Global reserves management Government Borrowers Forum 2007 Montreal, Canada 16 May 2007. Dr Krzysztof Rybiński* National Bank of Poland Deputy Governor Email: [email protected] Blog: www.rybinski.eu. * Views presented here are my own and they do not necessarily represent - PowerPoint PPT Presentation
Global reserves management Global reserves management Government Borrowers Forum 2007 Government Borrowers Forum 2007 Montreal, Canada Montreal, Canada 16 May 2007 16 May 2007 Dr Krzysztof Rybiński* Dr Krzysztof Rybiński* National Bank of Poland National Bank of Poland Deputy Governor Deputy Governor Email: Email: [email protected][email protected]Blog: Blog: www.rybinski.eu www.rybinski.eu *Views presented here are my own and they do not necessarily represent the official position of the National Bank of Poland or the Polish Financial Services Authority. Paper published in September 2007 in Economista (in English)
Transcript
Global reserves managementGlobal reserves management
Government Borrowers Forum 2007 Government Borrowers Forum 2007 Montreal, CanadaMontreal, Canada
16 May 200716 May 2007
Dr Krzysztof Rybiński*Dr Krzysztof Rybiński*National Bank of PolandNational Bank of Poland
*Views presented here are my own and they do not necessarily represent the official position of the National Bank of Poland or the Polish Financial Services Authority. Paper published in September 2007 in Economista (in English)
Rybinski.eu
Research motivationResearch motivation
• Central banks reserves exceeded 5 trillion Central banks reserves exceeded 5 trillion dollars in 2006, SWFs hold at least 1.5 dollars in 2006, SWFs hold at least 1.5 trillion dollars, cumulative reserves holding trillion dollars, cumulative reserves holding forecast to exceed 10 trillion dollars in 2010forecast to exceed 10 trillion dollars in 2010
• In recent years CBs and SWF embarked on In recent years CBs and SWF embarked on a „collective diversification journey” a „collective diversification journey” (particular attention given to Singapore, (particular attention given to Singapore, China, Japan, Korea)China, Japan, Korea)
• Goal: understand why this happened, what Goal: understand why this happened, what are the likely consequencesare the likely consequences
Rybinski.eu
Putting this in perspective …Putting this in perspective …
Source: Hildebrand (2007), author’s modifications
Global CB reserves
Rybinski.eu
Growth of Official ReservesGrowth of Official Reserves
0
500
1 000
1 500
2 000
2 500
3 000
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Developing and Emerging Economies, USD bln.
Sources: BIS, IMF, World Bank
Rybinski.eu
Do we have enough?Do we have enough?
Source: flickr.com
Rybinski.eu
Reserves Adequacy: Months of Reserves Adequacy: Months of ImportsImports
Developing and Emerging Economies, Weighted Average
We have more than enough!We have more than enough!
Source: flickr.com
Rybinski.eu
Usual costs of holding reservesUsual costs of holding reserves
• Cost of mopping up liquidity higher Cost of mopping up liquidity higher than return on reservesthan return on reserves
• Domestic currency appreciation may Domestic currency appreciation may lead to huge losses amid long foreign lead to huge losses amid long foreign currency positionscurrency positions
• Old cost measures focused on CB Old cost measures focused on CB balance sheetbalance sheet
Rybinski.eu
New concept: OCHARNew concept: OCHAR
• OOpportunity pportunity CCost of ost of HHolding olding AAmple mple RReserves …eserves …
• … … is a forgone GDP growth amid too is a forgone GDP growth amid too conservative central bank reserve conservative central bank reserve managementmanagement
Rybinski.eu
OCHAR factorsOCHAR factors
1.1. The size of reserves (absolute or above The size of reserves (absolute or above GG rule)GG rule)
2.2. The difference of returns between The difference of returns between optimal strategy in the long-run and optimal strategy in the long-run and actual short-term focused strategy actual short-term focused strategy pursued by CBspursued by CBs
3.3. The country specific ability to translate The country specific ability to translate additional income into projects with high additional income into projects with high social rate of returnsocial rate of return
Rybinski.eu
OCHAR, second factor - OCHAR, second factor - strategystrategy
Cumulative Return on a Stylized Central BankPortfolio
Cumulative Return on a Stylized PensionPortfolio
Global portfolio: US, Germany, UK (actual currency shares are weights)CB: 1-3 government bondsPension: 40% bonds (1-3), 60% stocks, Merill Lynch indices
Rybinski.eu
Opportunity cost: factors 1 & 2Opportunity cost: factors 1 & 2,,% GDP % GDP (5yr average)(5yr average)
OCHAR – third factor – OCHAR – third factor – good/bad governmentgood/bad government
• Higher central bank profits can be Higher central bank profits can be wisely invested to enhance potential wisely invested to enhance potential output or …output or …
• … … can be wasted on potential-growth can be wasted on potential-growth reducing social handoutsreducing social handouts
