Posted on Saturday, November 8th, 2008
By bsetser
If oil stays in the 60s — and if China isn’t willing to buy Agencies, let alone riskier assets — sovereign funds are not going to be the kind of force in the global economy that many forecast earlier this year. The investment banks are now busy revising their forecasts for the growth of sovereign funds down.
Nonetheless, sovereign funds are not going to disappear entirely, so understanding their various investment strategies remains important. In my view, the common argument sovereign funds are inherently passive, long-term investors interested mostly in financial returns oversimplifies.
For a recent example of this argument — one that happened to catch my attention — consider a recent column from Bloomberg’s Michael Sesit:
These funds represent the excess reserves of countries with large current-account surpluses and/or major oil exporters. They are overwhelmingly invested outside their domestic markets and so far have been managed passively, without political bias, to achieve enhanced returns.
No doubt some sovereign funds are invested passively and without political bias. Norway’s fund certainly invests passively, and its “political bias” is very transparent. The Abu Dhabi Investment Authority, Singapore’s GIC and the Kuwait Investment Authority all seem to focus primarily on managing a passive external portfolio — though in all three cases a lack of transparency makes it hard to know for sure. The KIA is certainly under pressure to do more to support Kuwait’s own market. The scale of the GIC’s investments in the financial sector also at least raises the question of whether the GIC’s strategic is evolving to include taking strategic states that might help to support Signapore’s own ambitions as a financial hub.
But many other funds invest both at home and abroad. Any many aren’t just passive investors either.
Singapore’s Temasek, for example, originally had some similarities to France’s proposed sovereign fund: it managed the Signapore’s strategic stakes in its large domestic firms. And it clearly takes large strategic stakes when it invests abroad.
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Posted in Sovereign Wealth Funds | 16 Comments »
Posted on Friday, November 7th, 2008
By bsetser
Central bank reserve growth has unquestionably slowed. Indeed, global reserve growth in October was almost certainly negative. But the Fed’s custodial holdings are still rising. That could imply that central banks are moving out of euros and into dollars, reinforcing the dollar’s rise. More likely though it is evidence that central banks are moving out of money market funds and other dollar assets with a bit of credit risk. No central bank wants to be in the same position as the China Investment Corporation. Explaining how you lost money on your safe investments isn’t fun.
The general flight out of risk by central banks is one reason why the Treasury’s bailout of the Agencies has failed to halt the central bank run on Agencies. The flight out of Agencies — and flight into Treasuries — over the past two months has been stunning. Last week continued the trend: central banks added close to $20b to their Treasury portfolio at the New York Fed while cutting their Agency holdings by $7 billion. That helps support the Treasury market amid all the new supply, but hasn’t done wonders for the Agency market.
Just look at a graph — produced by my colleague Paul Swartz of the Center for Geoeconomic Studies — showing the 52 week change in Agency and Treasury holdings.
The world — at least for central bank reserve managers — changed in late July. The rise in their Treasury holdings since then has been nothing short of stunning. Their activities are having an impact on the Agency market too. Agency spreads have stayed wide — despite large purchases of Agencies (at least for while) from PIMCO. Paul Swartz helped me show this graphically but comparing the 3m change in central bank holdings of Agencies at the New York Fed to Agency spreads over Treasuries.
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Posted in Systemic Risk, central bank reserves | 34 Comments »
Posted on Thursday, November 6th, 2008
By bsetser
The US, UK, Eurozone and Japan all look to be in recessions. The US and Europe had been the main drivers of global demand growth – at least for finished goods. That is going to change.
Emerging economies that relied on a commodity windfall to support higher domestic spending and investment may also need to cut back. The windfall isn’t what it once was. That also will cut into demand.
Emerging economies that relied on borrowing from the rest of the world to support high levels of domestic spending and investment also will be cutting back. They have been hit by the credit crunch.
China benefits from lower commodity prices. It has no need to borrow from the rest of the world to support high levels of domestic investment.
