Investing a nation's wealth for the future

 The investment objectives include savings for future generations, smoothing income streams or simply achieving higher returns on the country's reserve holdings.

Sovereign wealth funds (SWFs) are funded by the government's foreign-currency reserves or fiscal surpluses and are managed separately from official international reserves.

At present, there are about 50 SWFs in global markets. Their total size has been estimated at about US$2 trillion (Bt63.8 trillion) to $3 trillion, about double the size of hedge funds around the world.

Broadly, the sources of an SWF are a country's external reserves from its current-account surpluses from commodity and non-commodity exports, or its capital-account surplus following large net capital inflows. In terms of sustainability, the surplus from commodity exports is relatively predictable, long-lasting and regarded as genuine financial wealth. It can therefore be invested in assets with higher returns and greater risks.

In contrast, the current-account surplus from non-commodity exports tends to be more volatile.

Meanwhile, the wealth accumulated from large capital inflows is the least dependable as this could easily reverse, especially short-term inflows. Hence these two types of wealth may be thought of more as "borrowed wealth" and should not be invested in risky assets.

Thus, the investment returns from borrowed wealth would tend to be lower than initially expected.

While carving out part of a country's international reserves and investing it in more diversified asset classes other than foreign government bonds and debt papers is one plausible way to enhance returns, higher risks are also involved.

Importantly, if the objective of establishing an SWF involves the country's strategic investment, it is necessary that such an SWF allows that country to meet future economic and social needs through investment in strategic assets.

What kinds of foreign assets deserve to be another country's strategic assets?

Should it be energy, telecommunications, transport or something else?

Indeed, reflecting on the proliferation and some high-profile investments in the midst of financial turbulence in global markets, the growing role of SWFs has attracted a wide range of criticism on governance, transparency and possibly hidden political agendas underlying investment decisions, which in turn might trigger negative reactions from investment recipient countries.

For any country, establishing an SWF will naturally require a thorough study of the readiness of that country in terms of sources of wealth, financing adequacy, as well as the identification of justified invest-

ment objectives and capacity to make efficient overseas investments.

While these are some of the initial considerations, key detailed practical considerations are the legal infrastructure and the observance of international best practices regarding SWFs.

Indeed, current issues of intense debate on SWFs include the institutional arrangement, organisational structure and the legal process governing reserves and public-debt management that the country needs to revisit extremely carefully to ensure the safeguarding of its financial stability over the long term.