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Wealth fund under review

BOT governor says investment vehicle must be sustainable

BANGKOK: -- The Bank of Thailand will conduct a thorough feasibility study before making a decision on whether to establish a sovereign wealth fund, Governor Tarisa Watanagase said last week.

The study will ensure that the size of the fund is appropriate and that its investment objective is clear if a fund is to be set up.

Otherwise, the fund, as proposed by the government, would be established at the expense of other economic factors.

Tarisa said such a fund could be created from the Kingdom's international reserves, which are built up from non-commodity export income. However, this income as well as capital inflows is borrowed wealth, unlike that from commodity exports, such as oil, which is more sustainable wealth.

"The source of the funding is borrowed wealth, so we have to be clear that the size of the fund would make us comfortable," she said in an exclusive interview with The Nation Group.

The central bank will also thoroughly consider whether export income is sustainable enough to boost foreign reserves to a level that makes setting up the fund feasible.

Foreign-exchange income could drop, as the Kingdom's current account is likely to move into deficit soon when public and private investment fully picks up.

Moreover, capital outflows could become evident anytime amid current global financial integration.

"As a result, we're studying whether we should really set up the fund as we shouldn't just follow the current fashion [for countries with large foreign exchange reserves to have a sovereign wealth fund]. We don't have an urgent need," she said.

Recently, China introduced its sovereign wealth fund - the China Investment Corp - from non-commodity export income. But China's foreign reserves are enormous so they would be only slightly affected if exports become sluggish.

The governor said the central bank must also consider whether the size of a proposed fund contributes to an economy of scale or whether it justifies the cost.

In addition, the fund's investment objective must also be clear - whether it aims to maximise returns or to focus on strategic investments.

The objective of China's sovereign wealth fund is mainly for strategic investments as it, for example, has attempted to acquired international interests in oil and energy resources to meet domestic demand.

Tarisa said the Bank of Thailand will proceed with the fund's establishment if advantages are clear.

If the study shows that setting up such a fund is not yet appropriate, it will look for other choices such as amending the Bank of Thailand Act to authorise the central bank to invest in higher-risk bonds and other debt securities.

--The Nation 2008-05-11