VZCZCXRO4287
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #1753/01 1610859
ZNR UUUUU ZZH
R 090859Z JUN 08
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 3305
RUCNASE/ASEAN MEMBER COLLECTIVE
RUCPDOC/USDOC WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 BANGKOK 001753 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR EAP/MLS 
STATE PASS USTR 
USDOC FOR 4430/EAP/MAC/OKSA 
SINGAPORE FOR TREASURY ATTACHE BAKER 
 
E.O. 12958:N/A 
TAGS: ECON EINV ETRD TH
 
SUBJECT:  THAILAND CONSIDERS SOVEREIGN WEALTH FUND 
 
REF:  BANGKOK 1560 
 
¶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 
months. 
 
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 
objectives. 
 
¶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 
permission. 
 
¶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. 
 
ENTWISTLE