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Chumphol Mahattanakul
B.Econ (Quantitative), B.Eng (Electrical) and
M.S. (Operations Research)
The article is divided into two parts. The first Part illustrates a certain money
market mechanism through which additional supply of money is schematically
siphoned out in order to salvage the sinking financial institutions via the
lending of Financial Institutions Development Fund about three years ago. It
has dried up a liquidity available for the real sector with an embedment of
higher interest rate. A certain part of this article is to show that there remains a
room in case of no additional fund received that an interest rate could be
brought down without affecting the FIDF operation, and also benevolent to the
real sector. The latter Part is concerned about the about-face situation where
interest rates have been brought down continually for the sake of capital re-
structuring of the financial institutions, while leaving the real sector at random
with lending malfunctions. This Part also suggests a minimum deposit interest
rate pegging strategy, a way of compelling the banks to drain their liquidity.
PART I
CHARACTERIZATIONS
With a limited additional source of fund as characterized by SS curve of
which the vertical portion is reflecting its scarcity. A curve of FIDF demand
for money, DD(FIDF), is something positioned upper and right-hand-side a
demand for money curve of the real sector, DD(real sector), and then bent
downward as if it is meeting a saturation point along the salient part of
inelasticity.
Interest Rate
S S1
D (FIDF)
A*
i*
S
i1 D(real sector)
S'
i1' S'' A1' A1
i2' A2'
i2 S1 D(real sector)
A2
S2
D (FIDF)
O M* M1 M2 M
Money Supply
HOW TO HANDLE
A problem-solving is most likely to put more weight on boosting a purchasing
power (on the earnings side) than a debt settlement side. In other words, the
administration should strengthen and focus on the earning hand not the
debt-settling hand. No repayment can be made unless having money. On a
broad amount of five trillion baht national savings, every cut of one per cent
of deposit is equivalent to a yearly loss of fifty thousands million baht
purchasing power. Notwithstanding how low an interest rate would be,
interest-stimulated investment policy stays impassive in a liquidity-cum-debt
trap situation as no interest resilience can yield on investment.
It is requisite that the administration peg the floor (minimum) for deposit rate
at which the banks would suffer a loss unless injecting money into the economy
through their lending hands, a way of turning around the economy. By this, a
proportion of contributions to the economy is believed to account for much
larger than that of a set-back of the recurrence of non-performing loans with
which a national assets management corporation could appreciably cope. A
three-year attest of business strength of the survived business firms is likely
sufficient for the banks to restore their functional lending as usual. An afraid
of facing NPL recurrence should not be an excuse any longer.
Bangkok
May 13, 1998