Temasek’s Lesson to Standard and Poor’s – Rating Agencies as the new Target of the SWFs?

In November 2014, Standard&Poor’s (S&P) published a proposal of new criteria for assessing credit risk of “Investment Holding Companies” (IHCs), defined as “firms holding equity stakes across at least three sectors”, as part of a bigger focus onhow to evaluate the liquidity risk in the current depression.

The new framework grades IHCs’ asset liquidity by splitting their main countries of operation into four baskets. The split is based on a 30-year track record of those nations’ share market swings, taking into account of (1) the lack of direct ownership of assets by the IHC, (2) the challenges the IHC face when selling in illiquid markets and (3) the volatility of assets the IHC hold.

Singapore’s Sovereign Wealth Fund (SWF), Temasek Holdings has negatively reacted to this proposal, that groups Singapore -with a AAA rating for the last 20 years- and riskier nations. Singapore, in fact, falls into the third basket with Hong Kong, Saudi Arabia and Cyprus, but also with Greece and Jamaica.

The proposed industry classification could see -according to Temasek- a capping of IHCs’ “anchor ratings”, which help determine stand-alone scores at levels that, positively or negatively, don’t reflect the individual firms’ ability to pay their debt. S&P, in fact, assigns an “extremely high likelihood of extraordinary government support” to Singapore.

Temasek is a AAA-rated investment firm which managed US$165 billion of assets (as of March 2014). Its USD-denominated bonds, due in 2019, yielded 39 basis points more than US Treasuries (on current month) and its CDS were at 38.7, compared with 35.5 for Australia. According to its last annual report published in July 2014, Temasek had 31 per cent of its assets in Singapore, 41 per cent in the rest of Asia stood and 24 per cent those in North America, Europe, Australia and New Zealand. About 70 per cent of its assets were listed. The firm’s biggest holdings include stakes in Singapore Telecommunications Ltd (52 per cent, valued at USD 25bn); China Construction Bank Corp. (6 per cent, valued at USD 11.6bn), and DBS Group Holdings Ltd (29 per cent, valued at USD 10.4bn).

Temasek Holdings has come down hard, then, saying that the rules – if implemented – will get to “serious concerns”. In a 29-page response to the proposed changes, Temasek took issue with how the framework departs from:

• the principle that credit ratings should be based on the individual company’s underlying credit quality;
• individual companies should be assessed using credit metrics across business and financial aspects:
• the business aspects of an IHC should include the resilience and credit quality of its portfolio, as well as the management and governance structure of the IHC;
• the financial aspects should include portfolio liquidity, cash flow, debt maturity profile, sources of liquidity, overall funding and capital structure, and ability to meet payment obligations as and when they fall due.

According to the Temasek spokesperson, Stephen Forshaw, S&P seems to be confusing volatility with liquidity (“they would argue that a market in New Zealand is less volatile than Singapore. That may well be the case, but it should not be about volatility, it should be about liquidity.”)

Several analysts brushed off any potential negative impact on Singapore’s status as a financial hub, saying Temasek’s reputation do not ride solely on credit ratings. According to a CIMB economist, Song Seng Wun, “people will not take it seriously if Temasek is grouped with parties like Jamaica and Greece. Singapore has a good track record in repayment; the ratings merely reinforce the perception that people have of it. Singapore won’t be in Greece’s position unless the way the country is managed is fundamentally changed”.

The rating agencies have been recommending placing at least 10-15 percent of government revenues in a buffer fund of some sort. Since credit ratings directly affect borrowing costs, the governments have had a large economic incentive to do what the rating agencies want them to do. Now this clash radically changes the way in which SWFs have so far addressed to the rating agencies, marking the transition for the SWFs from “governmental entities” to “private corporation”.

Since S&P’s Ratings Services declined to comment on Temasek’s feedback, the final version of the S&P’s criteria will help to understand how, in the future, the weight of the SWFs will rule also the decisions of the rating agencies.

This post has been also published on LinkedIn.

 

DISCLAIMER: Any views or opinions presented here are solely those of the author and do not represent any official position of the Italian Ministry of Foreign Affairs and International Cooperation.