The world economy could really use a Chinese locomotive. But it increasingly doesn’t look like it will get one. A recent Credit Suisse report noted that the latest purchasing managers survey suggests that China is about to enter a manufacturing recession. Export orders fell sharply – as one would expect. But import orders fell more. If that proves an accurate guide to China’s demand for the world’s goods and services, China won’t be doing much to support global growth.
There has long been a rather sterile – at least in my view - debate over how much exports contributed to China’s recent growth. It has long been clear that:
a) Most of China’s growth didn’t come from exports. It couldn’t. Net exports almost never generate 10% growth on their own.
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Posted in China | 45 Comments »
Posted on Tuesday, November 4th, 2008
By bsetser
Back when the US Treasury announced the TARP, a common assumption was that the rise in the United States need to borrow need implied that the US would necessarily need to borrow more from the world’s central banks. After all, central banks have been the main purchasers — on net — of Treasuries over the past few years. Now there is a sense that the world’s central banks are necessary to finance not just the Treasury bonds associated with the TARP, but also the large expected fiscal deficit – and indeed concern that central bank demand may not rise as fast as Treasury supply.
Just today the Treasury announced it expected to issue – on net – an additional $500b this quarter. That is a lot by any measure.
I would be surprised, though, if it is all bought by central banks. Or even if most of the new Treasury will be absorbed by central banks. For the first time in a long time, I suspect Americans — not the world’s central banks — will be the main source of new lending to the Treasury.
Why? The last few months have been marked by three trends:
– The scale of Treasury issuance picked up. A bigger deficit, the TARP and above all the Supplementary Financing Facility led to a nearly $780b increase in outstanding stock of public debt between the end of August and the end of October.
– The pace of central bank reserve growth slowed. I don’t yet have full data for October, but reserve growth unquestionably slowed dramatically last month as capital flows to emerging economies reversed. Most central banks are running down their reserves, not adding to them. See Korea. Or Russia. And unlike in q3 – when around $150b in Chinese reserve growth and $50b in Saudi reserve growth more than offset the fall in other countries reserves – I suspect that on net central banks reduced their total reserves in the month of October. That also is a big change.
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Posted in China, U.S. trade deficit and external debt, central bank reserves | 42 Comments »
Posted on Monday, November 3rd, 2008
By bsetser
The Gulf states are thought to have built up their cash reserves in q2 and q3 – though the supporting evidence was always circumstantial (the TIC data implied that no one was buying US equities) and anecdotal.
Now there is a bit of hard evidence. We know that the Saudi Arabian Monetary Agency (SAMA) added $40.9b to its foreign deposits in q3 2008 – and only $13.6b to its foreign securities portfolio.
We also now know that the Saudis added $144.3b to SAMA’s foreign portfolio between the end of q3 2007 and the end of q3 2008. Not a bad year. A little over $50b of that went into deposits; a little over $90b went into securities. In other words, the shift toward deposits is recent phenomenon.
SAMA’s non-reserve foreign assets now total $405.2b and it manages another $63b in foreign assets for Saudi government pension funds as well as $31.7b in foreign currency reserves. That works out to close to $500b in total assets — enough to potentially make SAMA the largest sovereign fund manager in the Gulf. Rachel Ziemba and I never were convinced ADIA was nearly as large as some claimed – and both the big slide in global equities this year and the creation of new Abu Dhabi sovereign funds reduced the size of its portfolio.
Of course, looking only at the size of formal sovereign funds – and institutions like SAMA – misses the large “private” assets of some of the Gulf’s key families. Notably the region’s royal families.
Those private fortunes are coming out in the open — in part because a new generation of princes (and royal advisers) seems less adverse to advertising their wealth than the older generation.
Abu Dhabi’s Sheik Mansour bin Zayed al-Nahyan seems set to buy 16% of Barclay’s for his private portfolio (fits nicely with ManCity). Sheik Sheikh Hamad bin Jassim bin Jabor Al Thani (Qatar’s prime minister) is investing in Barclay’s through his private fund as well. And the QIA is adding to its stake too. If Qatar keeps adding to its stake in Barclays I guess it figures it will eventually make money …
One of the investors in UBS last December also is thought to be a member of one of the region’s royal families.
