Asian Development Bank calls for better use of foreign reserves

dpa German Press Agency Published: Tuesday March 27, 2007

Manila- The Asian Development Bank (ADB) on Tuesday urged
developing Asian economies to make better use of their growing
foreign exchange reserves, which could be invested to help boost
government resources.
The Manila-based ADB noted that developing Asia's foreign exchange
reserves totalled 2.28 trillion dollars at the end of 2006, according
to preliminary data.

The amount grew by 417.6 billion dollars from the previous year,
which is "much larger than the pattern of steadily increasing large
annual gains made by the region since 2001," the ADB's annual Asian
Development Outlook report said.

Despite the accumulation, the report noted that Asia's foreign
exchange reserves are often invested in short-term, secure assets
that earn low yields "that may be insufficient to compensate for even
modest exchange-rate appreciation."

The report said economies could reap "potentially large" rewards
if the reserves were invested more actively.

It noted that investing just 50 per cent of reserves in a globally
diversified portfolio with a yield of 500 basis points could
"generate a fiscal dividend of about 60 billion dollars, equivalent
to 0.9 per cent of regional gross domestic product growth."

"These additional resources could plug infrastructure gaps and
increase the supply of essential public goods," the report said. "Or
they could be used to retire public debts, creating larger fiscal
space in the years ahead."

The ADB cited some countries that were already taking steps to
better manage their reserves, such as China and India.

In China, the government recently unveiled a plan to establish a
state investment agency that would make better use of its reserves.

China accounts for about 47 per cent of Asia's stock of foreign
exchange reserves, with 1.066 trillion dollars at the end of 2006, up
27 per cent from the end of 2001.

The ADB said China's new agency would be similar to Singapore's
Temasek Holdings, which was established by the government in 1974 to
manage state-owned assets.

The Indian government proposed in its 2007 budget that foreign
exchange be used to pay for the foreign currency costs of projects,
or to back guarantees that would lover the costs of borrowing by
special purpose investment vehicles.

But the ADB report warned that "while rewards are certainly
tempting, central banks and governments are rightfully wary of
risks.

"If investments go bad, this could undermine confidence in
government and/or the central bank," the report said. "Having an
appropriately regulated 'fund,' operating at arm's length, to manage
some portion of reserves may have advantages."

© 2006 - dpa German Press Agency

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