Cablegate: Thailand Considers Sovereign Wealth Fund

DE RUEHBK #1753/01 1610859
R 090859Z JUN 08





E.O. 12958:N/A



1. Summary: With over $100 billion in accumulated foreign exchange
reserves, Thailand is considering whether to establish a Sovereign
Wealth Fund to better invest its excess foreign holdings. Bank of
Thailand and Ministry of Finance officials believe they have
sufficient funds available to start a small fund, but see
substantial obstacles to its development and have concerns about
whether a Fund is advisable. Eleven years after the Asian financial
crisis, serious reservations remain about taking risks with
Thailand's reserves. Thailand's reserves are predominantly
generated from a build up of current account surpluses over the past
few years, and officials realize these surpluses could quickly
narrow or turn to deficits if domestic investment picks up as
expected. In the meantime, with fewer restrictions on investing
abroad, Thailand's Government Pension Fund and private investors are
leading the way overseas by expanding their international holdings,
primarily in foreign equities. End Summary.

2. The Bank of Thailand (BOT) is conducting a feasibility study
into the merits of establishing a Sovereign Wealth Fund (SWF),
following in the footsteps of China, Singapore, the United Arab
Emirates, and other countries with substantial foreign exchange
reserves. The Fund would operate as a government investment vehicle
funded by foreign exchange assets and managed separately from
Thailand's official reserves. In a May 15 seminar on SWF's held by
the Ministry of Finance, Finance Minister Surapong Suebwonglee said
Thailand should explore an SWF to seek higher returns and stabilize
the economy in the medium and long term, but cautioned that more
study was needed on the potential impact and benefits of a SWF. The
BOT expects to have a full analysis completed within two to three

What to do with all that money?

3. According to the BOT, Thailand has accumulated approximately
$106 billion in foreign exchange reserves, most in just the last
three years, predominantly through current account surpluses and
capital inflows. Counting net forward positions, the BOT estimates
that available reserves are actually closer to $130 billion.
Current official reserves are approximately 40 percent of GDP, and
4.3 times short-term external debt. Reserves are held mostly in
U.S. Treasury bills, but increasingly in Euro- and yen-denominated
government securities.

4. BoT officials estimate that Thailand has sufficient excess
reserves to create a SWF up to twenty billion dollars. Dr. Kanit
Sangsubhan of the Fiscal Policy Research Institute explained at the
SWF seminar that the BOT would need to set aside reserves for $26
billion to back up banknotes, $21 billion for short-term foreign
debt, $28 billion for long-term foreign debt, and another $10-15
billion for short-term possible outflow from the Stock Exchange of
Thailand. Dr. Kanit suggested therefore that $10-20 billion could
be available for a SWF, though other analysts have suggested
Thailand begin with a Fund in the range of $5-10 billion.

5. Although Thailand appears to have more than sufficient reserves
to cover its current commitments, officials realize that the tables
could easily turn. Unlike SWF's in other countries whose foreign
exchange holdings stem from income derived from strategic commodity
exports, Thailand's come mostly from current account surpluses. Dr.
Yanyong Thaicharoen of the BOT's Monetary Policy Group said the Bank
expected that in the medium term the current account would turn to
deficits as domestic investment increases and oil prices remain
high. A series of deficits would erode Thailand's stock of foreign
exchange reserves and potentially leave the country with
insufficient funds to cover its commitments. As well, officials
wonder whether a SWF is even necessary to enhance the range of
investments. BOT officials noted that despite the baht's
appreciation, in 2007 the Bank still made a net profit from their
reserves. Thailand has other options to handle its excess reserves,
including simply broadening its asset classes beyond sovereign bonds
to also include high-grade sub-sovereign (agency) bonds or AAA-rated
corporate bonds.

