Interest rates are on the rise and will further dampen the economic outlook, Thanong Khanthong reports

Just when Thai companies badly needed lower interest rates to keep their businesses afloat in a sluggish economic environment, they are getting the opposite ­ interest rates are heading up.

That is further bad news to an already struggling stock market, which has nosedived to a record four and a half year low on a flat corporate earnings outlook, extremely tight liquidity and currency volatility.

The Bank of Ayudhya, the country's fifth largest commercial bank, has quietly raised its minimum overdraft rate from 13.75 per cent to 14 per cent. Other banks are considering following suit to perk up their lending rates amid the credit crunch.

Higher interest rates will further dampen the Thai economic outlook, whose projected growth rate has already this year been lowered to 6.8 per cent from 7.1 per cent by the National Economic and Social Development Board (NESDB). But the priority now is keeping macroeconomic stability in check rather than economic growth.

On Tuesday, both Bank of Thailand governor Rerngchai Marakanond and his trusted aide, Dr Siri Garnjaroendee, insisted that the interbank rate, which mirrors liquidity in the money market, should hover around 15 to 16 per cent at least for the immediate term.

As a rule of thumb, the banking authorities prefer to see the interbank rate move at 9 to 10 per cent. But this single-digit interbank rate will not come around easily as long as the BOT keeps on defending the baht from speculative attack.

Yesterday, Rerngchai emphasised that the central bank would continue to keep interest rates high as a measure to fend off baht speculators.

''We have to look at the economic picture first to see if a turnaround is imminent. For the moment, we will rely on high and stable interest rates and will continue to watch the foreign exchange market situation for a while," he was quoted as saying.

Yesterday, interbank rate volatility seemed to ease. The overnight interbank rate was quoted at 14 per cent, down from 22 to 26 per cent on Monday.

The call rate was quoted at 15 per cent, down from Monday's 20 to 25 per cent.

High interest rates are a strong weapon for the BOT to punish foreign currency dealers, who will incur exorbitant costs if they want to speculate in the baht. Speculators make a profit by borrowing the baht and selling it short for the US dollar in the hope of forcing the baht down.

But this high interest rate policy is having some gruesome side-effects on the economy. Corporations and finance companies, particularly those who have been relying on short-term funding, are feeling the pinch of the credit crunch.

''A lot of big companies, which hitherto opted to finance their business through lower-cost short-term borrowings, are now in big trouble," said a senior executive at a large Thai finance company. ''Now, with short-term rates skyrocketing, they cannot go back to the banks to ask for normal loans. So you see them scrambling for liquidity at any price."

This short-term mentality is symptomatic of Thai corporations, who are now paying a dear price for their heavy reliance on short-term loans to finance their operations.

In the aftermath of Moody's Investors Service's downgrading of Thailand's short-term debts, only blue-chip Thai corporations are in a position to raise money on international financial markets.

The BOT has ordered financial institutions to convert the short-term loans [loans with a maturity of less than one year] of their clients to longer maturity. Previously, Thai corporations preferred to borrow short-term money and roll it over.

''So far, most of them have only succeeded in converting their short-term loans from less than one year to one year and one day," said a keen observer of the Thai financial system.

Late last year, Finance Minister Amnuay Viravan signalled that he would like to see interest rates fall by at least 2 per cent because the prolonged tight monetary policy had been hurting the economy. Central Bank governor Rerngchai responded lukewarmly that interest rates could come down further in 1997.

As it turns out, interest rates are moving in the opposite direction to what the authorities want. The heavy assault on the baht has forced the banking authorities to keep interest rates high to fend off further attacks.

The baht has fallen to a five-year low against the greenback, which has been appreciating dramatically against the Japanese yen on the back of the strong US economy.

At one point yesterday, the dollar was trading at Bt25.943, down slightly from Bt25.945 on Monday. The BOT fixed its mid-rate for the dollar at Bt25.91 up from Bt25.90 on Monday. It also intervened in the Singapore foreign exchange market to defend the baht.

Commerce Minister Narongchai Akrasanee has expressed concern that the currency volatility has spilled over into the money market to place the burden of higher funding costs on exporters, who are already hard-pressed to strengthen their competitiveness.

The concerted attack on the baht has taken place while Thailand is suffering through a period of macroeconomic instability, particularly the persistently high current account deficit and an export slump. This is not to mention the property market crisis, which is further damaging the asset quality of finance companies and commercial banks.