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EDITORIAL

Minister, take a lesson from SEC's Thirachai

By The Nation

He should recall his own thoughts on sovereign wealth funds 3 years ago

When it comes to a sovereign wealth fund (SWF), Finance Minister Thirachai Phuvanatnaranubala may have to listen to the advice that he himself gave in his previous capacity as chief of the Securities and Exchange Commission.

On May 15, 2008, Thirachai, as secretary-general of the SEC, gave a sound caution to Asean finance ministers over the setting up of an SWF.

According to the speech, which is still available on the SEC official website, Thirachai did not wholeheartedly support the setting up of a fund for Thailand. Instead, he eloquently raised interesting observations that Thirachai, the finance minister, should be reminded of.

First of all, he said that Thailand may not fall into the category of countries that need an SWF to diversify its investment portfolio.

He said the countries that would need SWFs to diversify their investment portfolios were countries with too few people, or a population that is particularly risk averse to investing abroad, or lacks the knowledge to do so. Then, there may be a case perhaps for the government to do the job on behalf of its citizens, he said. Secondly, countries that may need SWFs are those in which wealth is highly concentrated in the hands of too few individuals. Or a country whose export revenues build up so fast, and the revenues mostly belong to the government, as in many oil exporting countries.

He also suggested that a better and simpler alternative would be for the government to disperse foreign assets out of the accounts of central banks into the hands of private individuals instead. The country should simply liberalise portfolio investment outflow for its citizens.

At any rate, Thirachai, in his capacity as finance minister, has recently asked the World Bank to study the setting up of a sovereign wealth fund. During the election campaign, the Pheu Thai Party expressed its intention to set up a SWF, claiming the country's US$180 billion worth of international reserves wass excessive.

But the plan has drawn controversy, especially after Energy Minister Pichai Naripthaphan said he wanted to use the prospective SWF to buy energy sources to prevent a possible shortage of energy. Many critics questioned the government's objectives even though it was unclear how big the fund would be.

The debate so far has nonetheless not addressed how the prospective SWF would support the strategy that Thailand wants to move forward in the future.

Also, managing a sovereign wealth fund is not an easy task especially when good assets seem to be hard to find amid the global financial turbulence. It is estimated that from 2007 to 2009, the world's SWFs lost roughly 20 per cent of their value - or US$600 billion.

Back in 2008, while mentioning the Thai government may instead further liberalise the market, Thirachai said he could also see an argument for the government to set up a SWF that buys into strategic foreign companies to enhance the global competitive advantages of certain business sectors of the country.

He said: "For example, a country with a strong agriculture sector may buy into bio-technology research companies to leapfrog on crop yields, or buy into fertiliser companies to control supply. A country with strong base metal industries may buy into mining companies." He also said that people said commodities may be the best investment for most emerging market countries - because this could lock up a supply of key commodities.

Nonetheless, Thirachai also addressed the two problems. First, sovereign wealth funds are not welcomed with open arms by some host countries, which are weary of SWFs from other countries coming in to control their resources and technology.

On the home country front, there are more serious problems especially should the government need to explain when a SWF incurs losses, even though it might be temporary and even though there might be an explanation that synergy is being generated elsewhere. It can still be difficult, he said.

Thirachai, as the SEC chief, noted: "It will become even more difficult if the country is like Thailand in that whenever an opposition party switches to become the government, it will have the tendency to try to find fault with the previous administration. We have seen many examples in the past of committees that were set up to investigate past deals. A loss in the sovereign wealth fund may provide a golden opportunity for revenge."

He concluded: "In the end, the answer on whether or not a country should set up a sovereign wealth fund may not lie so much with economics. It may lie more with politics."

No one can give better insight into Thirachai, the finance minister, than Thirachai in his past life, as the SEC chief who looked at this issue with an analytical and objective mind.

-- The Nation 2011-09-12