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Posted in Sovereign Wealth Funds, oil | 14 Comments »
Posted on Saturday, November 1st, 2008
By bsetser
The Fed’s balance sheet just surpassed 2 trillion dollars. It has grown by a trillion dollars over the course of the year. Literally. See “total factors supplying reserve balances” at the close of business on October 29. That growth was financed by Treasury bill issuance ($560b from the supplementary financing facility) and a large rise in banks deposits at the Fed ($405b).
The stated foreign reserves of China’s central bank reached $1.9 trillion at the end of September. That though understates the total assets managed by the PBoC by around $200 billion. It is now clear – I think – that the PBoC manages about $200 billion in foreign currency that the state banks have placed at PBoC. This isn’t a secret: the PBoC reports over $200 billion in “other foreign assets.” That means the PBoC already has a foreign currency balance sheet of over $2 trillion.
The pace of growth in that balance sheet slowed a bit in q3 – and may slow more in q4. But between q3 07 and q3 08, the PBoC added about $600 billion to its foreign portfolio (and another $100b or so was handed over to the CIC). The CEQ summary of my article for them covers this — though it only goes through q2 2008.
It consequently is natural to compare the balance sheet of the Fed with the external balance sheet of the People’s Bank of China — a balance sheet that is managed by the State Administration of Foreign Exchange (SAFE).
The Fed has a somewhat under $500 billion in Treasuries on its balance sheet. But it has lent about $220 billion of those securities to liquidity starved broker-dealers. It consequently has fewer Treasuries on hand than it reports. Its “uncommitted” Treasury portfolio is around $270b.
SAFE has – if it is safe to assume that SAFE accounts for the majority of China’s reported holdings of Treasuries – about $540 billion of Treasuries. But this total understates China’s real holdings; China probably accounts for about ½ (maybe more) of the Treasuries sold to investors in the UK (look at the pattern of past revisions). It consequently has more Treasuries on hand than reported in the US data – probably about $700 billion.
The Fed has provided about $1 trillion in credit — ok, $920 billion — to the US financial system – whether repos ($80b), term credit ($300b), other loans ($370b), purchases of commercial paper ($145b), or its holdings of the Bear assets JP Morgan didn’t want ($27b now).
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Posted in China, Systemic Risk, central bank reserves | 48 Comments »
Posted on Friday, October 31st, 2008
By bsetser
At least for Russia. And probably for a host of emerging economies.
Russia’s reserves fell by over $30 billion during the third week of October — tumbling from $515.7b on October 17 to $484.7b on October 24. Roughly $15 billion of the fall reflects the fall in the dollar value of Russia’s euros and pounds. But about $15 billion reflects Russian intervention in the currency market, as well as the drain on Russia’s reserves associated with the loans Russia’s government is making to Russian banks and firms seeking foreign exchange to repay their foreign currency debts.
A $15 billion weekly outflow is rather large.
$15 billion is as much as the IMF committed to lend Russia back in 1998. And the IMF actually only disbursed a third of that total.
The most the IMF ever actually lent out to a single country in the past was roughly $30 billion (to Brazil, in 2002-03). At the current rate, Russia will run through that much in two weeks.
The pace of decline in Russia’s reserves is partially a function of the fact that Russia had so many reserves back in July. Countries with less money in the bank tend to husband their scarce resources rather than spend them liberally. A lot Russia’s reserve buildup reflected private inflows rather than the oil surplus, so in some sense Russia’s government is just facilitating the reversal of those flows. In the process, of course, the Russian state is helping out some of Russia’s biggest businessmen. Russia’s state will likely end up controlling a broader swath of Russia’s economy at the end of the “deleveraging” process.
But the pace of decline in Russia’s reserves is also evidence of the scale of the reversal in capital flows to emerging economies — and the pace of the current outflow.
