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Published on August 7, 2007

Rapid accumulation of international reserves can also pose a policy challenge to the authorities, particularly if the reserves are made up of currencies such as the US dollar that are seeing a fall in value. In this regard, Thailand's assets will also face a fall in value with the declining value of the US dollar.

The rapid and huge increase in the international reserves can be partly attributed to the surplus from export earnings and also from capital inflow in the form of foreign direct investment or portfolio investment into the Thai stock market. Now portfolio investment is dominating the capital inflow.

To curb the sharp appreciation of the baht as a result of the current account surplus and from the capital inflow, the Thai authorities are obliged to intervene in the foreign exchange market by buying up the US dollar and selling the baht.

The dilemma is that if the value of the US dollar continues to decline, the authorities will face a tough task to manage the international reserves in such a way that higher yields gains offset the loss from the foreign exchange intervention.

If we fail to manage the reserves well enough, the country's assets held in the international reserves will continue to suffer a fall in value in the long term.

Thailand's international reserves of US$73 billion are now equivalent to around 40 per cent of the GDP (6 per cent for industrialised countries), or 7.5 months of imports (3 months for industrialised countries).

The reserves are also equivalent to 415 per cent of the country's short-term foreign currency debts (41 per cent for industrialised countries).

From these figures, we may conclude that Thailand has more than enough international reserves. The point is how we should manage the surplus of the reserves for maximum return in the long term.

It is no longer the case to argue that, as a developing country, Thailand needs a huge amount of international reserves to assure that it has enough liquidity to cope with a 1997-style financial crisis if it were to happen again.

But the trend is that the baht will continue to rise at least over the next two to three years because of the global capital inflow. It is necessary for the authorities to set aside a portion of the international reserves, which can be invested for higher return, instead of idly keeping them for low return as is now the case.

We should draw up an offensive strategy for the management of international reserves at this juncture. This can be handled by dividing the reserves into two tranches - the liquidity tranche and investment tranche.

The liquidity tranche will aim to manage liquidity and investment in safe havens. The authorities are already investing the reserves in foreign assets or other short-term monetary instruments that are safe. But this represents passive management.

For the investment tranche, the authorities will have to assume a more active role in the management, which can be in the forms of mutual funds, hedge funds, listed companies overseas, real estate or other higher yield monetary instruments.

They may also consider investing in private equity that provides high returns in the long term. This may entail a hiring of foreign specialists to manage the investment tranche on the authorities' behalf.

Other countries such as Singapore, South Korea, Kuwait, the United Arab Emirates and Norway have already formed an independent unit to help manage their international reserves.

The opinions expressed in this article are those of Dr Chodechai Suwannaporn and should not be construed as the official view of the Fiscal Policy Office, where he works.

Dr Chodechai Suwannaporn

Special to The Nation