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3 Apr 2013

Financial Markets

Liquidity and Interest Rates Affected by THB2 Trillion Infrastructure Bill (Current Issue No. 2344 Full Ed.)

KResearch has evaluated the effects of government loans – to be undertaken via legislative fiats authorizing the Ministry of Finance to borrow THB2 trillion for transportation infrastructure development projects – on liquidity and the interest rate trend in the Thai financial market during 2013-2014.
Fund mobilization under the THB2-trillion borrowing plan for infrastructure projects during 2013-2014, and loans for water management projects, are expected to begin about the same time. Borrowing may only be made incrementally: the first tranche, which would be for about THB30 billion, would likely commence in 4Q13, at the earliest. From 2014 onward, fund mobilization would accelerate until the final phrase in 2020, when the last disbursement would be scheduled. As for the water management loans, funding process will begin in 2H13, along with initial disbursement. Liquidity requirement during the initial phases of both plans will likely be in Baht term and rather moderate. This is because many preliminary works, i.e., site management, foundation structures, etc., need to be finished before more complex construction can proceed. We forecast that the government's funding for both projects will likely require additional liquidity during 2013-2014 of around THB350 billion, over the amount needed during normal period. This would cause liquidity to tighten only gradually, rather than to weigh on the market and cause interest rates to rise sharply.

As for how this will affect interest rates in our financial markets, other factors must be taken into consideration, e.g., other economic drivers, fund flows, the policy rate, etc., all of which would have an effect on the liquidity demands of business and finance. However, as it is expected that the government demand will be incremental, whereas the publicity about the borrowing plans has been undertaken in advance, depository institutions therefore should have sufficient time to plan their liquidity management. Moreover, the BOT is equipped with an effective tool to administer financial systems, i.e., bonds. Bonds' terms have been made more flexible in order to control liquidity at manageable. Recently, the BOT has stopped issuing long-term bonds, and has reduced the amount of medium-term notes, concentrating on short-term bonds instead. On account of the above factors, the possibility of an interest rate hike to the point that household/business loans and domestic economic activities are affected, should not become an issue.

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Financial Markets