The State Bank of Pakistan (SBP) contemplates to invest $3.2 billion in the lucrative investment outlets out of the country's foreign exchange reserves which have crossed $12 billion limit
and for this purpose eight fund managers have already been appointed in - in the words of the SBP Governor-transparent and open manner.
Initially a deal is reported to have been struck with the second largest bank of the world viz Hong Kong and Shanghai Bank under which a sum of $1.6 billion has been invested with/through that bank.
The build-up of large foreign exchange reserves is a recent phenomenon and owes its origin to the heavy inflows from abroad in the aftermath of September 11,2001. Prior to that meagre reserves were put by the SBP as in the short term placements with the banks abroad or in the U.S. Treasury bills.
With the gradual build-up of the reserves, the SBP commenced endeavours to find some investment outlets for the funds which are not immediately needed for day to day expenditure.
To this end, a delegation of the SBP comprising the Deputy Governor and the Executive Director, toured the middle-eastern countries in May or June,2003 to explore the possibilities of investment of comparatively smaller amount of $750 million only. The results of this visit were not made known to the public, but the silence in this respect suggested that the visit was not successful.
Prior to that the SBP is stated to have been fed up with its Treasury Department by engaging a "professional"- a Pakistani working abroad - at the fabulous salary and the perks which may not be less than half a million rupees a month.
Another gentleman- a chartered accountant- has also been engaged at similar salary and perks to oversee the risk management [even though the gentleman is said hardly to possess adequate experience in the field of the risk management].
To assist him, a lady from a local commercial bank believed having overseas experience in the risk management field was also engaged by the SBP but it is understood that her services have since been at the disposal of some other SBP department.
The SBP has also formulated a criterion for investment of a part of the foreign exchange reserves which was published in its first quarterly report of 2003-04 (July-September,2003) which was released some times in December,2003. The salient features of the criterion are reproduced below:
- the portfolio bucket has been divided into three sub-portfolios (a) cash portfolio (b) liquidity portfolio and (c) long-term portfolio. The funds allocated for these categories are: (a) $3 billion (b) $4 billion and (c) $2 billion. Any addition to the reserves after formulation of the policy is to be allocated to the cash portfolio.
- The cash portfolio is to be managed by the SBP itself through short term placements as per the current reserves management practice.
- Out of $6 billion allocated to (b) and (c) above, $ 3.2 billion will be invested in global short duration government bonds, global longer dated treasuries and global non-government bonds through external fund managers.
- The remaining $2.8 billion of the (b) and (c) portfolios is to be placed as cash portfolio. However, during the next 18 months (say by June 2005 as the SBP report under reference was released in December,2003) while the in-house capacity for investment would be developed, $1.4 billion would be allocated to the in-house management team.
- The maximum duration of long-term portfolios would not exceed five years.
- The overall portfolio rating would be at least "AA" while rating of any single instrument would not be below the investment grade . The investment in the equities is not permissible.
- The bank may appoint 8 to 10 fund managers and the funds will be distributed among the external managers according to their expertise.
- Similarly, a custodian bank may be appointed out of top highest-rated banks offering custodial services.
- All the matters pertaining to foreign exchange reserves position would be monitored and reviewed regularly.
The public is not aware of the transparent manner in which 8 fund managers have already appointed by the SBP. The SBP has also not provided the details of the investment of $1.6 billion already made with/through the Hong Kong and Shanghai Bank. e.g. whether investment has been made in the US Government bonds or euro-denominated bonds or non-government bonds and if the latter is the case whether the investment is dollar denominated or euro-denominated and what is the rating of the instruments in which investment has been made.
However, it appears imperative to dilate on the following issues in so far as the investment of the remaining amount of $1.6 billion is concerned:
- Whether we should go for the non-government goods and if so what will be its merits and demerits;
- Whether long term investment should be preferred in U S $ or Euro;- Is appointment of fund managers really unavoidable?
- What is the remuneration agreed to be paid to the custodial bank? Can the National Bank of Pakistan New York/Washington not render the services as a custodial bank?
The consideration for investment is obviously to earn best possible return. But in the case of poor country like Pakistan, primary consideration will be "safety and security" of the amount invested and the profit motive becomes secondary in nature.
The investment in the US Government bonds will obviously be considered more secure. It may be mentioned here that there is a marginal difference in the return on government / non-government bonds.
As per the information down-loaded from the internet-[ www.1loansusa.com]- updated upto the 16th July,2004- the yield on five year US Treasury bonds was 3.56 per cent per annum. while on AAA/ AA rated corporate bonds it was 3.72 per cent per annum and 3.82 per cent per annum respectively.
Thus the interest rate differential between government/non-government bonds is marginal and does not even cover the fund managers' commission which is usually put at half per cent.
As for the security aspect, investment in private bonds may assume dangerous proportion at any time despite ensuring at the time of investment that the respective corporate entity is AAA/AA rated.
The recent Enron/Worldcall and Xerox scams are not the happenings of too distant past even though these corporate entities were obviously better rated and audited by the well-reputed auditors. Keeping in view the above aspects and more particularly the safety aspect, the SBP should not go for the non-government bonds.
As for choice between dollar and euro, the latter was launched in January 2001 and initially it was quoted above the dollar. Then it came down to the level of U S cents 85-90. It is now hovering at about $1.22-1.24. The people expect it to rise to around $1.4 in near future.
When euro was at the lowest US cents 85-90, it was the opportune time for the SBP to shift a portion of its rising foreign exchange reserves to euro. Had the SBP done that, it could make sizable profit. By failing to snatch the opportunity at the appropriate time, the SBP incurred substantial losses or to put in other words "substantial losses in the gains".
It is not known who takes the bow for this indecisiveness - the Treasury Head or No.1/2 in the bank's hierarchy who are supposed to take the decisions. As for the future, even if the euro rises henceforward to $1.4, it will be difficult to predict whether this peak could be maintained for about half a decade or so as investment is contemplated to be made for the like period. The prudent course shall, therefore, be not to invest in the long term instruments denominated in the euro.
A portion of the investible funds can be converted into euro and placed in the short term deposits with the banks of international repute so that as and when the downturn of Euro seems visible, the relative funds may be reconverted into dollar with whatever the exchange rate benefit which could be available during the period of placements in that currency.
For quite a few days, interest rates are showing upward trends internationally. In the ascending interest scenario, it is always preferable to go for short term placements rather than investing in the long term instruments.
As could be deduced from the above discussions, the safer and wiser course for the SBP is to remain confined to the dollar treasury bills and bonds, and some placement in the euro. This work can be handled effectively by the SBP's own Treasury.
Therefore, unless the SBP is determined to throw away a sizable amount of poor nation's money to the fund managers unnecessarily, there is hardly any rationale in appointing and continuing with these managers.
The SBP might already have paid a sizable sum of $8 million to the Hong Kong and Shanghai Bank in respect of the investment of $1.6 billion. And similar amount is likely to be thrown away to the above or the other fund managers although these payments are cent per cent avoidable in view of the position discussed in the preceding paragraphs.
As regards appointment of the custodial bank, there is hardly any need of throwing away public money to the foreigners. This job can be effectively handled by the New York/Washington branches of the NBP at the nominal remuneration to be agreed upon between the SBP/NBP managements.
