Transparency of official assets moves up the agenda
Reserves analysis impeded by developing country secretiveness
by David Marsh
Mon 10 Mar 2014
The need for greater transparency among emerging market economies owning an increasing share of cross-border investments is moving slowly up the global economic agenda.
Last week’s announcement by the International Forum of Sovereign Wealth Funds (IFSWF) that it is moving its secretariat from Washington to London is only a small step. Yet it heightens pressure for large-scale public investors deploying funds internationally to open up operations.
Counting all the investments of central banks, official investment agencies, sovereign funds and public pension funds, global public investors (GPIs) now own about $30tn of assets worldwide.
Public sector or government-owned or controlled organisations appear intrinsically more intriguing than private sector groups. Investors, politicians, the media and the public frequently detect the long hand of official strategy behind their investment decisions.
The truth is often more prosaic. Large-scale private sector funds, whether operating in public or private markets, could show a similar approach on revealing details of their activities in different markets.
The IFSWF links 26 disparate members from 25 countries. The latest recruit, the $100bn-plus Kazakh sovereign fund Samruk-Kazyna, came officially on board last week. The Forum was set up to supervise implementation (on a voluntary basis) by its members of the so-called Generally Accepted Principles and Practices (GAPP) – known as the Santiago Principles – decided in 2008 to promote transparency and accountability among official owners of assets.
The IFSWF secretariat operates from within the International Monetary Fund (IMF). It moves to London in the summer to emphasise its independence and a new stage in its development. Stepping up interactions with international financial market practitioners is an important part of the relocation.
Ted Truman, an international expert on sovereign funds, a former Federal Reserve official now at the Peterson Institute in Washington, has pointed out that adherence to the Santiago principles has slipped. Some of the newer sovereign funds are much less compliant than the older ones. This is a trend that the IFSWF leadership intends to counter with the move to London.
Truman, a former Federal Reserve official now at the Peterson Institute in Washington, takes the sensible line that managers of international assets need to be accountable to their stakeholders, foreign as well as domestic, in the interests of international financial stability. He thinks that this approach needs to be extended across the board to central banks, pointing out that some of these institutions, even if they are nominally independent, are now moving into areas of investments (such as equities) that used to be the preserve of private sector funds.
As one indication of the challenges, the secretiveness of developing economies is making it harder to analyse the all-important currency composition of the world’s growing hoard of foreign exchange reserves.
The proportion of reserves that is broken down by currency reached a third consecutive all-time low in the third quarter of 2013, according to the IMF’s quarterly Composition of Foreign Exchange Reserves (COFER) data.
IMF members are not required to disclose how they allocate their foreign exchange reserves, which totalled $11.4tn at the end of September. They are increasingly choosing not to do so. In 1999, countries declared the currency breakdown of more than 75% of their reserves; by late 2013, the share was down to 54.1%.
The increased reticence reflects the behaviour of developing economies, which as a group divulged the composition of only 37.1% of their reserves in the latest IMF tally, down from 55.9% at the end of 1999. By contrast, advanced economies declared how 89% of their reserves were allocated. This is broadly unchanged from 1999, when the figure was 90.6%. Advanced economies are generally happy to go public, whereas developing ones tend to prefer greater opacity.
The IMF has found it exceedingly difficult to persuade countries such as China to reveal the currency breakdown data for foreign exchange holdings, even if the figures are provided solely for aggregated statistics and not to disclose individual country holdings. China has been a force for transparency behind the IFSWF. The London move could help raise openness in other aspects of official investment management.
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