Sovereign and Public Investor Topics: Asset Allocation and Policy
Deals | Alternatives - Hedge Funds and Private Equity
Real Estate and Infrastructure | Energy
Central Banks and Monetary Authorities

Central Banking

Kenya’s Central Bank Chair Talks Sovereign Wealth

Mbui Wagacha, the chairman of Kenya’s central bank, commented the country was moving forward on creating a sovereign wealth fund. Kenya’s attorney general is working on drafting a framework for the sovereign wealth fund.

The future sovereign fund would have a number of mandates which include, a stabilization component, savings fund and infrastructure allocation.

The revenue would be derived from projected 2016 oil output from companies such as Africa Oil Corporation and Tullow Oil Plc.

See: Kenya Dreams of a Sovereign Wealth Fund

Breaking: Yellen to Continue Tapering

Credit: Federal Reserve

Credit: Federal Reserve

Yellen in her remarks and press briefing:

“The dots moved down a little bit in December relative to September and then moved up ever so slightly. I really don’t think it’s appropriate to read very much into it.”

“We have had a series of years now in which growth has proven disappointing.”

“5 percent of the labor force working part time on an involuntary basis, that is an exceptionally high number relative to the measured unemployment rate, and it’s so to my mind is a form of slack that is, adds to what we see in the normal unemployment rate, and is unusually large.”

“My predecessor was also devoted to that. Strengthening the financial system is a work in progress, and he made large inroads in strengthening the financial system.”

Yellen has stated the Federal Reserve will maintain tapering. Beginning in April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of US$ 25 billion per month rather than US$ 30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of US$ 30 billion per month rather than US$ 35 billion per month.

Federal reserve officials are perceiving the federal funds rate at the end of 2015 should be at least 1 percent.

In the statement, the Committee acknowledged that although unemployment has neared its target of 6.5 percent, “economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

To add more, the FOMC statement in regard to the federal funds rate, “This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”

Federal reserve officials are perceiving the federal funds rate at the end of 2015 should be at least 1 percent, a more optimistic read from the previous press meeting

Yellen served as vice-chair to Ben Bernanke. The benchmark federal funds rate has been practically at zero since late 2008. The U.S. unemployment rate and continued slack in labor markets has kept that rate low.

Choo Heung-Sik Named New CIO of Korea Investment Corp

The Korea Investment Corporation (KIC) has appointed Choo Heung-Sik as the new chief investment officer who replaces Lee Dong-ik. Choo was head of reserves management at the Bank of Korea. The Bank of Korea’s reserve management group manages around US$ 330 billion. In 2012, during his role at the Bank of Korea, Choo was keen on diversifying Korea’s foreign exchange reserves moving capital in a snail-like pace into Chinese debt and equities.

Choo started with the Bank of Korea in 1982 and had a brief stretch at the World Bank.

Lee Ju Yeol Appointed New Bank of Korea Governor

In an expected move, South Korean President Park Geun-hye appointed Lee Ju Yeol as governor of the Bank of Korea. Lee, a veteran of the Bank of Korea, was a former senior deputy governor with 35 years of experience at the central bank. Lee served during the Asian financial crisis of 1997 as a forecaster.

He is replacing Governor Kim ChoongSoo whose 4-year term ends on March 31st. Kim appointed the first female deputy governor to the Bank of Korea, Suh Young Kyung.

South Korea is Asia’s fourth biggest economy.

Four Key Vatican Financial Reforms

Pope Francis recently announced plans to revamp the Vatican’s financial system, consolidating management and increasing transparency. The papacy issued a press release Monday outlining the restructuring process, which included four notable reforms.

