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Govt to issue domestic bond to finance budget deficit

THE government plans to issue a domestic bond this year to partially finance its budget deficit, which is likely to continue to be problematic during the economic slow-down, Deputy Finance Minister Dr Pisit Lee-artham said.

But Pisit said the size of the domestic bond, to be issued by the Finance Ministry, had not yet been determined and depended on how much was needed to finance the budget deficit for fiscal 1999/2000.

If the domestic bond is launched, it will mark the first time since 1990/1991 that the Thai government has been obliged to enter the local capital market to raise money to match its spending needs.

In the previous decade the Thai government enjoyed a budget surplus, although it continued to borrow from the capital market.

The Financial Institution Development Fund (FIDF) has been actively issuing bonds in the local market, amounting to almost Bt200 billion.

The fund acts as a guarantor of the financial system and is obliged to raise a massive amount to pay for the damages caused by the failure of finance companies and banks.

The FIDF's long-term bonds carry an average yield of about 7.9 per cent, while short-term bonds are yielding more than 4 to 5 per cent.

With the domestic market awash with liquidity, there is less incentive for the Thai government to launch a sovereign bond in the global capital markets.

The Finance Ministry last year received a legislative mandate to raise US$2-5 billion through a global issue, but unfavourable market conditions throughout last year delayed the launch.

This year sentiment on the Thai and other emerging markets has improved significantly.

This can be seen in the the narrowing of the spread of Thai sovereign bonds to 170-180 basis points above US Treasuries, compared with 750 basis points at the peak of the crisis.

''We have not heard the minister saying anything about issuing the global bond,'' said one official source close to Tarrin Nimmanahaeminda, the finance minister.

''But if the Thai government is to issue the global bond, it won't have any problems [despite of the absence of an investment grade].''

The success of Siam Commercial Bank's recent launch of its global equity has increased confidence that, the credit rating aside, there is still ample room for the Thai private and public sectors both to raise money in the international markets if they come up with an attractive issue.

Malaysia, which has seen its economy recover to head for a growth rate of 1.9 per cent this year, has announced that it will go ahead with the issue of a global bond of between $1 billion and $3 billion in the absence of a credit rating from the rating agencies.

Malaysia's return to the global capital market, following that of the Philippines and South Korea, indicates that confidence in the region has been substantially restored following the slump of the past two years.

But Pisit strongly indicated that he was in favour of raising the government bonds domestically owing to excess liquidity and low interest rates. During the crisis, the government held back from tapping the domestic market for fear that it would sap all the liquidity from the cash-strapped system.

IMF officials are conducting a review of the progress of Thailand's financial and economic reforms which will form the basis of a staff report on Thailand in May and September.

So far there have not been any formal discussions between IMF officials and their Thai counterparts over the size of the budget deficit next year, but it is anticipated that the deficit will match that of the 1998-1999 budget, which posted a deficit of 6 per cent of gross domestic product.

''But if Thailand has a recovery, it might not be necessary to go for the budget deficit,'' the official source said.




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