Sovereign wealth fund not a goal for central bank

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Sovereign wealth fund not a goal for central bank
ACHARA DEBOONME
THE NATION

BANGKOK: -- THE Bank of Thailand is not pursuing a path towards the creation of a sovereign wealth fund, but rather seeking greater flexibility in managing foreign reserves to cope with volatility in the year ahead.

Like his predecessor, Prasarn Trairatvorakul, newly appointed BOT Governor Veerathai Santiprabhop does not support the idea of financing government projects with foreign reserves.

"The reserves do not belong to any government," he bluntly said in an interview, when asked about the possibility. "Rather, it is the money of all Thais, aimed at maintaining the stability of international transactions."

Reserves are accumulated in line with foreign inflows, therefore all parties must be mindful when the capital exits the country, he added.

The central bank has been under pressure to finance government projects with the reserves, following success stories of the sovereign wealth funds of several Asian countries, chiefly Singapore and China, in creating national wealth, as well as new infrastructure projects at home.

The pressure to finance projects this way mounted particularly during the previous Thai government.

Thailand's reserves peaked near US$180 billion (Bt6.47 trillion) before export declines sapped the amount in recent years. Still, the reserves remain high, at roughly nine months of import value.

As of November 27, the amount stood at $155.7 billion, excluding a net forward position of $11.86 billion.

The reserves have tended to rise further due to the current-account surplus, which was as high as $26 billion in the first 10 months of the year.

Veerathai stressed that all other options must be exhausted before the reserves could be tapped.

In the energy sector, Thailand is represented overseas through private companies, he added.

Against the idea of investing the reserves in unconventional securities, the BOT is instead seeking to expand the pool of investable assets for its reserves.

Government bond yields in several countries have fallen sharply due to quantitative-easing measures. In search of a higher return, the central bank eyes investing a portion of the reserves in global equity markets, in addition to highly rated corporate bonds.

Three goals are in mind - returns, liquidity and stability - the governor said.

"Several central banks have invested in equity, some even in real estate," Veerathai said. "We need to admit that investment in government bonds generates very low returns. Besides, equity and bond markets offer a different correlation. When the equity market is good, the bond market flops. More choices should allow us to earn a higher return."

The governor also said the Finance Ministry had approved the draft amendments to the Bank of Thailand Act, to free reserves under the banking department. The investable assets for reserves in the currency reserve account, meanwhile, would remain unchanged.

He added that once the amendments were finally approved, the BOT would not immediately jump into the market, and help from experienced fund managers would be sought.

He also mentioned that the targeted amount would be small, and would be geared towards long-term gains.

In the interview, the governor also expressed concern about greater volatility in the global financial market next year.

While the US rate hike would suck capital from emerging markets, monetary easing in the euro zone and Japan would inject new capital into the market.

Yet, the yuan, with the International Monetary Fund's permission for it to become the fifth reserve currency next October, will become a new factor influencing the market, as well as yuan accumulation by central banks, he explained.

Though the yuan's weight in the IMF's reserve basket will be as high as 10 per cent, Veerathai said the ratio of Thai reserves denominated in yuan may not match the IMF's weighting, with the returns and risks of each reserve currency forming part of the picture.

"I don't think all [central banks] will jump to 10 per cent, due to the limit of [yuan-denominated] securities," he said. "From now until October 2016, the BOT's operations will need to take several factors into account."

Source: http://www.nationmultimedia.com/business/Sovereign-wealth-fund-not-a-goal-for-central-bank-30274534.html

-- The Nation 2015-12-09

[bangon04]

"Reserves are accumulated in line with foreign inflows, therefore all parties must be mindful when the capital exits the country, he added."

The government is working on it. We are doing our collective best to discourage foreign inflows, and we are all doing our individual best to increase capital exits.