1. Creation of a new Council for the Economy composed of 8 cardinals or bishops and 7 “lay experts of different nationalities with strong professional financial experience.”
2. Establishment of a new “Secretariat for the Economy” department headed by a cardinal prefect, which will report to the Council for the Economy.
3. Appointment of an auditor-general with the power “to conduct audits of any agency of the Holy See and Vatican City State at any time.”
4. The Administration of the Patrimony of the Apostolic See (APSA), the Vatican’s current real estate management arm, will become the Central Bank of the Vatican with “all the obligations and responsibilities of similar institutions around the world.”

The Secretariat of the Economy will preside over “all economic and administrative activities within the Holy See and the Vatican City State,” including human resources, financial planning, preparing an annual budget, and procurement. Pope Francis named Cardinal George Pell, the current Archbishop of Sydney, Australia, to the position of Prefect.

The Council for the Economy will convene regularly to discuss policies and practices to be implemented by the Secretariat. It will also prepare and analyze reports on the Holy See’s economic and administrative undertakings.

The pope’s announcement came after the conclusion of an extensive examination by the Pontifical Commission for Reference on the Organization of the Economic- Administrative Structure of the Holy See (COSEA). COSEA recommended, among other things, “the adoption of accounting standards and generally accepted financial management and reporting practices as well as enhanced internal controls, transparency and governance.” Pope Francis’ governance advisory council (8 cardinals) and the Holy See’s financial affairs committee (15 cardinals) endorsed COSEA’s recommendations.

“The changes will enable more formal involvement of senior and experienced experts in financial administration, planning and reporting and will ensure better use of resources, improving the support available for various programs, particularly our works with the poor and marginalized,” the Vatican said in the press release.

South Korea, Australia Ink US$ 4.5 Billion Currency Swap Agreement

The Bank of Korea and Reserve Bank of Australia struck a bilateral local currency swap agreement on Sunday. The deal, which is effective for three years unless extended through mutual consent, allows the exchange of up to 5 trillion won for 5 billion Australian dollars (US$ 4.5 billion).

“The agreement will ensure that trade between the two countries can continue to be settled in local currency even in times of financial stress,” the central banks said in a joint press release later that day. “The agreement can also be used for other, mutually agreed purposes.”

The central bank governors, Kim Choong-soo and Glenn Stevens, signed the agreement in Sydney while attending the G20 summit. Bilateral trade between the two countries in 2013 totaled around US$ 30 billion, ranking Australia the seventh largest trading partner for South Korea and South Korea as Australia’s fourth largest.

South Korea, trying to dampen the effects of volatile foreign capital flows, has penned similar currency swap accords, weighing in at about US$ 120 billion, with other countries in the past, including a multilateral arrangement for US$ 56 billion with China and US$ 10 billion with Japan. Additionally, South Korea has deals with United Arab Emirates, Indonesia, and Malaysia for US$ 5.4 billion, US$ 10 billion, and US$ 4.7 billion, respectively.

2 Reasons Why China Recently Dumped Treasuries

December Treasury International Capital (TIC) data was semi-calamitous for the United States Treasury due to China’s year-end retraction of Treasuries. Maintaining quantitative easing and stepping in, the Federal Reserve became the largest financier of the U.S. government’s deficit in 2013. In total, the U.S. government issued a net US$ 759 billion in Treasury securities to the public with the Federal Reserve buying a net US$ 543 billion of that amount.

The CIC’s new chairman and CEO, Ding Xuedong, reiterated in talks with the American press that he believes infrastructure investments will be a major theme in all markets.

The largest foreign creditor of the United States is China. Holdings of U.S. Treasuries by China fell by the highest magnitude in 2 years, offloading some US$ 48 billion in paper. These levels of Beijing’s Treasury holdings mimic March 2013 figures. To fill the void at year-end, Belgium (some say as a European Union proxy) greatly augmented Treasury purchases which led to aggregate growth in moving foreign holdings to US$ 5.79 trillion.

