Financial expert Vichai Punpocha has floated the idea to carve a Foreign Exchange Management Unit out of the central bank. This comes at a time as the baht continues its upward trend and the stronger currency threatens the competitiveness of Thai exports.

Vichai said that with global knowledge, the new institution could become a proprietary foreign-exchange trader providing and securing the best foreign-exchange rates for Thailand's state-owned enterprises and import and export companies.

"By doing so, the Finance Ministry and the Bank of Thailand may concentrate on their management of economic and inflation policy.

In the event of a strong baht, the new institution will long the foreign exchange for yielding placement in AAA-Titles of countries with sound economic health," Vichai said.

"This method is now being applied by all leading investment banks and universal banks with a steady division profit. Maybe it is now time for Thailand to go for this solution."

Hong Kong and China are now eyeing bringing in business and profit opportunities for their huge foreign-exchange reserves of US$136.3 billion (Bt4.76 trillion) and $1.066 trillion, respectively.

Yesterday, a Citigroup Global Markets report said the Hong Kong government required the Exchange Fund, which manages foreign reserves, to earn higher revenues from investment. Similarly, China is setting up an investment agency to manage part of its foreign-exchange reserves. The move will lead to a diversification of China's foreign reserves.

The Bank of Thailand (BOT) is in the process of revising the Currency Act, which would allow it greater flexibility to invest its foreign-exchange reserves of almost $70 billion.

Currently, the BOT is allowed to invest its reserves in the government bonds of developed countries.

Government of Singapore Investment Corp has been set up with reserves of the Monetary Authority of Singapore and is now investing these reserves worldwide for higher yields.

The UBS Investor's Guide said last Friday that global foreign-exchange reserves had reached $5 trillion at the end of last year, doubling the total in 2002.

It said the US dollar remained the No-1 reserve currency but that emerging market countries had increasingly diversified over the past six years. Some commodity exporters, especially oil-exporting countries, might switch from the dollar into other currencies, mainly the euro, it added.

The BOT, for instance, has reduced its dollar holdings to significantly below 66 per cent of its reserves, the central bank reported earlier.

The UBS Investor's Guide said the huge build-up of foreign-exchange reserves was due to emerging markets in Asia, oil-producing countries and Japan.

"We think the build-up of foreign-exchange reserves is likely to stop at some point, unless the large current-account deficit of the US continues," it said.

"Such a halt could weaken the US dollar against the currencies of the countries accumulating reserves, since the demand for dollars would diminish. In fact, the currencies of countries accumulating foreign-exchange reserves generally strengthen in the long run."

Thanong Khanthong

The Nation