit Tanarat (See bankthailand.info)
Siam City Bank (SCIB) - "established in 1941 by government officials and members of royal family with initial registered capital of Baht 1 million. In August 1994, SCIB was listed in the Stock Exchange of Thailand and its shares were traded for the first time. In April 2002, SCIB became the 5th largest Bank (asset size) in the nation after the merger with Bangkok Metropolitan Bank" (See bankthailand.info)
obligations - things that you must do, your duties and responsibilities
upfront costs - made in advance
reimbursement - get back money you spent for someone else
sought reimbursement - tried to get back the money you spent for someone else
crowding out - when government borrowing to finance government spending reduces the amount of loans that private companies get (See glossary)
excess liquidity - had more funds than they could use
repurchase agreement (REPO) - selling a security and agreeing to buy it back in the future for a fixed price, central banks use repos to provide liquidity to the financial system, they inject money into banks and the economy by buying securities from banks, agreeing to sell them back in a week or two, this controls the money supply and inflation
intervention schemes - when the government buys and sells in a market to influence prices
stockpiles - large amounts stored for future use
retain purchase prices for 30 days - cannot change agreed price even if market prices fluctuate
subject to price fluctuation risks -
booked as public debt - recorded as government debt and expenditure in accounting records and public reports
refuses to acknowledge the subsidy for what it is - subsidises but unwilling to say that it subsidises
a provision - an arrangement
no provision made in the budget - the use of money is not recorded in the budget so that everyone can see it and parliament can debate it, off-balance sheet item. hidden expenditure
registering losses - recording losses so that the public can see the loss
