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Published on November 23, 2007

 Is this amount, which is a historic high, too much? Not really. In this era of financial globalisation, it is difficult to predict the movement of capital. We can't really rush to pass judgement that foreign reserves of $100 billion are too much to handle.

We may recall that at the end of 1996 Thailand had foreign reserves of $39 billion. Most of these reserves were accumulated by short-term debt brought into the country. At that time, the country was running a current account deficit of 7-8 per cent of the gross domestic product. So the reserves were pretty much "other people's money".

When the country faced a crisis of confidence in its financial and foreign-exchange system, capital began to flow out of the country. The reserves did not match the short-term capital of $50 billion-$60 billion. So investors lost confidence because they were afraid that we might not have enough dollars to service the debt.

The massive capital outflow, matched by the ensuing Bank of Thailand's defence of the baht by selling the dollar, resulted in the country losing most of its reserves. Before Thailand sought a $17.2 billion support programme from the International Monetary Fund, reserves fell to a net $800 million. That was when all hell broke loose.

Now the central bank appears to have learnt its lesson. Over the past few months it has somewhat improved its management of the foreign exchange reserves. In doing so it has bought up dollars consistently to defend the baht at a certain level in order to keep its value competitive against regional currencies. This prevents losses from intervention because it does not allow the baht to move up. As a result, Thailand's reserves jumped rapidly to more than $100 billion.

Late last year and in the first half of 2007, the central bank was still unsure of what it wanted to do in foreign-exchange management. It intervened in the foreign exchange market half-heartedly, unsure of when it should step in or when it should back off. This half-hearted intervention lost the central bank money because it allowed the baht to rise beyond its level of defence cost. When marked to market, the dollar reserves have less value in baht terms.

The central bank was not paying attention to what neighbouring central banks were doing. For instance, in the first six months of this year, the Bank of Thailand's foreign reserves increased by $12 billion, while Bank Negara of Malaysia's reserves jumped by $30 billion. Bank Negara was not afraid to buy up the dollar to support the ringgit, arguing that it is easier to manage capital inflow than capital outflow. Now the baht is moving in line with the regional currencies. Exports, contrary to pessimistic views, are also doing fine, reflecting the competitiveness of Thailand.

The next question is what we should do with the foreign exchange reserves to get better returns? To manage the excess reserves, some people say we should start to think about setting up sovereign wealth funds like China, South Korea and Singapore.

China now boasts $1.3 trillion in foreign exchange reserves. It has decided to set aside $200 billion from these reserves as a sovereign wealth fund to invest in assets in foreign countries.

For Thailand, according to Dr Chalongphob Sussangkarn, the finance minister, it might not be time to set up a sovereign wealth fund. He said the $100 billion reserve is not that high, even though the country's short-term debt is now low, at around $20 billion. We must take into account foreign investment in equities, bonds and other types of investment; once these are sold by the investors and taken out of the country in the form of dollars, our reserves must be able to cope with this volatility, he said.

Chalongphob said it might be time to consider setting up a sovereign wealth fund if Thailand's reserves hit $130 billion. This would allow the country to manage the foreign exchange reserves for maximum benefit.

 Thanong Khanthong

The Nation