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Posted in IMF, central bank reserves, emerging economies | 45 Comments »
Posted on Wednesday, October 29th, 2008
By bsetser
Today the Federal Reserve indicated that it would swap US dollars for Brazilian real, Korean won, Mexican pesos and Singapore dollars — effectively allowing a select group of emerging economies to borrow dollars on terms similar to those available to the G-10 economies. Or almost similar terms. The G-10 central banks can currently borrow dollars from the Fed without limit; the four selected emerging market central banks can only borrow $30 billion each. But $120 billion is real money — and if need be, the the size of these swap lines conceivably could be increased.
This move goes some way toward breaking down the line between the G-7 (really G-10) economies and emerging economies that emerged after the G-7 countries guaranteed that systemically important financial institutions in their economies wouldn’t be allowed to fail and the Fed expanded the scale of the swap lines available to European economies whose banks had a large need for dollars. Those moves reduced the risk of lending to another bank in the G-7 (or G-10), but increased the (relative) risk of lending to a bank outside the G-10. German banks needing dollars could get dollars from the ECB, which could get dollars from the Fed. Korean banks had no such luck.
Change has come to the IMF as well. The IMF used to be in the business of providing tranched, conditional loans. And for a long-time the stated goal of fund policy was to return to the funds traditional lending limits (for geeks, 100% of quota in a year, 300% of quota over the life of the program). Now it is willing to lend to some countries unconditionally. And to provide up to 500% of quota upfront. Today’s IMF press release:
The new facility, approved by the IMF’s Executive Board on October 28, comes with no conditions attached once a loan has been approved and offers large upfront financing to help countries restore confidence and combat financial contagion.
“Exceptional times call for an exceptional response,” said IMF Managing Director Dominique Strauss-Kahn. “The Fund is responding quickly and flexibly to requests for financing. We are offering some countries substantial resources, with conditions based only on measures absolutely necessary to get past the crisis and to restore a viable external position,” he said.
That’s change. There was a time when it was fairly standard to argue that the financing that the Fund provided was almost incidental to the success of a Fund program. The conditions were what really mattered. Now, for at least a subset of countries, the Fund thinks all that really matters is money.
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Posted in IMF, Systemic Risk, emerging economies | 88 Comments »
Posted on Wednesday, October 29th, 2008
By bsetser
To date, the CIC hasn’t exactly distinguished itself with its investment acumen. Its investments in Blackstone and Morgan Stanley are underwater. Its Blackstone shares are down something like 75%.
Even its “safe” investments haven’t been safe: it put money in the Reserve Primary Fund — the money market fund that famously broke the buck.
But it almost certainly has outperformed other sovereign funds this year. Its winning strategy?
Cash. Lots of it. SWF Radar highlighted a Thomson Reuters report that indicated:
[the] “CIC has been very stable so far, because at a time when global stock markets are dropping dramatically, it has more than 90 percent of its assets in cash,” the official Shanghai Securities News cited Lou Jiwei, head of CIC, as saying.
Apparently the CIC didn’t put most of its money to work. Which, if nothing else, means it didn’t lose all that much.
On the other hand, it really isn’t necessary to create a sovereign fund just to invest in money market funds.
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Posted in China, Sovereign Wealth Funds | 50 Comments »
Posted on Tuesday, October 28th, 2008
By bsetser
Via Martin Wolf and Nouriel Roubini comes the latest global forecast from JP Morgan:
“Once again, we have taken an axe to near-term growth forecasts for the developed world and will likely follow up with additional downward revisions for emerging economies in the coming weeks. Already, our forecasts suggest that global gross domestic product will contract at a near 1 per cent annual rate” in the fourth quarter of 2008 and the first quarter of 2009.
JPMorgan expects shrinkage this quarter at an annualised rate of 4 per cent in the US, 3 per cent in the UK and 2 per cent in the eurozone. It is forecasting 0.4 per cent global growth in 2009, with advanced countries shrinking 0.5 per cent and emerging ones growing 4.2 per cent.”
Ouch. And that is before the forecast for emerging economies has been revised down to reflect recent turmoil.
Posted in Systemic Risk | 37 Comments »
