Offshore borrowing costs leap
Written by Admin on Thursday, September 4th, 2008
POLITICAL SHOWDOWN
Offshore borrowing costs leap
Risk premium rises over past month
PARISTA YUTHAMANOP
The government’s declaration of a state of emergency in Bangkok has significantly increased the country’s offshore borrowing costs, according to Pongpanu Svetarundra, director of the Public Debt Management Office (PDMO).
Political tension due to aggressive demonstrations led by People’s Alliance for Democracy has caused the risk premium for sovereign debt to rise since mid-August, he said.
”The premium for government borrowing was about 60 basis points above Libor (London interbank offered rate) before the political tensions increased. But since mid-August, the premium has increased to about 100 basis points above Libor,” Mr Pongpanu said.
”And since Sept 2, after the government’s declaration of an emergency state decree, the spread has risen to 140 basis points, which is very high.”
However, he said the increasing premium of sovereign debt would not affect the government’s plans for large-scale infrastructure investment, because its negotiations with multinational bodies like the Japan Bank for International Co-operation (JBIC), the World Bank and the Asian Development Bank (ADB) had been concluded.
He added that the hike in the premium for sovereign debt reflected investors’ general lack of confidence in political stability. The Finance Ministry also expects this to affect the private sector’s ability to tap the overseas financial market. ”Obviously, the financial market has lost confidence in Thailand as a result of the declaration of a state of emergency. The increasing premium reflects difficulty in seeking new funding sources,” Mr Pongpanu said.
”For now, only conglomerates will be able to issue overseas debt. Even so, their funding costs will increase.”
Warnings from credit-rating agencies that political instability put sovereign rating under pressure created a negative trend for the country’s overseas borrowing, Mr Pongpanu added.
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.
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.
The government plans to draw US $25 billion worth of borrowing from JBIC, World Bank and ADB in the 2009 fiscal year starting in October. The interest rate on JBIC’s loans stands at 1.4% and World Bank Libor at minus 0.06%.
The 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.