• This factor is country specificThis factor is country specific
• We use infrastructure spending We use infrastructure spending coefficient (Munnel [1992]) of 0.39coefficient (Munnel [1992]) of 0.39
Rybinski.eu
OCHAR, % GDPOCHAR, % GDP
1990-1995 1996-1999 2000-2002 2003-2006 1990-2006
Stylized pension portfolio
Western Europe 0.01% 0.23% -0.27% 0.14% 0.04%
CEE 0.09% 0.74% -0.91% 0.54% 0.17%
Asia 0.02% 0.43% -0.72% 0.67% 0.14%
Oil exporting countries 0.03% 0.42% -0.58% 0.48% 0.12%
Latin America 0.05% 0.35% -0.42% 0.29% 0.10%
Africa 0.03% 0.32% -0.46% 0.26% 0.07%
Rybinski.eu
Two strategies. First – keeping Two strategies. First – keeping reserves at the „optimal” levelreserves at the „optimal” level
Two strategies. Second – Two strategies. Second – raising marginal revenueraising marginal revenue
Source: Green, Torgerson (2007), author’s modificationsStrategy adopted by majority of CBs
Rybinski.eu
The central bank The central bank collectivecollective diversification journeydiversification journey
Source: flickr.com
Rybinski.eu
XX century investing vs. XXI XX century investing vs. XXI century investing by CBscentury investing by CBs
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00%
T-Bill
USG1-3
Govts
+Agcy
+ABS/MBS
+Corps
+Hi Yield
+Equity
+EmgMkt
+Commdty
+HedgeFunds
Very conservative central bank, capital protection strategy
GIC, 9.5% pa.
Source: World Bank Treasury, author’s modifications
Rybinski.eu
What are the implications?What are the implications?
Rybinski.eu
Changes is assets relative pricesChanges is assets relative prices
• ImplicationImplication 1 1: relative asset prices : relative asset prices in XXI century will change, and often in XXI century will change, and often will have very little in common with will have very little in common with historical averages in XX century historical averages in XX century (some asset prices may not be (some asset prices may not be mean-reverting)mean-reverting). Emerging markets . Emerging markets as new safe heaven???as new safe heaven???
Rybinski.eu
Some recent evidence of Some recent evidence of relative risk rerelative risk re--pricingpricing
Source: BIS quarterly, March 2007. Record low emerging market CDS spreadssuggest significant reduction of credit risk in emerging markets relative to UScorporate risk in the same credit category
Rybinski.eu
EM volatility below major EM volatility below major markets volatilitymarkets volatility• In In 2007 2007 late Feb – Mar episode local and sovereign EM debt late Feb – Mar episode local and sovereign EM debt
was was the the most stable asset class – PIMCO (April 2007)most stable asset class – PIMCO (April 2007)
JPMorgan (2006)
Correlation of EMvolatility and coremarkets volatilityhas gone up
Rybinski.eu
ReRe--pricing of risk, emerging pricing of risk, emerging markets markets
Source: IMF, „Global Financial Stability Review”, September 2007.
Rybinski.eu
From Greenspan put to From Greenspan put to Bernanke kaput*Bernanke kaput*
• Is CB action Is CB action causing massive causing massive moral hazard?moral hazard?
• Is policy geared Is policy geared towartowardds s stabilization in stabilization in developed world developed world causing EM boom?causing EM boom?
Phrase borrowed from HSBC research note
Rybinski.eu
Other implicationsOther implications• US will loose „exorbitant privilege” (Gourinchas, US will loose „exorbitant privilege” (Gourinchas,
Rey (2005))*Rey (2005))*
• Faster developments of financial markets in Asia, Faster developments of financial markets in Asia, maybe leading to common currency „asian” (work maybe leading to common currency „asian” (work on on rregional egional ffinancial inancial mmechanism „AMFechanism „AMF??” already ” already started)*started)*
• Better allocation of assets globally leading to higher Better allocation of assets globally leading to higher global growthglobal growth
• CBs likely CBs likely to to ususee market risk reassessment periods market risk reassessment periods to accelerate diversification processto accelerate diversification process
*Explained in detail in K.Rybinski „Globalizacja w trzech odsłonach”, to by Difin, May 2007 (in Polish), current discussion ofthese topics on author’s blog www.rybinski.eu (in English)
Rybinski.eu
Global risk? Global risk?
• What if global four-sigma event shuts off What if global four-sigma event shuts off many markets, and liquidity is gone. Will many markets, and liquidity is gone. Will CBs acting as good asset managers be CBs acting as good asset managers be able to act able to act timely timely as lenders of the last as lenders of the last resort?resort?
• Shocks are becoming increasingly global Shocks are becoming increasingly global (Ehrmann, Frat(Ehrmann, Fratzzscher (2006)), only scher (2006)), only heavyweights can deal with these heavyweights can deal with these shocksshocks
Rybinski.eu
Central bankers’ job is Central bankers’ job is becoming increasingly becoming increasingly challengingchallenging
