Cabinet approves central bank investing in equities

Thailand’s central bank gained more flexibility in managing the country’s foreign reserves last week when the Cabinet approved legal changes to allow the Bank of Thailand to invest 3 to 4 percent of the reserves in foreign equities with the aim of mitigating currency risks and achieving higher returns on the funds.

Veerathai Santiprabhob, governor of the Bank of Thailand, said the measure was needed because currencies in advanced economies had become more volatile with their central banks’ adoption of quantitative easing policies. In quantitative easing, central banks purchase government or market securities to ease interest rates and increase the money supply.

Those policies were employed by many central banks in response to the global financial meltdown of 2008 and the weak recovery that followed. Both the United States Federal Reserve and the European Central Bank have been using quantitative easing.

Thailand’s international reserves currently stand at $110 billion. Veerathai said that the capital markets have proven they can be effective tools for managing risk, and with more investment choices the central bank can strengthen its risk management capabilities. He noted that central banks in China, Hong Kong and Malaysia have all turned to investing in capital markets to hedge against currency volatility and the policy has worked well in terms of stabilizing liquidity in those countries.

Prior to the change in the Bank of Thailand Act approved by the Cabinet, the central bank was allowed to buy and sell bonds, foreign currencies, gold and silver, and deposits at central banks and foreign commercial banks. The amendment to the Act still needs approval from the National Legislative Assembly, but passage is widely expected.

Once the legislature approves, the Bank can begin investing in securities. Veerathai said the investment in the capital market would be in equities and ETF (exchange-traded fund) indices. Such investments would be small, however, compared with those in bonds, he stressed. Initially, investment in equities would be around 3-4 percent of the international reserves.

In addition, Tongurai Limpiti,deputy governor for financial-institutions stability, said that the Bank of Thailand will being collaborating with other central banks in the region to promote local-currency settlements for trade and investment.

Earlier this month, the Bank of Thailand and the central bank of Malaysia appointed cross-currency dealers to act as clearing agents for the baht and the ringgit. The negotiations with other countries on similar arrangements are ongoing on, she said.