The strategic role of Shari’ah Boards

In December 2014 issue, Business Islamica published my article about The Strategic Role of Shari’ah Boards.

Check it out and, please leave comments!

DISCLAIMER: Any views or opinions presented here are solely those of the author and do not represent any official position of the Italian Ministry of Foreign Affairs and International Cooperation.

Fitting Islamic Finance in the Basel III Scheme

In January 2015 issue, Business Islamica published my article about Fitting Islamic Finance in the Basel III Scheme.

Check it out and, please leave comments!

DISCLAIMER: Any views or opinions presented here are solely those of the author and do not represent any official position of the Italian Ministry of Foreign Affairs and International Cooperation.

What a Sovereign Wealth Fund is

Over the past years, the international portfolios of State-owned investment funds, known as Sovereign Wealth Funds (SWFs), have gained momentum. The SWFs’ foreign investments have attracted remarkable attention, both in the US and in Europe, due to a main question:

“are the SWFs a threat to recipient countries related to their national sovereignty and security?”

Making this question does not represent the best approach for understanding the Sovereign Wealth Funds universe. It needs, instead, to focus on some other -more fundamental- questions, such as:

(1) why the SWF is created by a Government;

(2) what their goals are;

(3) how the Government manages these funds.

Give sense to a “political approach” to the SWFs’ international investments is misguiding, since, in the long term  – and often also in the short term -, the negative costs for the recipient States could be less than the positive benefits of the SWFs investments.

The dominant conception, that the State-investors are in pursuit of political power over other States, is unjustified. Also the assertion that SWFs are primarily used for balance of payments adjustments is unsound. Using a SWF, a Government act as investor in order to increase the value of their assets.

The global financial crisis brought back the State-investor on the markets. The activity of a State as a private investor is to be attributed to:

(A) the -generally widespread- funding shortage for investments;

(B) the negative aggregate effects of many policy-making mistakes (mostly in the regulatory function) and the resulting government action for preventing loss of political consensus;

(C) the fear of citizens for their future and their savings.

The State has revived for himself the role of “market player”, putting it beside its traditional role of “market regulator”. This new policy phase has been making easier by (1) an institutional investors’ weakness and (2) an ill-conceived role of the market and the State. The citizens, reversing the past “liberalist” (in a European sense) slogans, has started to call “more State and less market“, worrying less about the rules, and ignoring that the faults of the States are not less than those of the markets.

An important caveat about the “liberalist” concept. The meaning of the word “liberalism” diverges in different parts of the world. According to the Encyclopedia Britannica, “In the United States, liberalism is associated with the welfare-state policies of the “New Deal”, starting with the Roosevelt Administration, whereas in Europe it is more commonly associated with a commitment to limited government and laissez-faire economic policies.”

Regardless of ideologies, it’s humanly understandable -but socially wrong-, that people nourish the hope to burden the community with their problem. John Fitzgerald Kennedy was right when he urged US citizens not to wonder what the State could do for them, but what they could do for the State. The distributive activity of a Government is always welcomed by the citizens since they hope to benefit from it without paying the cost.

Generally speaking, the market can offer new opportunities to those who can grasp them. The State tries to do the same but, because of its failures, sooner or later ends up to offer only mere assistance. Promising opportunities, indeed, the State feeds hopes of well-being in the citizens, whether they are poor, workers, unemployed, small or big businessmen, but by the end of the day its function turn to be a mere redistribution of resources and not a creation of new ones.

The Sovereign Wealth Funds (SWFs) are the main political expression of the State-investor on the market. They operate as private entities but with public funds. It could be appropriate to consider that they are causing a reversal of the process started in the ‘70s, since they are the result of some real shortages, or mistakes, in processing the rules that governing global trade.

I can sum up in a scheme what I propose as the spillover effects of global market institutional weaknesses.

After the rejection of the Bretton Woods Agreement of 1944, decided unilaterally by the United States in 1971, new monetary and currency rules did not follow. Global trade came under the control system of the WTO, the World Trade Organization, the institutional evolution of the GATT, the General Agreement on Tariffs and Trade.

