Govt mulls wealth fund

Thirachai: Gives BoT a month to study idea

Foreign reserves may be set aside to invest abroad

Finance Minister Thirachai Phuvanatnaranubala has told the central bank to study the possibility of putting aside a portion of the country's foreign reserves to set up a sovereign wealth fund to invest in infrastructure projects abroad.

He instructed the Bank of Thailand (BoT) yesterday to complete its study within one month.
If the central bank's study shows the idea is feasible, he will ask it to submit certain details on establishing the fund, including its size and who will manage it, Mr Thirachai said.
By law, foreign reserves are needed to back up the Thai currency.The central bank also uses the reserves to manage the baht's foreign exchange rate.
Mr Thirachai said the foreign reserves are equivalent to US$189 billion (5.67 trillion baht), enough to set aside a portion to establish a wealth fund without having an effect on the baht and on foreign exchange rate management.
He said Thailand should use the extra foreign reserves to make gains on investments, particularly in infrastructure projects in Asean countries and also in certain Asian nations which still need capital to develop infrastructure.
"The development of such infrastructure projects will also benefit Thailand as they will enable Thailand to link its transportation with the region's networks," he said.
The fund should be booked as a sovereign risk, meaning its gains or loss would be booked in the government's accounts and not the central bank's. This would protect the central bank from being affected by the performance of the wealth fund.
Mr Thirachai said part of the country's reserves are in foreign currencies whose values are declining as some countries are injecting more money into their economies. This depreciation would lower Thailand's foreign reserves.
The BoT's foreign reserves comprise US dollars and euros. The two currencies are under strong pressure due to the twin crises in the United States and the Eurozone.
The central bank recently converted part of its reserves into gold, but the greenback and the euro are still believed to form the largest portions of the reserve basket.
"This is the other reason for Thailand to earn higher gains to offset depreciation of its foreign reserves," he said.
Former finance minister Korn Chatikavanij said politicians must not interfere in the central bank's decision on whether it is necessary to set aside foreign reserves to set up the wealth fund. If it is set up, politicians should not be allowed to take part in managing the fund.
"The foreign reserves represent the country's economic stability and credibility, so politicians must not have any say in this," Mr Korn said.
Economist Somphob Manarangsan said part of the country's foreign reserves are in the form of fund flows to the stock market and also foreign debts.
"In the worst case of foreign investors selling all their investments in the stock market and also recalling all debts, the foreign reserves must still be high enough to back up the Thai currency and manage foreign exchange rates," he said.
The size of the wealth fund, if established, should not be higher than 10% of the total existing amount.
Mr Thirachai also assigned the central bank to study how to reduce the government's burden in servicing debts owed by the Financial Institutions Development Fund.
The fund was set up to bail out failing lenders during the 1997 financial crisis.
The government had realigned interest payments so they are paid regularly, while the central bank is responsible for servicing the principal of the debts.
The interest burden amounts to about 60 billion baht a year, which affects the government's ability to invest in infrastructure projects, Mr Thirachai said.
In his view the gap between the BoT's upper- and lower-bound inflation target was too wide, ranging from 0.5-3%.
He has assigned the central bank to study whether it is possible to narrow the gap.
The target means the BoT will not allow inflation to move higher than 3% or lower than 0.5%.
If there are signs of inflation going higher or lower than the target, monetary measures will be implemented to keep the inflation rate in the target range. One such measure is to raise or lower the policy interest rate.
BoT governor Prasarn Trairatvorakul said the central bank would not increase the upper-level target from 3%, but it would consider adjusting the lower one up from 0.5% to narrow the range.
"If we increase the upper-bound target, it means we send a signal to the public that we would allow inflation to go higher. The interest rate would rise too if inflation goes up. Borrowing costs would increase as investors would look for higher bond yields that would beat inflation," Dr Prasarn said.
He said the current inflation target was appropriate to monetary policy as it allowed the central bank to control increases in prices efficiently.
Deputy Prime Minister and Commerce Minister Kittiratt Na-Ranong said inflation this year was expected to reach 4.1%, higher than the target range of between 3.2 and 3.7%. However, the government's policies would help to bring down inflation.
The ministry had found that manufacturers of consumer products were willing to lower prices after oil prices were cut but details were not yet to hand.
It would soon launch the sale of cheap packed rice under the Blue Flag project to help consumers.
The Internal Trade Department will review price controls on live swine, now that prices have eased to around 77 baht a kilogramme, lower than the capped price of 81 baht. The pork price is likely to drop to 140 baht next week.