Rising baht: Dollar borrowing by Thai banks

Interest rates lower in other countries, so Thai banks borrow there in dollars causing baht to rise in value making Thai exports less competitive.

Click button to listen to Banks Dollar Borrowing download 

BANKING

Banks' dollar borrowing eyed

Somchai: Large spread drove baht strength
20 May 2013
Wichit Chantanusornsiri & Somruedi Banchongduang

The Finance Ministry has blamed local commercial banks' offshore borrowing at low interest rates to be lent locally as a factor accelerating the baht's strength.

Somchai Sujjapongse, director-general of the Fiscal Policy Office (FPO), said capital inflows in the first three months of this year came from four sources, and the US$2-billion borrowing by commercial banks was one of them.

The other three sources were offshore investments in the Thai bond market ($4.7 billion), current account surplus ($1.2 billion) and foreign direct investment ($106 million).

"Borrowing offshore loans by local commercial banks accounted for nearly half of Thai bond purchases by foreigners. While it seemed to have lifted the baht significantly, the activity has never been mentioned much," he said, without revealing the names of those commercial banks.

Even though the net amount of local commercial banks' borrowing was only $107 million, the hefty borrowing which was brought into the country helped strengthen the baht against the dollar.

The local currency's appreciation has gained momentum since early this year. It peaked to a 16-year high at 28.55 to the dollar around mid-April due to a flood of capital inflow prompted by money being printed on an unprecedented scale by the US Federal Reserve, the Bank of Japan (BoJ) and the European Central Bank.

However, the local currency retreated to 29.76/80 as of 6pm on Friday.

Bank of Thailand governor Prasarn Trairatvorakul last month said the baht at that time was somewhat beyond fundamentals. 

The government has since pressured the central bank to introduce measures to curb the capital inflows and the baht's rise.

Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong has repeatedly said cutting the policy rate is his preferred choice. He made clear he wants to see the rate cut by as much as 75 basis points from the present 2.75%.

The central bank's Monetary Policy Committee (MPC) is scheduled to meet on May 29 to decide on the policy interest rate.

Mr Somchai said the spread of interest rates between local and foreign markets has led local commercial banks to borrow abroad.

The Fed has kept its interest rate within a range of zero to 0.25% to stimulate the world's largest economy. 

Chairman Ben Bernanke also said the Fed will maintain the rock-bottom rate until unemployment falls to 6.5%. US joblessness stood at 7.5% last month

"It's only natural. As long as there is a wide gap between local interest rates and those abroad, commercial banks see an opportunity to make a profit," said Mr Somchai.

Apart from the spreads, local banks have also benefited from the baht's strength for their foreign-denominated debts.

Capital inflows into Thailand have escalated since the BoJ's announcement of the unconventional asset buying scheme last month, said Mr Somchai.

He also wonders how bad an economic slowdown must be to convince the central bank to slash the rate.

The central bank earlier said the rate cut would be adopted immediately once the economy begins losing steam. 

However, Kittiya Todhanakasem, a first senior executive vice-president of Krungthai Bank, said it is unlikely that local banks will bring in their US dollar borrowing to be converted into baht for loan extension locally, given the excessive liquidity in the local financial market.

Besides, it could be a risky case of currency mismatch that lending banks generally try to avoid. 

Typically, Thai banks raise funds in dollars to be extended in the same currency to finance transactions by their customers abroad, she said. 

Thailand's second-largest bank in March issued $500 million worth of bonds to foreign investors with a maturity period of five and a half years to increase its loan portfolio.

(Source: Bangkok Post, BANKING, Banks' dollar borrowing eyed, Somchai: Large spread drove baht strength, 20 May 2013, Wichit Chantanusornsiri & Somruedi Banchongduang, link) 

 
Banking Vocabulary

commercial bank - a bank with branches in many different places that provides services to people and businesses such as bank accounts, loans and saving money

local  (adjective) - in this country (Thailand)
local commercial bank

locally (adverb)
money lent locally

offshore - happening in a different country; foreign
offshore borrowing

offshore loans - loans from overseas (in dollars, not baht)
offshore loans by local commercial banks

investment - taking your money and putting it into projects to make a profit or earn interest (buying stock shares, bonds, real estate)
offshore investments - investments in another country, foreign investments

interest rates - the cost of borrowing money, usually expressed as a percentage of the amount borrowed

spread - the difference or separation between two things
interest rate spread - the difference between two interest rates (between foreign and local interest rates)
large spread drove baht strength

triggered - caused
finger pointing - blaming someone for bad thing that happened
local banks - banks in Thailand

