Why Thailand must protect its international reserves

Why Thailand must protect its international reserves

On the basis of its international reserve holdings of over $160 billion (4.4 trillion baht), Thailand has been a member of the rich-nation club for many years now.

Although that $160 billion stockpile is nowhere near China's at close to $4 trillion, it still puts Thailand at number 14 in the world, just below Germany's $193 billion and above Great Britain's $156 billion. As $160 billion is equivalent to over eight months of Thailand's goods imports in 2014, it is judged excessive by many economists who consider keeping international reserves to about three months of imports sufficient to weather any unexpected events. 

Whether or not holding such an amount of reserves is excessive is subject to debate. Experiences, however, show that reserves can disappear quickly. In 1997, Thailand lost virtually all of its reserves in a matter of weeks before the onset of the economic crisis in July. If one looks back to the case of Argentina, which was once as rich as or richer than France, Germany and Canada, one would find that it once had an exceptionally large amount of international reserves worth about 2.5 years of imports. That amount was quickly used up by the Juan Peron government, whose line of populist policies the government of Thailand adopted in 2001. Argentina has had a series of crises since the 1950s when it depleted all of its reserves and has fallen far behind those three countries.

The Bank of Thailand (BoT) has been in charge of managing Thailand's international reserves and the laws stipulate that it can only invest them in virtually risk-free assets such as advanced countries' treasury bonds. Last week, a report surfaced saying the central bank was considering having the laws changed so that the BoT could invest in other assets with higher yields than such bonds. This idea is not new because a previous government had looked into it. That government was also reported to have considered putting part of the reserves into a newly created sovereign wealth fund, whose investments could include buying shares and bonds of companies that would build and operate infrastructure projects in the kingdom. Nothing along those lines came to fruition following strong resistance from various quarters. 

Strong resistance came about presumably from a memory still fresh from the financial crisis brought about by the US real estate bubble bursting in 2008. That bubble was supported in no small part by high-yield assets such as the collateralised debt obligations created by reputable Wall Street financial institutions and highly rated by rating agencies. Another motive -- probably much stronger -- came from a deep distrust of high-ranking government officials and politicians.

Once the laws are relaxed, losses of internationals reserves could come not only from investments in higher-risk assets, while the possibility of corruption should not be dismissed. One may legitimately ask whether such scenarios could happen only in the minds of the paranoid. Perhaps. But prevention is better than cure.


Sawai Boonma has worked as a development economist for more than two decades. He can be reached at sboonma@msn.com.

Sawai Boonma

Writer

Former Senior Country Economist at the World Bank and now a freelance writer.

Email : sboonma@msn.com

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