​Chatwaruth Musigchai

THAILAND recently revealed a rapid increase of external debt - up to US$94.1 billion (Bt2.91 trillion) as of the end October 2010, a level that gets close to the historical peak of $112.3 billion in 1997. This has drawn attention and raised some concern regarding Thailand's external vulnerability. Are we still doing okay in terms of external financing? Or are we approaching another round of excessive external borrowings? These questions demand further investigation of the current structure of Thailand's external debt to explain such an increase as compared to the 1997-crisis era.

Since 1980, Thailand incurred external-borrowing debts mostly to bridge the gap of cumulative current-account deficits. These debts (a substantial portion in the short term) were made possible through financial liberalisation in 1993 coupled with the presence of the Bangkok International Banking Facility loans. Great availability of these "cheap" loans together with non-stringent bank lending policies spurred speculations in non-productive sectors. The eruption of the Asian financial crisis triggered regional currencies to depreciate along with massive capital flights. Meanwhile, Thailand's current-account balance instantly turned back to surplus and external debt declined and remained rather stable throughout 2006-2008, followed by a steady increase since late-2009. A series of quantitative easing stimulus policies coupled with slow G-3 economic recovery and strong EM economies hence induced capital into the region, in particular, flows into debt markets.

Unlike the 1997 era, there are certain differences in Thailand's external debt composition in 2010. One of the noticeable differences is the public external debt. Since 2009, we have witnessed rapid accumulation of non-resident holdings of public sector (MOF and BOT) bonds in the secondary market ($8.9 billion as of the end of October 2010). As for the banking sector, short term borrowings have risen sharply since 2009 due to resident banks (foreign bank branches) import short-term borrowings from affiliate nonresident banks in order to manage their portfolio risks. Meanwhile, the private enterprises sector also experienced a rapid debt increase in trade credit liabilities ($18.4 billion as of the end of October 2010), but such an increase was also accompanied by a rise in export credit claims, which consistently outgrew liabilities, hence not only reflecting growing cross border trade but also confirming the adequacy of financial and credit access by Thai import-exporters.
In addition, basic external vulnerability indicators indicate that the current level of external debt is still considered acceptable. For 2010 Q3, the reserves/short-term debt ratio was at 3.9 times, hence suggesting adequate short-term liquidity. Debt/GDP, debt/XGS and the debt service ratio stood at 32.2 per cent, 44.1 per cent and 4.0 per cent, respectively, reaffirming the country's ability to service its foreign debt.

Still, are we approaching the state of over-financing our country with external borrowings in the near future? All previous analyses suggest that our external status remains sound with a remote possibility of reaching such presumption. Nevertheless, in order to remain vigilant, mutual cooperation is required from all related parties. The corporate sector should implement a strict debt management policy with emphasis on corporate governance and debt creation discipline. Banks must implement prudent lending and borrowings policies. Lastly, the concerned authorities must closely monitor external debt developments while implementing appropriate prudential measures in order to ensure that we are not approaching an excessive external debt level in the future.

The opinions expressed in this article are the author’s own and do not necessarily reflect the official opinion of the Bank of Thailand.