SAFE and TIC data
Sources: China’s State Administration of Foreign Exchange and U.S. Treasury TIC Data

#1 Diversification – Fear of Rising Rates

Clearly, Beijing is attempting to diversify its reserves from holding government debt, especially U.S. debt. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

President Goodluck Jonathan Suspends Nigerian Central Bank Governor

Controversy has been brewing between Nigeria’s national oil sector and the central bank. Lamido Sanusi who is the central bank governor of Nigeria has been suspended by Nigerian President Goodluck Jonathan for “financial recklessness and misconduct.”


President Jonathan believes Sanusi leaked a private letter about billions in unremitted revenue to the government. Sanusi stated he never meant for the letter to go public. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Yellen Staying the Course, Institutional Investors Cheer

Credit: Library of Congress

Credit: Library of Congress

Janet Yellen, the newly inaugurated chair of the Federal Reserve, gave her first testimony before Congress, delivering the Fed’s semiannual Monetary Policy Report to Congress, also known as the Humphrey Hawkins testimony. Yellen, who became chairman earlier this month, largely echoed the sentiment of her predecessor, Ben Bernanke, defending the use of unconventional policy tools, such as forward guidance, and planning to maintain very low interest rates. Institutional investors around the globe, including sovereign wealth funds and pension CIOs listened intently on her words.

“I expect a great deal of continuity in the FOMC’s approach to monetary policy,” Yellen said in her prepared remarks. “I served on the Federal Open Market Committee as we formulated our current policy strategy and I strongly support that strategy.”

Barring a “notable change” in economic data, Yellen said the Fed will continue tapering its monthly purchase of Treasuries and mortgage-backed securities. The process, known as quantitative easing (QE) implemented by the FOMC, was intended to lower long-term interest rates to stimulate spending in the domestic economy. Under Chairman Bernanke, the Fed scaled back monthly asset purchases to US$ 65 billion.

Although signs of slow job growth will not shake the Fed’s resolve to taper asset purchases, Yellen said the Fed will keep short-term interests rates at zero “well past” the time unemployment reaches 6.5%, which was the benchmark the Fed set for raising rates in 2012, when unemployment was at 8.1%, during its last round of stimulus.

This is approximately a 133% increase in the debt limit from May 2003.

Staying the Course

Yellen said she strongly supports the Fed’s dual mandate to promote employment and control inflation. Unemployment has dropped to 6.6%, but Yellen told the U.S. House of Representatives’ Financial Services Committee that the labor market recovery was “far from complete.” The Bureau of Labor Statistics reported only 113,000 new nonfarm positions added in January and 75,000 in December. In addition, the labor force participation rate plunged over the years – testing late 1970s levels.

Doing the Popular Thing

As many of her predecessors at the Fed have done, Yellen warned that the United States is on an unsustainable fiscal budget path. Rising deficits will crowd out private investment leading to higher interest rates and slower growth, she said. This is on the backstop of Congress agreeing to approve the U.S. debt limit through March 2015. The new U.S. debt ceiling is US$ 17.2 trillion which served as blow to pro-austerity politicians. Near the end of May 2003, Congress approved at debt limit of US$ 7.384 trillion. This is approximately a 133% increase in the debt limit from May 2003.

When pressed by Rep. Michele Bachmann (R-Minn.) to respond to former Congressman Ron Paul’s “Audit the Fed” proposal, Yellen said she strongly objected to “interfering with the independence of monetary policy, by bringing political pressures to bear on the committee’s judgment.” She noted that the Fed is already audited extensively and said she opposed the idea of Washington second guessing central bank decisions.

Abu Dhabi Investment Council Wants Money Back From Golomt Bank

The Abu Dhabi Investment Council (ADIC) is desiring to sever ties with Mongolia’s biggest private lender, Golomt Bank. Created in 1995, Golomt Bank is 84.6% owned by Bodi International LLC, an industrial conglomerate. Other key investors include Credit Suisse, Swiss-Mo (owned by Urs Schwarzenbach) and Trafigura Beheer B.V.