The baht has triggered lots of finger pointing, most recently at local banks

eye - to look at something, to check it and investigate it
Banks' dollar borrowing eyed

factor - a fact or situation which influences the result of something ปัจจัย
accelerating - happening at a faster rate เร่งให้เร็วขึ้น
a factor accelerating the baht's strength

blame  - to say that someone did something wrong, caused something bad to happen ตำหนิ, กล่าวโทษว่าเกิดจาก

The Finance Ministry has blamed local commercial banks' offshore borrowing at low interest rates to be lent locally as a factor accelerating the baht's strength.

capital inflows - investment money coming into the country

flood - a large amount or number of something จำนวนมาก
a flood of capital inflow

sources - places where things come from

capital inflows in the first three months of this year came from four sources, and the US$2-billion borrowing by commercial banks was one of them.

bond - money borrowed by a government or an organization from many people who bonds, agreement to pay back the money an investor has lent plus a fixed amount of interest on a particular date
the Thai bond market

current account - the money coming into and going out of a country as a result of imports and exports of goods and services, income from investments, etc

surplus - an amount above the required or necessary amount
current account surplus

foreign direct investment (FDI) - "a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds" (See Wikipedia)

The other three sources were offshore investments in the Thai bond market ($4.7 billion), current account surplus ($1.2 billion) and foreign direct investment ($106 million).

reveal - to show what something is (to people who do know it yet)
revealing names of commercial banks

significantly - in an important way อย่างสำคัญ

"Borrowing offshore loans by local commercial banks accounted for nearly half of Thai bond purchases by foreigners. While it seemed to have lifted the baht significantly, the activity has never been mentioned much," he said, without revealing the names of those commercial banks.

hefty - very large ใหญ่
hefty borrowing

Even though the net amount of local commercial banks' borrowing was only $107 million, the hefty borrowing which was brought into the country helped strengthen the baht against the dollar.

appreciation - when a country's currency becomes more valuable compared to the currencies of other countries (which makes goods exported from the country more expensive) Mr Winai said a resurgence in Thai exports would certainly lead to improved tax revenues, as companies post stronger profits and revenues. But department officials say that

the local currency's appreciation has gained momentum since early this year.

peaked - reached its highest level
it peaked to a 16-year high

prompted by
a flood of capital inflow prompted by

unprecedented - never having happened before ที่ไม่เคยเกิดขึ้นมาก่อน
scale - size (relative size)
on an unprecedented scale

money being printed 
money being printed on an unprecedented scale

a flood of capital inflow prompted by money being printed on an unprecedented scale by the US Federal Reserve

The local currency's appreciation has gained momentum since early this year. It peaked to a 16-year high at 28.55 to the dollar around mid-April due to a flood of capital inflow prompted by money being printed on an unprecedented scale by the US Federal Reserve, the Bank of Japan (BoJ) and the European Central Bank.

currency - a widely used the money accepted for exchange of goods in an economy เงินตรา (See Wikipedia)
retreated - go back to a position or level or place that you were at before rising (example: the floodwaters retreated to their normal level)
currency retreated

However, the local currency retreated to 29.76/80 as of 6pm on Friday.

fundamentals - the underlying health of a company or economy (that will determine whether it is profitable and survives in the long-run) ที่สำคัญ ที่เป็นตัวกำหนดความมั่นคงของบริษัท
somewhat - a little bit

the baht was somewhat beyond fundamentals. 

Bank of Thailand governor Prasarn Trairatvorakul last month said the baht at that time was somewhat beyond fundamentals. 

measures - actions taken to solve a problem มาตรการ
introduce measures

curb - stop or reduce ลดหรือยุติ to control or limit something that is harmful ระงับ, ควบคุม
curb capital inflows

introduce measures to curb capital inflows

central bank - the largest bank in a country, run by the government, that supplies money to banks and controls the amount of loans and money in the economy

pressure - force or push someone to do something
pressured the central bank to do something ....  

The government has since pressured the central bank to introduce measures to curb the capital inflows and the baht's rise.

policy - a plan of action to guide decisions and achieve outcomes นโยบาย (See Wikipedia)
policy interest rate

preferred - people like it more than others ซึ่งชอบมากกว่า
choice - of very good quality หัวกะทิ, ชั้นหนึ่ง, ดีที่สุด
preferred choice

Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong has repeatedly said cutting the policy rate is his preferred choice.

clear - easy to understand
make clear

He made clear he wants to see the rate cut by as much as 75 basis points from the present 2.75%.

scheduled - planned to happen at a particular time or day ตามตารางเวลา

The central bank's Monetary Policy Committee is scheduled to meet on May 29 to decide on the policy interest rate.

spread of interest rates
interest rate spread

Mr Somchai said the spread of interest rates between local and foreign markets has led local commercial banks to borrow abroad.

stimulate - act so as to increase activity กระตุ้น encourage development and economic activity, growth, and development
stimulate economy. 
stimulate the world's largest economy 

