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Published on October 4, 2007

The Finance Ministry has resubmitted the draft amendments to the Currency Act, along with three other finance bills designed to modernise the regulatory regime of the Thai financial system, to the National Legislative Assembly (NLA). Having consulted members of the banking/finance industry and the assemblymen, the ministry, which is the sponsor of these important pieces of legislation, now expects the four bills to stand a better chance of being passed.

The financial markets have been waiting for the passage of these four bills. Thailand, at its current stage of economic development and integration into the global economy, needs the whole package of the proposed financial laws - including the Financial Institutions Act, the Bank of Thailand Act and the Deposit Guarantee Institution Act - to strengthen its financial system. These laws will also make the Thai financial system more transparent and hopefully create some immunity against the adverse impacts of global financial volatility.

In August, Finance Minister Chalongphob Sussangkarn abruptly withdrew the four pieces of legislation before the NLA had a chance to take them up for deliberation. The Finance Ministry reasoned that it needed more time to promote better understanding of the bills among people in the industry, and among members of the public, in order to improve the likelihood of their passage. But the fact was that a powerful faction within the NLA had been at odds with the Surayud government. This faction planned to rally support from other NLA members to shoot down any pieces of government legislation.

The Finance Ministry and the Bank of Thailand have spent the past month and a half clarifying the substance of the bills. They have exchanged views with leading economists, senior bankers, financial experts and NLA members, and have revised the bills to make sure that they serve the stated purposes while at the same do not pose undue impediments to the conduct of business and the smooth functioning of the economy.

However, both the finance minister and the central bank must brace themselves for possible opposition from a group of anti-government assemblymen who may choose to oppose the bills for purely political reasons. They should not underestimate this small but vocal opposition group, which has connections to an influential media group and some military leaders. The opponents of the bills are not only capable of totally disregarding any attempt to engage them in rational debate, but also are fully prepared to pander to a xenophobic form of nationalism that serves to cloud the real issues. They have already succeeded in bringing down the Commerce Ministry's attempt to revise the Foreign Business Act.

In the proposed amendments to the Currency Act, the key issue is to reduce the government's exposure in financing debts incurred by the Financial Institutions Development Fund (FIDF) after the bailout of financial institutions.

As things stand, both the Finance Ministry and the central bank have to shoulder the burden of the bailout cost of the Thai financial institutions. The central bank, through the FIDF, has to issue bonds in order to bear the principal cost, while the Finance Ministry assumes the interest costs. Since the Bank of Thailand is saddled with accounting losses as a result of the baht intervention, it has found itself in no position to finance the principal cost of the financial restructuring following the 1997 financial meltdown. This has put the Finance Ministry in trouble, as it is forced to service both the principal debts and interest burden.

By seeking to limit its exposure in financing the FIDF, the central bank would be put in a better position to manage foreign-exchange rates to deal with the unpredictability of global capital flows, which requires timely responses. As a package, the four financial bills, if passed by the NLA, would provide the government and the Bank of Thailand with financial/monetary management tools. At present these tools are not available to them, and therefore expose the country to an unacceptably high level of financial risk.

The proposed laws would also remove outdated restrictions on the management of foreign exchange reserves - which incurs unnecessary economic costs - by providing new management options. The NLA must pass these financial laws to move the country ahead.