The Ulaanbaatar-based bank and ADIC are arguing in London if the Abu Dhabi sovereign fund can redeem a five-year loan before maturity. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

SAFE’s CIO to Leave Job

Zhu Changhong, the man behind managing China’s foreign exchange reserves, is leaving his position as chief investment officer. The former PIMCO alumni is credited for diversifying China’s foreign reserves away from U.S. Treasury bonds. Zhu lowered the proportion of treasuries, while increased exposure to U.S. corporate bonds, equities, real estate, Japanese bonds and Japanese equities.

Zhu joined PIMCO in 1999.

The Sovereign Wealth Fund Institute covered inside details of China’s SAFE back in November 2013.

Obama to Nominate Stanley Fischer for Fed Vice Chairman

Dr. Stanley Fischer, Photo Credit: IMF

Dr. Stanley Fischer, Photo Credit: IMF

President Barack Obama announced his intention to nominate former Bank of Israel governor Stanley Fischer as Federal Reserve vice chairman. Before working for the Bank of Israel, Fischer was vice chairman of Citigroup and a former first deputy managing director at the International Monetary Fund (IMF). Fischer would represent the New York region.

President Obama is also planning on nominating Lael Brainard and Jerome Powell to the Board of Governors of the Federal Reserve System.

According to the press release, President Obama said, “These three distinguished individuals have the proven experience, judgment and deep knowledge of the financial system to serve at the Federal Reserve during this important time for our economy. Stanley Fischer brings decades of leadership and expertise from various roles, including serving at the International Monetary Fund and the Bank of Israel.”

Jerome Powell
Jerome Powell is currently serving on the Board of Governors, but his first term expires January 31. Powell would represent the Philadelphia region.

Lael Brainard
Lael Brainard served in the Obama administration as Under Secretary of the Treasury for International Affairs. She stepped down from that role in November. Brainard would represent the Richmond region.

Norges Bank to Hold Off on FX Reserve Purchases

Norges Bank, which manages Norway’s Government Pension Fund Global (GPFG), will not be making foreign exchange (FX) purchases in January 2014.

Norges Bank is slated with the task of maintaining FX reserves. It does this by collecting North Sea oil revenues denominated in foreign currencies and FX purchase on the market into a common fund known as the petrobuffer. The appropriate allocations are then transferred to the GPFG on a monthly basis.

Norway’s Ministry of Finance determines the size of monthly transfers, but Norges Bank is actually responsible for the purchases, transfers and maintaining the petrobuffer.

If the petrobuffer is large enough (or if allocations to the fund decrease), Norges Bank holds off on FX purchases.

Deciding to forego FX purchase in January is not common for Norges Bank, although it is not unheard of; this will be the 5th January in 13 years. Instead the bank tends to slow down its purchases near the end of the year in order to shrink the petrobuffer, according to its website.

Bernanke’s Final News Conference – Taper Down

The key thing to remember is that quantitative easing is not ending, it’s barely being reduced. Starting in January, the Federal Reserve will taper QE to a US$ 75 billion pace. Essentially, instead of US$ 40 billion of asset purchases in mortgage-backed securities, the Fed will purchase US$ 35 billion per month. Instead of purchasing US$ 45 billion longer-term Treasury securities, the Fed will purchase US$ 40 billion per month.

Capital markets are happy with Bernanke’s taper announcement; the Dow Jones Industrial Average shot up nearly 1% within 20 minutes of the Federal Open Market Committee’s statement being released. Federal Reserve Chairman Bernanke made it clear that Yellen’s ascension had no bearing on timing of the call to taper.

When questioned on whether the Fed would use other types of means for economic stimulation, Bernanke tiptoed around the idea of favorable discount window rates to banks that could prove they were loaning money to small businesses and households. But he mostly dismissed the idea stating that he feels that tight credit is not the U.S. economy’s main problem.

