Angola’s international reserves total around $14.4bn and the investment portfolio is mainly composed of fixed-income instruments, namely sovereign debt securities (44.6%) and money market assets (41.1%), mostly time deposits. The investment portfolio is also composed of commodities (gold) and an allocation managed by external asset managers.
The Banco Nacional de Angola is responsible for the management of the country’s foreign reserves. This role is performed in accordance with the bank’s investment guidelines for reserve management, as well as the investment policy. The reserve management is based on three fundamental pillars: liquidity, capital preservation and optimisation of the risk-return ratio.
All decisions in regard to foreign reserves are made by the bank’s investment committee, which is chaired by the governor. It is responsible for analysing the evolution of the investment portfolio, as well as defining the bank’s strategic objectives and risk profile. The committee approves strategic investment decisions on a quarterly basis whereas, for the tactical asset allocation, the strategy is set monthly.
International reserves are managed in three tranches: liquidity, transition and investment. The US dollar currently represents the vast majority of investments with an allocation of 71.5% of the total foreign reserves portfolio. This is where the diversification challenge persists. There is still no currency that can accommodate international reserve investments as much as the dollar. Being a commodity-exporting country (oil) and having such a high exposure to the dollar, combined with a fixed-income portfolio of 44.5%, makes the challenge even greater.
Last year was particularly challenging due to interest rate hikes by the main monetary authorities. Throughout 2023, central banks around the world raised interest rates in order to address rising inflation. The US Federal Reserve hiked rates four times during the year, increasing from 4.4% to 5.5%. Meanwhile, the European Central Bank, also pressured by rising inflation in the euro area, raised the key rate from minus 0.5% to 4.5%, the highest level since the 2008 financial crisis. This opened a window of opportunities for investment in euros, in particular for the money market portfolios.
This scenario, almost unthinkable a few years ago, has given rise to new diversification opportunities for investment portfolios. Certainly, the dollar remains the main currency in terms of investment allocation, but with the euro on positive ground, the European currency is now a bigger consideration for both strategic and tactical investment decisions. There is also a greater allocation consideration for the euro in Banco Nacional de Angola’s guidelines and investment policy documents, which are currently being reviewed.
In tactical and strategic allocations, more investments are being made in euros. There has been a noticeable shift from a time when the allocation for investments in euros was very limited due to negative returns to an era where the euro is positive yielding. As a result, some inactive nostro euro accounts are now active and have applications at competitive rates.
For central bankers, the approach to currency diversification is surely much ‘smoother’ with the euro on positive ground. While diversification away from the dollar has been at the top of many central banks’ agendas for decades, and various initiatives have been discussed throughout the world, there is still, at least so far, no other reserve currency yet to replace the dollar in reserves due to its combination of stability, liquidity and return.
Finally, the return of positive rates for the euro has brought an additional sparkle for the markets, especially for conservative investors such as central banks. This has opened the way for more investment opportunities in a reserve currency that sustains the combination of stability, liquidity and now positive returns.
Tânia Patrícia Mendes Lopes is Manager of Markets at Banco Nacional de Angola.
This was originally published in OMFIF’s Global Public Investor 2024 report. Download and read here.
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