Reserve Management

17 May 2023 Takes 999 minutes to read

The Bank of Thailand (BOT) is responsible for managing foreign exchange reserves to ensure its adequacy at times of external shocks. In order to achieve a defined range of objectives, BOT follows 3 guiding principles:

1. Security: Preservation of reserves values

2. Liquidity: Availability of foreign assets and ability to meet the objectives of monetary and exchange rate policies

3. Returns: Maximizing risk-adjusted returns given investment guidelines




Definition and purpose of reserves

    The foreign exchange reserves are foreign assets, reported on BOT’s balance sheet and used to support financial stability and preserve global purchasing power of Thailand. They act as a 'buffer' for the economy, help mitigating the impact of external volatilities on domestic businesses, and, therefore, are crucial indicator of the country’s external vulnerability and economic stability.


Change in the Official Foreign Reserves 


What could cause the official foreign reserves to rise or fall? 

    The level of Official Foreign Reserves changes as a result of


    1. Change in level of balance of payment 

    Export of Thai businesses, increase in tourist numbers, and/or foreign investment inflow lead to balance of payment surplus, rising demand in Thai Baht and Thai Baht appreciation.

    In order to maintain financial stability and lessen the fluctuation of exchange rate, the BOT purchases foreign currencies, sells Thai baht and issues bonds to absorb excess liquidity in financial system. As a result, the BOT’s asset and liability will both increase by the same amount. Therefore, an increase in official foreign reserves does not reflect the BOT's wealth.

    On the other hand, if the foreign investors divest from Thailand and there is a balance of payment deficit, the official foreign reserves will be required to ensure financial stability and preserve the purchasing power of the Thai economy. Hence, significant amount of official foreign reserves will reduce the risk and impact of currency crisis.


    2. Change in market price movement 

    Official foreign reserves are established in variety of assets and currencies for diversification benefit. Therefore, market price movement will derive changes in the foreign reserve Mark-to-market values.




The main laws and regulations governing the BOT's reserve management are as follow:


1. Bank of Thailand ACT B.E. 2485


    Section 35 The BOT shall have powers and duties to manage the BOT’s assets; including to make an investment for the purpose of earning income in accordance with the rules prescribed by the BOT Board, provided that consideration shall be taken on financial security, liquidity, income and risk management.


    Section 36. For the management under Section 35, in case of the investment in foreign assets, only the following assets shall be eligible;

1. gold;

2. currency of a country accepting the obligations prescribed in Chapter 8 on Agreement on the International Monetary Fund, which must be in the form of deposits with a commercial bank outside the Kingdom, a foreign financial institution outside the Kingdom, an international financial institution, or in the form of money deposits at a custodian outside the Kingdom, in accordance with the characteristics or qualifications prescribed by the BOT Board; 

3. foreign securities payable in foreign currency as stated in (2), only the following securities; 

    3.1 securities of a foreign government, an organization of a foreign government, an international financial institution or international organization

    3.2 securities which guaranteed as to the performance of obligations by a foreign government, an international financial institution or international organization; 

    3.3 instruments issued by an international financial institution, of which Thailand is a member, as evidence that the holder thereof is participating with such institution in making available loans to member government or organizations of member governments of the said institution to the amount indicated in the instruments; 

    3.4 securities issued by other foreign organization or juristic person as prescribed by the BOT Board;

4. unit trust or foreign equity issued by a foreign entity in accordance with the rules, procedures and conditions prescribed by the BOT Board, including the determination of appropriate investment proportions of such unit trust or foreign equity.

5. right to purchase reserve tranche under the law on authorization on the operation in relevant to the International Monetary Fund and the international banks; 

6. Special Drawing Right under the law on Authorization and Regulation of Certain Operation concerning Special Drawing Right in the International Monetary Fund; 

7. other assets paid as subscription to the International Monetary Fund which may not be regarded as Currency Reserve under the law on currency; 

8. other assets as prescribed by the BOT Board.


    Section 37 The BOT shall quarterly submit the performance report on the management of the BOT’s assets to the BOT Board.  


2. CURRENCY ACT B.E. 2501 


    Section 30. The following assets shall be lawful components of the Currency Reserve: 

1. gold;

2. foreign currencies which are convertible currencies or any other currencies prescribed by a Ministerial Regulation, which must be in the form of deposit with a bank outside the Kingdom or with an international financial institution;

3. foreign securities payable in foreign currencies as stated in (2); 

4. gold and foreign assets paid as subscription to the International Monetary Fund; 

5. Reserve Tranche Purchase Certificate; 

6. Special Drawing Right Certificate;

7. securities of the Thai Government payable in foreign currencies as stated in (2) or in baht; 

8. domestic bills which the Bank of Thailand is permitted to purchase or rediscount, provided that the total value thereof does not exceed 20 per cent of the total amount of notes issued.