The FOMC did not modify its forward guidance. The threshold of the unemployment rate for a first rate hike is well below 6.5%. However, Bernanke noted that he will not hike rates merely because unemployment hits this threshold. He wanted to stress that the federal funds rate will remain near zero “well past” this threshold. Once the target is reached, Bernanke suggested that the Fed will look more closely at other types of employment figures, notably the labor force participation rate.

Hands Off Brazil’s Sovereign Fund for 2013 Possible Shortfall

Contending with a probable ratings downgrade derived from a narrowing 12-month primary budget surplus, Brazilian public officials are seeking new options. Brazil may not be able to reach the year-end budget savings target of 2.3% of gross domestic product – a lowered target from last year. Last week, the Banco Central do Brasil stated the 12-month public sector primary surplus slimmed to R$ 67.89 billion (US$ 29.14 billion) from R$ 74.1 billion.

This is important for Brazilian government bondholders because the primary surplus is used to pay down Brazil’s net public sector debt. Last year, the Fundo Soberano do Brasil (FSB), the sovereign wealth fund of Brazil, was used to cover the budget shortfall. R$ 12.5 billion was moved from the FSB to the National Treasury – some economists perceived it as a masking technique. On December 4, 2013, Brazilian Treasury Secretary Arno Augustin made it clear that the FSB will not be tapped to fund any possible shortfall in the meeting of the budget surplus target for 2013. Brazil’s sovereign wealth fund was intended for being a stabilization reserve for the budget and foreign exchange rates. In addition, the sovereign fund had the option to take strategic investments in Brazilian companies.

Brief Peak Inside the SAFE

What started as a small operation during the Asian Financial Crisis of 1997 now reverberates across capital markets and asset classes. The SAFE Investment Company invests money on behalf of China’s State Administration of Foreign Exchange (SAFE). China’s explosive growth over the last decade has filled the SAFE with foreign reserves, surpassing Japan’s massive pool of U.S. treasuries. As of October 2013, China’s foreign exchange reserves increased to US$ 3.66 trillion. China’s wealth is viewed by some government officials with conservatism and is described as xue han qian or “blood-sweat money” on the backs of Chinese workers.

China’s Foreign Reserves (Click to Enlarge Image) – Billions USD
Source: State Administration of Foreign Exchange

An ancient Chinese proverb, 富 不过三代 or fu bu guo san dai, essentially means, “wealth does not pass three generations.”

If one were to read more deeply into the Eastern adage, it can be interpreted like so: The first generation destroys the initial wealth; the second generation sacrifices and works hard, and the third generation learns to save – and the cycle repeats. The Chinese government went through three decades of transforming the country into a manufacturing powerhouse. In the context of the proverb, the Chinese have entered the “third generation.”

The 2007 shocks from the global financial crisis and Western banks’ massive deployment of stimulus measures have created a flood of inflationary currency in international markets. In addition, interest rates of U.S. treasuries plummeted. In 2007, officials at SAFE reacted; they moved their strategy to embark on diversifying into equities, specifically large cap stocks. They weren’t content to simply move capital into different asset classes, SAFE moved capital into different geographic markets such as Spanish bonds.

Investment managers at SAFE have held a long-term view of equity markets. Growing bold and opportunistic, SAFE’s managers predicted that the market drops of 2008 would trend upwards in the long-run. Not all market dislocations and opportunities were positive. SAFE opted to dip their toes into private equity and trust private equity firm TPG Capital to safely manage their capital. SAFE invested US$ 2.5 billion into a fund managed by TPG which invested in the now-failed Washington Mutual. Co-founded by David Bonderman, TPG later admitted their fifth fund was a mess.

Zhu’s Appointment[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Yellen Takes the Stand

With Ben Bernanke termed out on January 31, 2014, nothing much is expected to change with accommodative Federal Reserve monetary policy. Yesterday, Federal Reserve Vice Chairman Janet Yellen came forward before the U.S. Senate Banking Committee for her confirmation hearing. Political theater played in the background as some policymakers tried to act tough with the Fed Chairman nominee. Already holding the #2 slot at the Federal Reserve, Yellen’s confirmation is all but a shoe-in. However a Republican senator on the committee, David Vitter of the state of Louisiana, plans to oppose her. Earlier in November, Senator Vitter took a stand speaking out against the Federal Reserve’s bond buying program.

