Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Real bills doctrine wikipedia , lookup
Systemic risk wikipedia , lookup
Currency war wikipedia , lookup
Currency War of 2009–11 wikipedia , lookup
Fear of floating wikipedia , lookup
Balance of payments wikipedia , lookup
Great Recession in Russia wikipedia , lookup
Global financial system wikipedia , lookup
Modern Monetary Theory wikipedia , lookup
Nouriel Roubini wikipedia , lookup
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 the official position of the National Bank of Poland or the Polish Financial Services Authority. Paper published in September 2007 in Economista (in English) Research motivation • Central banks reserves exceeded 5 trillion dollars • • in 2006, SWFs hold at least 1.5 trillion dollars, cumulative reserves holding forecast to exceed 10 trillion dollars in 2010 In recent years CBs and SWF embarked on a „collective diversification journey” (particular attention given to Singapore, China, Japan, Korea) Goal: understand why this happened, what are the likely consequences Rybinski.eu Putting this in perspective … Global CB reserves Source: Hildebrand (2007), author’s modifications Rybinski.eu Growth of Official Reserves Developing and Emerging Economies, USD bln. 3 000 2 500 2 000 1 500 1 000 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 0 1995 500 Sources: BIS, IMF, World Bank Rybinski.eu Do we have enough? Source: flickr.com Rybinski.eu Reserves Adequacy: Months of Imports Developing and Emerging Economies, Weighted Average 9 8 7 6 5 4 3 2 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 0 1995 1 Sources: BIS, IMF Rybinski.eu Reserves Adequacy: Short-Term Debt Coverage (GG) Developing and Emerging Economies, Weighted Average 3,0 2,5 2,0 1,5 1,0 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 0,0 1995 0,5 Sources: BIS, IMF Rybinski.eu Reserves Adequacy: Short-Term Debt Coverage USD m 4 2000 2005 3 2 1 0 Western Europe CEE Asia Oil exporting countries Latin America Africa Sources: IMF IFS, BIS-IMF-OECD-WB Rybinski.eu We have more than enough! Source: flickr.com Rybinski.eu Usual costs of holding reserves • Cost of mopping up liquidity higher than return on reserves • Domestic currency appreciation may lead to huge losses amid long foreign currency positions • Old cost measures focused on CB balance sheet Rybinski.eu New concept: OCHAR • Opportunity Cost of Holding Ample Reserves … • … is a forgone GDP growth amid too conservative central bank reserve management Rybinski.eu OCHAR factors 1. The size of reserves (absolute or above GG 2. 3. rule) The difference of returns between optimal strategy in the long-run and actual short-term focused strategy pursued by CBs The country specific ability to translate additional income into projects with high social rate of return Rybinski.eu OCHAR, second factor - strategy Global portfolio: US, Germany, UK (actual currency shares are weights) CB: 1-3 government bonds Pension: 40% bonds (1-3), 60% stocks, Merill Lynch indices 500% 450% 400% 350% Cumulative Return on a Stylized Central Bank Portfolio Cumulative Return on a Stylized Pension Portfolio 300% 250% 200% 150% 100% 50% 0% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Rybinski.eu Opportunity cost: factors 1 & 2, % GDP (5yr average) 2,0% 1,5% 1,0% 0,5% 0,0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 -0,5% Western Europe CEE Asia Oil exporting countries Latin America Africa -1,0% Rybinski.eu OCHAR – third factor – good/bad government • Higher central bank profits can be wisely invested to enhance potential output or … • … can be wasted on potential-growth reducing social handouts • This factor is country specific • We use infrastructure spending coefficient (Munnel [1992]) of 0.39 Rybinski.eu OCHAR, % 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 reserves at the „optimal” level Source: Green, Torgerson (2007), author’s modifications Examples: Slovakia, Switzerland, Mexico Rybinski.eu Two strategies. Second – raising marginal revenue Source: Green, Torgerson (2007), author’s modifications Strategy adopted by majority of CBs Rybinski.eu The central bank collective diversification journey Source: flickr.com Rybinski.eu XX century investing vs. XXI century investing by CBs 16.00% 14.00% 12.00% T-Bill GIC, 9.5% pa. USG1-3 Govts 10.00% +Agcy +ABS/MBS 8.00% +Corps +Hi Yield +Equity 6.00% +EmgMkt +Commdty 4.00% 2.00% 0.00% 0.00% +HedgeFunds Very conservative central bank, capital protection strategy 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% Source: World Bank Treasury, author’s modifications Rybinski.eu What are the implications? Rybinski.eu Changes is assets relative prices • Implication 1: relative asset prices in XXI century will change, and often will have very little in common with historical averages in XX century (some asset prices may not be mean-reverting). Emerging markets as new safe heaven??? Rybinski.eu Some recent evidence of relative risk re-pricing Source: BIS quarterly, March 2007. Record low emerging market CDS spreads suggest significant reduction of credit risk in emerging markets relative to US corporate risk in the same credit category Rybinski.eu EM volatility below major markets volatility • In 2007 late Feb – Mar episode local and sovereign EM debt was the most stable asset class – PIMCO (April 2007) JPMorgan (2006) Correlation of EM volatility and core markets volatility has gone up Rybinski.eu Re-pricing of risk, emerging markets Source: IMF, „Global Financial Stability Review”, September 2007. Rybinski.eu From Greenspan put to Bernanke kaput* • Is CB action causing massive moral hazard? • Is policy geared towards stabilization in developed world causing EM boom? Phrase borrowed from HSBC research note Rybinski.eu Other implications • US will loose „exorbitant privilege” (Gourinchas, Rey • • • • (2005))* Faster developments of financial markets in Asia, maybe leading to common currency „asian” (work on regional financial mechanism „AMF?” already started)* Better allocation of assets globally leading to higher global growth Possibly higher short-term volatility CBs likely to use market risk reassessment periods to accelerate diversification process *Explained in detail in K.Rybinski „Globalizacja w trzech odsłonach”, to by Difin, May 2007 (in Polish), current discussion of these topics on author’s blog www.rybinski.eu (in English) Rybinski.eu Global risk? • What if global four-sigma event shuts off many markets, and liquidity is gone. Will CBs acting as good asset managers be able to act timely as lenders of the last resort? • Shocks are becoming increasingly global (Ehrmann, Fratzscher (2006)), only heavyweights can deal with these shocks Rybinski.eu Central bankers’ job is becoming increasingly challenging Source: flickr.com Rybinski.eu