The Fed has kept its interest rate within a range of zero to 0.25% to stimulate the world's largest economy. 

rock-bottom - very low (the lowest possible)
rock-bottom rate - the lowest interest rate possible

maintain - to keep รักษา
the Fed will maintain the rock-bottom rate

unemployment - the number of people without a job; the percentage of people who want to work but can't find jobs  (See Wikipedia)  การว่างงาน
unemployment falls to 6.5%

joblessness - Same as "unemployment"

Chairman Ben Bernanke also said the Fed will maintain the rock-bottom rate until unemployment falls to 6.5%. US joblessness stood at 7.5% last month.

natural - what is expected and reasonable in a situation เป็นเรื่องปกติ ธรรมดา
It's only natural.

gap - the distance or difference between two things ช่องว่าง
wide gap
a wide gap between local interest rates and those abroad

profit - money that you make from selling goods and services after all your costs have been paid กำไร
make a profit

opportunity - a situation when it is possible to do something that you want to do  
opportunity to make a profit
see an opportunity to make a profit

As long as there is a wide gap between local interest rates and those abroad, commercial banks see an opportunity to make a profit.

denominated - measured in
foreign-denominated debts - a loan that made with a foreign currency (not the baht), borrowing money in another country's currency

Apart from the spreads, local banks have also benefited from the baht's strength for their foreign-denominated debts.

escalated - increased
capital inflows have escalated

announcement - information given to public ประกาศ
the BoJ's announcement

asset - something owned by a person, company etc., particularly money and property ทรัพย์สิน
scheme - a plan that is developed by a government or large organisation in order to provide a particular service for people แผนการ โครงการ
asset buying scheme

unconventional - not the usual or ordinary thing that people do
unconventional asset buying scheme

Capital inflows into Thailand have escalated since the BoJ's announcement of the unconventional asset buying scheme last month, said Mr Somchai.

slash - (of a budget, price, etc.) to cut, especially by a large amount ตัด
slash the rate

convince - saying things to make a person believe something
convince the central bank to slash the rate

He also wonders how bad an economic slowdown must be to convince the central bank to slash the rate.

adopt - start using something
immediately - happening right after something else with no delay; right away ทันที
adopted immediately - start using right now (without delay)

losing steam - moving or  growing more slowly (like an old "steam engine" train that "loses steam" and slows down)
the economy begins losing steam

The central bank earlier said the rate cut would be adopted immediately once the economy begins losing steam. 

executive - the highest level managers in a company
executive vice-president
a first senior executive vice-president of Krungthai Bank

converted - changed form one form to another เปลี่ยนระบบ เปลี่ยน โอนจากที่หนึ่งไปยังอีกที่หนึ่ง
converted into baht

US dollar borrowing converted into baht for loan extension locally

loan - an amount of money that a person, business, or country borrows, especially from a bank เงินกู้
extension - an increase in the power of effect of something ขยายขอบเขตออกไป
a loan extension

local banks will bring in their US dollar borrowing to be converted into baht for loan extension locally

excessive - too much มากเกินปริมาณที่พอดี
liquidity - the amount of cash and loans available สภาพคล่อง

excessive liquidity
excessive liquidity in the local financial market.

However, Kittiya Todhanakasem, a first senior executive vice-president of Krungthai Bank, said it is unlikely that local banks will bring in their US dollar borrowing to be converted into baht for loan extension locally, given the excessive liquidity in the local financial market.

lending - giving money to someone who agrees to pay it back in the future การให้ยืม
lending banks

risky - involving the possibility of danger, harm or failure เสี่ยงอันตราย
a risky case of currency mismatch 

currency mismatch - when  the money you borrow is in a different currency (borrowing dollars in Thailand, for example)
that lending banks generally try to avoid currency mismatch

Besides, it could be a risky case of currency mismatch that lending banks generally try to avoid. 

funds - money needed or available to spend on something เงินทุน
raise funds
banks raise funds in dollars

extend - to give something to someone
extend a loan - to give a loan to someone

finance - to provide money for something จัดหาเงินทุนให้
transaction - when two people or companies do some kind of businesses that involves the exchange of money (buy and sell goods, for example)
finance transactions

Typically, Thai banks raise funds in dollars to be extended in the same currency to finance transactions by their customers abroad, she said. 

issued - made available ออกใหม่
issued bonds

maturity - the length of the life of an asset
bonds with a maturity period of five and a half years

portfolio - the set of investments owned by a person or an organization; securities (stocks, bonds) owned and derivatives owned by a firm or individual หลักทรัพย์

loan portfolio - the investment of a bank is in the loans it makes (it risks to either make or lose money with each loan)
the bank increased its loan portfolio

Thailand's second-largest bank in March issued $500 million worth of bonds to foreign investors with a maturity period of five and a half years to increase its loan portfolio.