Sovereign wealth fund for Thailand?
By Jon Fernquest |
Thailand's political crisis began with the sale of Shin Corp to Singapore's sovereign wealth fund over two years ago.
Things haven't been the same since.
This week a conference sponsored by the Fiscal Policy Office of the Thai government and HSBC bank took a closer look at sovereign wealth funds.
One of the issues they addressed was whether Thailand might use a sovereign wealth fund to deal with its massive foreign reserves. The answer seems to have been "no," at least not right now. The conference did explore future foreign reserve investment options for Thailand including: 1. having a portion of the reserves managed by private fund managers, and 2. diversifying into longer term investments with a higher return.
For further reading, see Bangkok Post articles on From Shin Sale to Coup). Here is the full article:
Surapong rules out Thai wealth fund
Not enough reserves to invest overseasPARISTA YUTHAMANOP
Friday May 16, 2008
Establishing a sovereign wealth fund to invest foreign reserves more aggressively in overseas markets may not be possible in the short term, according to the Finance Ministry. Sovereign wealth funds have become increasingly popular among emerging economies and Middle Eastern countries as a means of increasing returns from their large foreign reserve holdings or oil revenues.
But Surapong Suebwonglee, the finance minister, said Thailand's foreign reserves were still too low to make a wealth fund a practical concept.
Thailand's foreign reserves, now at $130 billion including forward positions, have built up rapidly over the past several years, thanks to short-term capital inflows in the local market and a strong trade surplus.
But expectations of a pickup in investment would result in demand for reserves.
"We need to carefully look into this whether the trump card that we have is enough to make us a long-term successful investor in the overseas market. In this aspect, I don't think the official reserve currently is enough," he said at a conference on sovereign wealth funds sponsored by the Fiscal Policy Office and HSBC.
Dr Surapong said the ministry was reviewing various options to help boost the investment returns from the country's official reserves.
"The strong baht and the high reserves could cause an opportunity loss. But there are many means to utilise reserves," he said.
As of last Friday, gross foreign reserves were $130 billion, including $20 billion in net forward position, up 40% from the beginning of 2007.
Net official reserves are now equal to 10 months' import and 40% of gross domestic product.
Thirachai Phuvanatnaranubala, the secretary-general of the Securities and Exchange Commission, said the government should focus on promoting outbound foreign direct investment by local firms as a way to reduce pressure from foreign capital inflows.
"We need to have a clear policy on foreign exchange first. The economy could run a current account deficit in the future, causing the baht to weaken. To what extent can we tolerate a weaker baht?" he asked rhetorically.
Kanit Sangsubhan, director of the Finance Ministry's Fiscal Policy Institute, said Thailand actually had only $10 to $20 billion in available foreign reserves for possible investment.
Some $26 billion in reserves are required to be maintained as a legal support for currency in circulation.
Another $49 billion are intended to cover foreign debt and another portion is needed in lieu of foreign equity investments.
One option to improve returns was to have the government separate a portion of the reserves for management by private fund managers.
Foreign reserves are now managed by the Bank of Thailand, which mostly avoids long-term investments in order to maintain liquidity.
"The ministry could allow the central bank to continue managing the reserves but with greater flexibility or it may adopt a mixed approach," Dr Kanit said.
Charlie Hanbury-Williams, HSBC's global sector head for public sector and reserve management, said high official reserves reflect the country's cost to mop up additional money supply as a result of foreign capital flows.
Thailand could face growing problems managing high foreign reserves in the future, he said.
"Thailand may have too much of a good thing. The time could come when the amount of reserves far exceed the need you might have to tackle foreign-exchange issues," he said.
Vocabulary:
a sovereign wealth fund - a government run fund for investing overseas with funds coming from foreign exchange reserves (See Wikipedia)
reserves - money that is available now (on hand) and available for planned future payments or other unforeseen need (See Economist glossary)
foreign reserves, foreign exchange reserves - reserves of currencies from other countries held by the government of a country
aggressively - with great determination and force
emerging economies - an optimistic way of saying "developing country," a country that has not yet become a modern industrialised, rich country yet
short-term capital inflows in the local market - money moving internationally, invested in Thailand as well as other countries for only a short period of time
a strong trade surplus - the value of exports is a lot more than imports
a pickup in - an improvement in
a pickup in investment - an improvement in investment
trump card - something powerful that you use or do that gives you an advantage over other people
utilise reserves - use reserves
net - remaining amount after all deductions subtracted
sell forward - the seller agrees to provide goods at a fixed price on some date in the future
buy forward - the buyer agrees to receive goods it at a fixed price on some date in the future
a position of X in asset Y - the total amount X of asset Y that is owned
net forward position - sold forward more than you bought forward
Foreign Direct Investment (FDI) - when a company "invests directly in production in another country, either by buying a company there or establishing new operations of an existing business" (See Economist glossary)
outbound foreign direct investment by local firms - companies that
pressure from foreign capital inflows - if a lot of foreign investment money flows into the country, this makes the currency stronger and more valuable (currency appreciation)
reduce pressure from foreign capital inflows - taking measures to offset the foreign investment inflows that are making the baht stronger, if Thais invest overseas this outflow will offset the foreign inflow
offset - move in the opposite direction (See glossary)
balance of payments - money coming into a country less money going out of a country during a period, = current account + capital account (See Economist Glossary)
the current account - roughly: Exports - Imports
the capital account - roughly: long-term capital flows from FDI - short-term capital flows by portfolio investors (speculators, fund transfers by multinational companies), short-term flows can lead to sharp movements in exchange rates
a deficit - more goes out than comes in
a surplus - more comes in than goes out
run a current account deficit - roughly: more exports than imports
tolerate - even someone or their ideas, even though you don't like them
asked rhetorically - ask a question to make a statement, rather than to get an answer
currency in circulation - the physical money that is in the economy, in the hands and wallets of consumers who are using it to purchase things (some are hiding it under their matresses also)
in lieu of - instead of, in place of
maintain liquidity - making sure the assets you hold are quickly convertible to cash without a loss of capital (for example, a house is not liquid because it requires a long time to find a buyer, US treasury bills are a low-risk, near subsitute for cash, and are therefore very liquid)
flexibility - able to change easily and adapt to new situations as they occur
mop up - remove something so that it is no longer a problem (like "mopping up" a drink that someone spilt on the floor with a "mop")
mop up additional money supply - reduce the money supply (by selling bonds or by currency swaps, for example)
