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Published on July 31, 2007

Some economists are urging the government to follow the example of other countries around the world and manage Thailand's foreign reserves by setting up sovereign-wealth funds, which can use excessive reserves for investment abroad.

Among them is Chodechai Suwanaporn, director of the Fiscal Policy Office's Financial Policy Section, who has expressed his support for the establishment of so-called sovereign-wealth management firms.

"Thailand's reserves, of about US$80 billion (Bt2.7 trillion), are too large for the purpose of taking care of the exchange rate, and the central bank should be looking for investment opportunities abroad," he said.

Earlier, Bank of Thailand (BOT) Governor Tarisa Watanagase said she would consult with experts over what to do with the country's foreign reserves. Many observers interpreted her statement to mean the central bank might wish to follow in the footsteps of other countries.

Chodechai said many countries had set up sovereign-wealth management firms after accumulating large reserves of US dollars through exchange-rate intervention or oil exports.

Many governments are also under high pressure to care for populations that are ageing rapidly, and this need for huge financial resources has led them to create sovereign funds to look for investment opportunities abroad.

In Asia, the South Korean and Chinese governments have recently created sovereign-wealth management funds. Indonesia, Malaysia and Taiwan are expected to launch similar funds soon. By the end of this year, the combined value of sovereign-wealth management funds is expected to be about $2.5 trillion, while privately owned hedge funds are expected to total $1.6 trillion.

Finance Minister Chalongphob Sussangkarn and the BOT governor discussed the issue with Prime Minister Surayud Chulanont last Friday.

"For the time being, the government has no policy of setting up such a fund," Surayud said after the meeting.

Chodechai said the BOT could allocate 15-20 per cent of its foreign reserves, presently estimated to be $83 billion (including dollar forward contracts), for investment funds.

He pointed out the success story of the Government of Singapore Investment Corp, which currently has assets estimated at $330 billion (see table). Better known in Thailand is Temasek Holdings of Singapore, which bought Shin Corp in January 2006.

"We could diversify our investment into property, hotels and oil firms," Chodechai suggested.

Chulalongkorn University economist Sompop Manarungsan said that for Thailand, foreign reserves of $40 billion were sufficient. The remaining $43 billion should be put into management firms.

China has recently established such a fund with assets of $200 billion and will begin investing in the fourth quarter, he said. Japan is also considering divestment of its holdings of US treasury bills, worth $616 billion, to diversify its investment portfolio. The Japanese central bank has foreign reserves of $913 billion, about 74 per cent of which is in the form of US treasury bills, 1 per cent in gold and the rest in foreign currencies.

However, Thailand Development Research Institute research director Somchai Jitsuchon said Thai foreign reserves were not big enough for such investment purposes compared with the foreign reserves of Singapore or China, both of which held more than $100 billion.

"When Tarisa spoke about how our foreign reserves should be managed, I guessed she only wanted to find a way of letting part of the reserves flow out of the country, in order to reduce pressure on the baht," Somchai said.

He said International Monetary Fund economists had suggested to Asian central banks that they lend their excess reserves to mutual funds. In this way, investment strategies or returns would be the responsibility of privately owned mutual funds.

Earlier, National Economic and Social Development Board secretary-general Ampon Kitti-ampon suggested part of the country's foreign reserves be used to finance mega-projects. BOT Deputy Governor Atchana Waiquamdee agreed as long as the investment was borrowed from the BOT and not simply taken.

Former BOT governor MR Pridiyathorn Devakula does not support the idea of setting up sovereign-wealth management firms. He said current law strictly prohibits such risk investment.

Finance Minister Chalongphob also warned foreign reserves must be adequate to cope with possible sudden outflows of capital. It is possible that in the future, foreign investors may suddenly sell out local stocks to recover their money, and that could trigger another financial crisis.

Since the central bank has lost as much as Bt173 billion by intervening in the foreign-exchange rate, Chalongphob said the public should understand that the BOT could lose money and diminish the Kingdom's foreign reserves in stabilising the baht.

Wichit Chaitrong

The Nation