Macau urged to create SWF to invest reserves

31 July 2014   Category: News, Asia, Global, Macau   By Daniel Shane

Macau’s government has been urged to create a sovereign wealth fund (SWF) to better manage its substantial fiscal reserves and buffer the territory against external shocks.

Following a recent mission to the Chinese SAR, the International Monetary Fund (IMF) issued a report stating that the establishment of an SWF with a clear mandate would enable Macau to generate better risk-adjusted returns over a long horizon, as well as help to diversify its asset base.

According to the IMF, the territory’s fiscal reserves stood at 58.7% of its overall GDP in 2013, or close to US$30 billion. It also projected that Macau’s economy would grow by 9% this year and by 10% in 2015.

However, the fund warned that Macau’s economy could face headwinds due to a potential slowdown in gaming revenues, as a result of any slowdown in tourism from China and Hong Kong, in addition to its ageing population. The IMF said that the winding down of unconventional monetary policy in the US, of which Macau’s currency is pegged to, as well as structural reform in Mainland China, also posed risks.

The IMF advised that setting up an SWF, administered by the territory’s monetary authority, with the assistance of external fund managers, should be seriously considered to invest some of Macau’s reserves.

“There may be merit to allocating some part of the fiscal reserves to an SWF with a clear mandate to achieve better risk-adjusted returns over a long-term horizon, including through a more diversified asset allocation strategy,” the IMF report read.

“This would help build sustainable buffers that could be used to offset the impact of potential adverse shocks and set money aside to fund long-term aging expenditures. International experience suggests that a variety of institutional arrangements are possible for an SWF, including having the monetary authority manage the assets, often with the help of external fund managers,” the report continued.

The Monetary Authority of Macau (AMCM) has from this year invested around 10% of reserves into equities, including with the help of external fund managers, the IMF reported. The AMCM is said to be willing to take further steps in this direction, but emphasised that any decision would need to be backed by a clear increase in risk tolerance and willingness to judge performance over a long-term horizon.

The IMF cited the examples of Singapore’s Temasek Holdings and the Korea Investment Corporation as models of SWFs in Asia that Macau could follow.