    With respect to the assets stated in (1), (2), (3), (4), (5) and (6) above, the Bank of Thailand shall be required to maintain their total value at not less than 60 per centum of the notes issued.


Governance Structure


    The BOT has a clear, well-defined governance structure in reserves management, emphasizing the importance of check and balance between risk oversight branches and investment branches. Performance and risk reports are also conducted regularly.


    Reserves management governance can be divided into 2 functions:


1. Risk-related Committees, supervising and making decisions on risk management policy and framework. They are responsible for setting organizational risk tolerance and risk appetite, overseeing financial risks, approving investment guidelines and monitoring performance and risks.


2. Investment-related Committees, making decision on both strategic and tactical asset allocations.

RMD Governance Structure


Risk Management


    The BOT’s risk management framework addresses 3 main risks – market risk, credit risk and liquidity risk. All risk guideline and limits are approved by Risk Committees and reviewed regularly to meet changing market and investment environment. 


1. Market Risk


    The objective of market risk management is to ensure that the risks arising from adverse price movements are consistent with the organization’s risk appetite and investment objectives.

    The measures used in managing market risks include (1) for long-term investment, setting up Institutional Benchmark as a reference point to align risk and return of benchmark portfolio with its objectives, and (2) for short- to medium-term investment, using tracking error limits to determine how far the investments can deviate from the benchmark portfolio


2. Credit Risk


   The objective of credit risk management is to mitigate losses caused by default or adverse price movement driven by a credit rating downgrade. The BOT has credit risk exposures to foreign governments, corporates and financial institutions.

    The measures used in managing credit risks include (1) establishing minimum acceptable credit rating by utilizing ratings from global credit rating agencies, and (2) limiting maximum exposure to foreign governments, corporates and financial institutions to avoid concentration risk. 

    The minimum acceptable credit rating of the BOT is investment grade for foreign sovereign and stricter for foreign corporates and financial institutions.


3. Liquidity Risk


    The objective of liquidity risk management is to ensure that the BOT has sufficient liquid asset to meet its financial obligation and has ability to convert those assets without significant impact on market prices.

    The measures used in managing liquidity risks include (1) dividing managed foreign exchange reserves into 2 sub-portfolios: Liquidity Portfolio and Long-term Investment Portfolio, (2) setting a limit on illiquid asset holdings, and (3) setting holding limits based on issue size of the security.


4. Performance and Risk Measurement


    The BOT marks to market its foreign exchange reserves by using end-of-day pricing, on a daily basis. The asset valuation and performance and risk assessment are done independently from Reserve Management Department on a regular basis. 


Investment Framework


    The BOT has 2 main managed sub-portfolios, which are: 


1. Liquidity Portfolio: The purpose of this portfolio is to meet short-term needs of monetary and exchange rate policies. The investments therefore focus mainly on highly liquid and safe assets, denominated in US dollar.


2. Long-term Investment Portfolio: The purpose of this portfolio is to preserve capital, to serve as a buffer to absorb balance of payment shocks and to maintain global purchasing power of Thai economy. The investments in this portfolio therefore diversify across asset classes and different currencies.


    The BOT requires these 2 portfolios to have separate benchmark that can be used to evaluate whether risk-return profile is consistent with the guidelines and portfolio objectives.




Asset Allocation


Investment Guidelines


    The BOT’s Reserve Management focuses on asset allocation in medium- to long-term horizon, not daily speculative trading. Long-term, strategic asset allocation considers structural factors including country competitiveness and key global structural trend, along with an aim to achieving a well-diversified portfolio

    However, market volatilities and/or short- to medium-term events could have an impact on return and risk of the portfolio. A so-called tactical asset allocation consequently could be employed to address these risks and/or capture any opportunities to improve risk-return profile.


What are the components of foreign exchange reserves?


    As the foreign exchange reserves are used to absorb external shocks on Thai economy, the reserve must be “adequate” and “readily available” to facilitate the needs to use foreign currency, from international trades and investments of both Thai and foreigners.

    Hence, the foreign exchange reserves consist of stable, liquid, and diversified assets, denominated in foreign currencies, such as government bond, equity, and gold. Any assets, denominated in local currency – in this case Thai baht, are not considered foreign exchange reserves under the international standards.