Tell it to the monks

6. Political considerations have stymied past efforts to enhance
the range of investments for Thailand's reserves. Eleven years
after the Asian financial crisis that saw Thailand's reserves
disappear in a matter of weeks, politicians and private groups have

BANGKOK 00001753 002 OF 003

been wary of undertaking investments that could endanger the funds.
Investment losses could quickly lose support for the somewhat
riskier investments that an SWF would likely pursue. An influential
group of monks that collected and donated gold to the government
during the crisis have kept a particularly watchful eye over
Thailand's reserves and have publicly opposed taking any steps
toward riskier investments. (Note: This opposition was the main
reason the Currency Act, which would have broadened the assets that
the BoT could invest its reserves in to include AAA-rated agency or
corporate debt, was not passed by the last parliament (see reftel)).
The BOT realizes that any changes it pursues would have to be made
with great transparency to allay these fears, but SWF experts also
caution that too much transparency can hamper investment

7. In any event, a SWF is currently incompatible with Thailand's
financial laws. Dr. Yanyong believes that an entirely new law would
probably be necessary to create a Fund. Under the new BOT Act, the
law only gave power to the BOT to manage its own assets (or the
Bank's general account which is a part of the country's official
reserves) but not assets in currency reserves accounts that are
regulated by the Currency Act. The new Act restricts the Bank from
investing in foreign assets other than gold, deposits with
foreign/international institutions, foreign securities payable in
foreign currencies (including securities issued or guaranteed by
foreign governments, international financial institutions,
international organizations, other foreign organizations),
investment-graded corporate bonds, reserve tranche purchase
certificates, or IMF special drawing rights. Recent changes to the
BOT Act gave additional powers to the Bank to manage its assets, but
the Bank is still restricted from investing in foreign equities.

8. Despite the obstacles, BOT officials are giving thought to how a
SWF would be managed. An eventual SWF would almost certainly have a
passive investment objective, expanding investments into new
investment classes, but eschewing strategic investments like large
stakes in foreign companies. Management would be under either BOT
or a separate entity that would manage the fund under a steering
committee of officials from BOT, MOF and other agencies and with
assistance and advice from the investment industry. Dr. Yanyong
stressed that the BOT would not completely outsource management of
the fund to investment banks.

Private sector shows the way

9. While it mulls its options, the BOT is interested in having the
private sector act as the canaries in the overseas investment coal
mine, building up investment experience before the government takes
the plunge. Thai authorities have been careful in the past about
limiting private investment outflows, particularly so after the 1997
Asian financial crisis, but are now loosening restrictions.
Previously, Thai institutional investors (and only those registered
under Securities and Exchange Commission supervision) could invest
in offshore securities with a maximum of two billion dollars for all
overseas securities investment, but this limit was increased to USD
10 billion in 2007 and is to be increased to USD 13 billion in 2008.
Those Thai institutional investors include the Government Pension
Fund, Social Security Fund, provident funds, mutual funds (excluding
private funds), securities companies, and special financial
institutions. In addition to an effort to encourage outflows to
keep the currency from appreciating, the BOT also loosened rules to
allow a company to invest overseas up to USD 100 million per year,
from the previous USD 10 million limit, and to increase the limit on
remittance of funds abroad for purchasing immovable properties to
USD 5 million, from USD 1 million previously, without the BOT

10. A recent analysis by Kasikorn Research Center showed that net
flow of Thai direct investments abroad in the last five years was
118 billion baht (USD 3.7 billion), nearly doubling the cumulative
investment up to 2002. In 2007 net investment hit 40 billion baht
(USD 1.25 billion), the highest level in history and 58 percent over
2006. Through custodians, the BOT revealed that investment in
foreign securities (both bonds and equities) was up 165 percent in
2007 to $6.9 billion. Much of the investment concentrated in
Australia thanks to a high rate of return and stable currency.
Luxembourg (the legal home of many investment funds), the U.K. and
the U.S. followed as primary destinations.

11. The Government Pension Fund (GPF), Thailand's largest
institutional investor and the most advanced among the country's
investment funds, received approval to raise its level of foreign

BANGKOK 00001753 003 OF 003

investments from 15 percent to a maximum 25 percent of net assets.
The GPF manages 324 billion baht (USD 10 billion) in pension assets
for 1.2 million civil servants. GPF's secretary general said last
month that the Fund would be expanding its investments abroad in the
next few months, focusing on food and property sectors.

12. Comment: A SWF of the size that Thailand is contemplating
would be small potatoes compared to the giants managed by
oil-producing nations and other countries like China and Singapore
which sit on large stacks of foreign exchange. Nevertheless, there
are political and economic implications if the Fund begins making
large-scale investments overseas. Given Thailand's long-standing
relations with the U.S., officials are not overly worried about a
negative reaction to Thai investments in the U.S. However, this may
not be the case if Thailand pursues aggressive investments in its
immediate neighbors, with whom the historical relationships have not
always been as friendly and trusting.


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