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Published on March 11, 2008

 This will help reduce the pressure of capital inflow that has sent the baht on its appreciation trend.

There are a few things the BOT should bear in mind when thinking about an SWF, because there are many different models to consider.

Is governance an important issue?

This is crucial, because the SWF will be managing a significant sum of money. Norway's SWF has strict rules on the governance structure that ensure transparency and accountability, and it really seems to have set a gold standard for SWFs.

Governance rules should make clear the key performance indicators that will be used to judge the success of the fund, and these should be published regularly. There should also be external audits and inspections to ensure there is no malfeasance. Parliament should have ultimate rights to scrutinise the financial statements, for instance.

What is the primary objective of an SWF?

You have to consider whether it is to maximise returns and nothing else (like GIC Singapore) or be used for some strategic purpose. In China, for instance, a good part of the funds are to be used to recapitalise domestic banks. Or is it meant also to assist in monetary policy - in the sense that by moving liquidity abroad, it relieves pressure on the central bank in managing domestic liquidity?

Experience suggests that there should be one clear objective for each SWF, so as to minimise loss of focus and scope for misjudgement.

What are some of the risk-management guidelines? Will the SWF invest domestically?

GIC, for example, is not allowed to invest any money in Singapore or in Singaporean-dollar-denominated assets. Since it is meant to manage a large part of Singapore's national savings, it was thought that it should not be exposed to domestic Singaporean risk.

With so much money under management, an SWF is always the target of cronies and corrupt officials. Therefore, it is vital that there be appropriate risk-management guidelines to prevent the loss of funds.

How many SWFs should there be?

There is an argument for more than one SWF in a given country. First, it is better to diversify the institutions that are managing a large proportion of a country's reserves or national savings. If these funds are spread across two or three institutions, there is less likelihood that problems in one particular institution will lead to the loss of a considerable percentage of a country's savings.

Remember what happened to Indonesia in the Pertamina scandal of the late 1970s? So much of the country's surpluses from oil revenue were in one institution. And when poor management and corruption infected that institution, Indonesia lost a huge part of its oil surpluses, and this also led to a crisis in the economy.

Also, there could be multiple objectives, and these are best met by each SWF being dedicated to a specific objective or a specific range of risks. One SWF could be much more risk-tolerant than another, for instance.

How do you deal with backlashes from foreigners when an SWF makes acquisitions in another country?

There is much concern now in the US and Europe about foreign SWFs coming in to acquire iconic companies or invest with a national-security agenda of some kind.

The reality is that all SWFs have to move carefully, win over such detractors and build a level of confidence in their activities.

How active should an SWF be in its investments? Should it seek management control, or will it always limit its investment to small stakes that do not come with board membership or other responsibilities?

Generally, SWFs prefer the latter in foreign investments, because that minimises the risk of political backlash - but then it may not have sufficient influence to protect its investment. So there has to be a balance.

Manu Bhaskaran, a leading economist from Singapore, speaks with 'Nation' editor Thanong Khanthong about the Bank of Thailand's possible establishment of a sovereign wealth fund.

The Bank of Thailand (BOT) is pondering the establishment of a sovereign wealth fund (SWF).

TheNation