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Published on July 26, 2007

The Bank of Thailand (BOT) is looking at independent management for some portion of the country's US$73-billion foreign-exchange holdings to maximise investment returns.

"We might set up a fund management unit to look after the reserves. Or we can also separate the reserves and manage the money independently," BOT Governor Tarisa Watanagase said yesterday.

In an interview with Suthichai Yoon's radio blog, Tarisa said she would consult with experts and the Finance Ministry on how to make use of and get the best yields from the foreign-exchange reserves, which have swollen since the 1997 financial crisis to the equivalent of Bt2.46 trillion.

In Asia, China and Singapore are two countries that have turned to a business model to run their international reserve operations.

But here, it's long been taboo to touch the international savings, which are considered the country's last resort in case of a crisis. The reserves also serve to back the baht in circulation and to facilitate financial and international trade transactions. Amounts greater than what is needed as a cushion against emergencies and for international settlements are considered excess.

Managing the foreign reserves with a business model is a way to shift capital out of the country and reduce the surplus.

Supavud Saicheua, managing director of Phatra Securities, argued that if the central bank accumulates foreign exchange indefinitely to stabilise the baht, it might need to set up an investment unit to manage the excess reserves.

"This would, however, require Thailand to make legislative changes for excess reserves to be set aside under, say, a government investment corporation of Thailand (GICT) to spend/invest these excess dollars. The legislative changes will be a challenge, especially accepting the possibility that some of GICT's investments could face losses," he said.

"This option is not ideal for two main reasons. First, persistent balance-of-payments surpluses arising from a policy of undervalued exchange rates would only force the GICT to get bigger, pushing it to eventually make risky investments. If it does not, and returns are low, then the opportunity cost to the Thai economy and people would be large.

"Second, excess reserves can be seen as a tax on imports. In other words, if the baht were allowed to appreciate, Thai consumers and investors could have enjoyed cheaper imports."

But Tarisa said if the reserves are to be designated for active management, it must be done with a legal backup or with clear rules and regulations.

"It's a risky venture, so we need somebody who is an expert to look after it," she said.

The Government Investment Corporation of Singapore, which is managing the city-state's glut in foreign reserves, has been investing aggressively in foreign assets.

Thailand's reserves are mainly kept in low-risk offshore sovereign bonds.

Tarisa also hinted that the central bank is quite satisfied with the current level. "We have enough of foreign reserves."

This implies that the central bank might be afraid of more losses from the build-up in reserves because the value of the US dollar is falling against the Thai currency.

Last year alone, it posted a loss of almost Bt100 billion from intervention in the forex market to calm the baht.

In 1997, Thailand was forced to seek a $17.2-billion support programme from the International Monetary Fund because it depleted its reserves trying to defend the baht.

Now it has replenished financial resources and is not sure how to deal with the pile.

Commerce Minister Krirk-krai Jirapaet also said yesterday that his ministry would join with the Industry and Energy ministries in making a proposal for local companies across industries to invest overseas.

The incentives would help the companies reduce exchange risks and diversify, he said.

Thanong Khanthong

The Nation