Risky business?
Rising risk premiums for international borrowing in Thailand
By Jon Fernquest
Can political risk of the
sort found in recent aggressive street protests by
the People's Alliance for Democracy (PAD) actually be measured?
How would you predict the future of the ongoing conflict between PAD and Prime Minister Samak's government?
Interest rates are predictions of the future
The interest rates offered by foreign lenders provide one such prediction of the future.
Foreign investors and lendors adjust the borrowing rates they offer (offshore borrowing rates) up and down based on political events such as street protests and government emergency declarations.
Investors' expectations, predictions, and confidence about future political stability in Thailand are reflected in the interest rates that they offer borrowers in Thailand.
(See PAD protesters outside government house praying in photo on the right)
Risk premium for offshore borrowing
Lenders add a risk premium for the sovereign debt of a country to the standard international benchmark interest rate known as Libor, the London interbank offered rate.
During the last month the risk premium for Thai government borrowing has shot up. Before the recent escalation in the conflict the premium was 60 basis points (0.60%) above the LIBOR rate. From mid-August to September 2 when the government declared a state of emergency the premium increased to 100 basis points (%1.00), one full percentage point above LIBOR.
The declaration of a state of emergency in Bangkok had an immediate and quite large effect on the risk premium which soared to 140 basis points (1.40%).
This may make it more difficult for both the government and companies in the private sector to find new funding sources. Even if they do find funding sources, the rates will have increased.
Credit agency warnings
International credit agencies have issued warnings that political instability in Thailand might cause a downward revision in Thailand's sovereign debt credit rating.
"Institutional investors use credit ratings to help assess the risk of new debt issues. Weaker-rated bonds require issuers to pay higher rates of interest to compensate for higher risks compared to higher-rated instruments."
"Over the past week, both Standard & Poor's and Moody's Investors Service have issued warnings that the country's investment-grade ratings could be in jeopardy due to political instability."
"Although Thailand's external and fiscal credit strengths currently support its 'BBB+/A-2' foreign currency rating and stable outlook, an outbreak of widespread violence would significantly increase political and policy risks and could trigger a negative rating action," S&P said on Tuesday.
Infrastructure project borrowing treated differently
Increased risk premiums will not affect the borrowing rates for large-scale infrastructure projects.
Three multinational bodies are helping with the funding of these large projects: the Japan Bank for International Co-operation (JBIC), the World Bank, and the Asian Development Bank (ADB).
Negotiations on these loans are finished and low interest rates have already been locked in.
The Thai government will borrow $25 billion from these organisations starting in October, the beginning of the 2009 fiscal year.
The interest rate on JBIC's loans will be 1.4%.
The World Bank loans will be made at the Libor rate minus 0.06%.
Government borrowing needs next year
"The Public Debt Management Office (PDMO) plans to borrow from the domestic market a total of 460 billion baht in the 2009 fiscal year to finance infrastructure development and the budget deficit.
The public debt is expected to increase to 3.8 trillion baht, or 38% of GDP after the borrowing, up from 3.6 trillion baht, or 36% of GDP after the borrowing."
For further reading, check out two previous articles on credit agencies in Thailand [article #1 , article #2] and the financial market archives for Easy Business English and Business Blog.
(Source: Bangkok Post, PARISTA YUTHAMANOP, business, page B2, temp-link)
Vocabulary:
Banking and loan vocabulary
risk -
the chance that things might turn out bad, worse than expected (See The
Economist Glossary and Wikipedia)
ความเสี่ยง
credit risk - the risk of loss due to a debtor's
non-payment of a loan ความเสี่ยงในการให้กู้เงิน
creditworthiness - the opposite of credit risk, the
less risky a borrower is, the more creditworthy they are
มีความน่าเชื่อถือของเครดิต มีเครดิตดี
a premium
- an additional amount added to a price
a risk premium - an additional amount added to a
price to pay for extra risk
political risk
- the chance that political events might negatively affect the success
of a project ความเสี่ยงทางการเมือง
political stability - ความมั่นคงทางการเมือง
offshore
- outside the country นอกประเทศ
offshore borrowing - borrowing money from banks
outside the country การกู้ยืมเงินจากนอกประเทศ
expectations - what people believe will happen in
the future ความคาดหวัง
X reflected in Y - Y shows X, Y is evidence of X
ส่งผลต่อ
sovereign debt
- money borrowed by the government of a country (since companies rarely
go bankrupt this debt is generally safer that the debt of companies)
หนี้สินของประเทศ
Libor, the Libor rate - LIBOR means "London Inter Bank Offer Rate" which is interest rate of London's wholesale money markets, the standard interest rate used in US financial markets, changes less than the prime rate, used to set variable-rate loans including credit cards and adjustable-rate mortgages (Source: DebtConsolidation.com)
a basis-point
- 0.01% (50 basis points is 0.50%)
credit
- money loaned to people and businesses, debt หนี้
a credit agency, a credit rating agency - a company
that rates the credit of corporate debt หน่วยงานจัดอันดับความน่าเชื่อถือ
downward revision -
credit rating - a measure of credit worthiness, a
measure of the risk of loaning to (See Wikipedia)
การจัดอันดับความน่าเชื่อถือ
Standard
& Poor's - a company that publishes financial
research and analysis on stocks and bonds, also provides credit rating
information (See Wikipedia)
Moody's Investors Service - "performs financial
research and analysis on commercial and government entities. The
company also ranks the credit-worthiness of borrowers using a
standardized ratings scale. The company has a 40% share in the world
credit rating market." (See Wikipedia)
มูดี้
หน่วยงานจัดอันดับความน่าเชื่อถือทางการเงินและเศรษฐกิจของประเทศต่างๆ
ทั่วโลก
investment-grade ratings - A bond that is rated
within the top four categories by Moody's or Standard & Poor's
(Source: Google
definitions)
Japan Bank for
International Co-operation (JBIC) - promotes economics
cooperation between Japan and oversea countries by providing resources
to foreign investments and by fostering international commerce, plays a
major role in promoting Japanese exports and imports, and the country's
activities overseas (See Wikipedia)
locked in
- already fixed and won't change in the future ไม่เปลี่ยนแปลง
public debt - money that the government has borrowed
and owes หนี้สาธารณะ
a budget deficit - when government spending is
greater than the tax income to pay for it (must borrow to finance and
pay for the deficit) งบขาดดุล
General vocabulary
aggressive
- done with anger and determination กร้าวร้าว
an escalation in the conflict - when the fighting in
a conflict increases (with more casualties, injuries, and deaths)
การปะทะกันอย่างรุนแรง
a declaration of
a state of emergency - ประกาศสภาวะฉุกเฉิน
higher interest rates to compensate for higher risk
- have to pay more to borrow money, if there is less chance you will
pay it back
in jeopardy
- in a dangerous situation (might be lost, destroyed, or fail in some
way) อยู่ในภาวะน่าวิตก ในอันตราย
the outlook - what people think will happen in the
future ภาพรวมในอนาคต
a stable outlook - people believe that there will be
political stability in the future ความมั่นคงในอนาคต
an outbreak - when something unpleasant
starts to happen (a disease outbreak, an outbreak of violence)
การแพร่ระบาด
an outbreak of widespread
violence ความรุนแรงที่แผ่ขยายไปทั่ว