Magic bullet measures such as bond buying and asset purchases by the central bank will likely continue.

In 2008, the Federal Reserve played their QE card and moved to bring interest rates to zero. Yellen reiterated the only thing to do is to “to do everything possible to promote a very strong recovery.” With ease, Yellen demonstrated that the overall risk is worth the unintended consequences of quantitative easing, playing down the notion of asset bubbles forming in various markets. With boldness, she indicated a continuation of the Federal Reserve’s extraordinary monetary stimulus under her watch. Magic bullet measures such as bond buying and asset purchases by the central bank will likely continue. Money managers are happy Yellen is in the chair, as equity markets would tank with a less dovish central bank head.

Asset owners such as U.S. pensions face dire consequences due to the Fed’s accommodative policies. Encouraged risk-taking and speculation into asset classes such as life settlements, re-entering the CMBS market and illiquid assets proliferated in Pensionland.

HKMA Hedges Against QE, Invests in Mayfair Development

Hedging against high-priced Hong Kong real estate and continued quantitative easing policies by Western monetary authorities, large Asian investors are plowing capital into London real estate. In July 2013, Ping An Insurance Co Of China Ltd acquired the Lloyd’s Building for £260 million while Hong Kong-based Knight Dragon recently agreed to buy the remaining 40% in a project on the Greenwich Peninsula from Quinlan Estates & Development Plc. Knight Dragon is an investment vehicle owned by Dr. Henry Cheng Kar-Shun. Singapore’s GIC Private Limited, China Investment Corporation, Korea’s National Pension Service, Korea Investment Corporation and China’s SAFE Investment Company have acquired real estate in London.

The Hong Kong Monetary Authority (HKMA) entered into a 50:50 joint venture with Great Portland Estates, a London-based real estate investment trust. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Norwegian Government to Use More Sovereign Fund Oil Wealth

ernasolberg_eretroThe Norwegian Ministry of Finance released an Amendment to its 2014 fiscal budget today that indicates a lowering of tax rates and an increase in transfers from the Government Pension Fund Global (GPFG), Norway’s sovereign wealth fund, to cover the non-oil fiscal budget deficit.

In response to Dutch disease-like symptoms, the new Norwegian government, led by Prime Minister Erna Solberg, is seeking to stimulate growth in parts of the domestic economy that have been priced out by the explosive growth in the petroleum sector. Sectors experiencing a strain are housing and trade. According to a statement, “The petroleum sector, including subcontractors, has expanded, whereas the high cost level has posed challenges for the trade exposed industries.” The new fiscal budget is responding by lowering taxes and establishing a “productivity commission” slated with giving advice on how to strengthen growth and productivity.

In addition, the government is augmenting spending on growth projects. “The increased spending of petroleum revenues is targeted on measures that stimulate growth and production,” says Minister of Finance Siv Jensen.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

European Central Bank Cuts Rates to New Low

ecbFighting deflationary risk and a stronger Euro, the European Central Bank (ECB) chopped interest rates to a new record low. Eurozone inflation took a dive and the ECB board members emphasized they would prime banks with liquidity until 2015 to prevent a recovery stall in the economy.

The main refinancing rate was lowered by 25 basis points, while the ECB held the deposit rate it pays on bank deposits to zero. The emergency borrowing rate was cut from 1% to 0.75%.

ECB President Mario Draghi told a news conference, “We may experience a prolonged period of low inflation to be followed by gradual upward movements towards an inflation rate of below but close to 2 percent later on.”

Financial markets were taken a bit by the move – in the aggregate European stock shares increased today.