The WTO members could freely choose between “fixed” or “flexible” exchange rates for their national currency, unless they were not part of monetary agreements. This allowed some important countries with balance of payments surplus to choose between a “dirty floating” regime (i.e. with public, not systematic, intervention on the exchange rates) and a fixed exchange rate regime (with systematic intervention), while countries with balance of payments deficit could practice perfectly flexible exchange rates, whether the regime best suited to their interests.

In this way, countries with current account surpluses chose a regime of floating exchange, starting an accumulation of large reserves. This condition favored the emergence of (1) the unfair accumulation of official reserves and (2) the management of the external imbalances through a portfolio allocation of these reserves.

Moreover, the countries, holders of official reserves, could diversify their currency baskets also purchasing securities denominated in currencies different than those issued by them.

Thus, the exchange rate of a currency ended up to reflect the terms of trade, i.e. the rates at which the products of one country are exchanged for the products of the other, and tended to depend on monetary conditions and on the policies pursued by those countries, creators and users of official reserves. The economic policy of the United States and of the Eurozone, considered in their effects on the respective currencies, continued to set the tone of the monetary and financial global market, no longer alone yet. Also the exchange rate policies of China and other surplus countries would have had big relevance.

The trade-off between major current account imbalances and higher growth rates has made acceptable the geo-economics of the United States and China, laying the roots of the current crisis and increasing the shared responsibilities.

This structure of world trade has enabled the United States to see financed their deficits (therefore, their consumption) with the world savings, in particular from China. This “circular dynamic” has been stabilizing for both countries, for the value of their currencies, their trade balances, the purchasing power of their consumers, the inflationary pressures and interest rates in the United States, and, above all, for their respective cycles. Monetary policy in Beijing created a significant reserve in US securities.

The impressive trend called for a diversification of international reserves, as has fueled fears about a potential expansionary impact for the global monetary creation.

Countries holders of huge quantities of reserves started a process of currency diversification, opting for conversion to euro of US dollar-denominated securities. Then, they constituted Sovereign Wealth Funds as private legal entities that invest with state assets according to efficient asset allocation models. These tools have allowed the reinvestment of dollars in areas other than those where the US dollar is dominant.

The weakening of the dollar, as a result of this diversification process, caused, on one hand, a reduction of credibility and reliability of the US due to excessive borrowing, on the other hand, adjustment measures of trade which, in the particular case of the Washington-Beijing relationship, led to the revaluation of the Renmimbi/Yuan (21 July 2005) and the introduction of full convertibility on capital account in China (14 April 2006).

The consequences of this process, such as the reduced financing for the US current account deficit, the high risk of global trade collapse, as well as the social turmoil risk in China, linked to the domestic growth rate decline, showed how the Sovereign Wealth Funds issue was born economic but ends up geopolitical.

In the next post, we will talk about some practical definitions of SWFs.

This post was also published on LinkedIn.

DISCLAIMER: Any views or opinions presented here are solely those of the author and do not represent any official position of the Italian Ministry of Foreign Affairs and International Cooperation.

About fracking and Sovereign Wealth Fund

According to the Daily Mail, British Government is preparing an own “Sovereign Wealth Fund” to manage the revenues from the controversial fracking activities, or hydraulic fracturing, in the Northern England.

This proposal was already made by the Scottish First Minister Alex Salmond, giving a lecture at the London School of Economics on 15 February 2012 (“if Scotland becomes independent following a public referendum, it would use some of the tax revenues generated by its oil and gas industries to create a sovereign wealth fund for future generations“).

Recently, the Chancellor of the Exchequer George Osborne, in his recent Autumn Statement, has confirmed these plans. He said the new fund would use tax receipts from the exploitation of shale gas reserves in the North of England to invest in economic development projects in the region.

Between London and Edinburgh tensions continue yet. Last 3rd December, in fact, the Scottish Government renewed calls for a sovereign wealth fund to be set up for North Sea oil and gas. Scottish Energy minister Fergus Ewing branded Mr. Osborne’s decision “utter hypocrisy” after calls for a similar scheme for Scotland has been repeatedly rejected by Westminster governments.

According to scientists, UK is potentially sitting on shale deposits filled with enough gas to supply the whole country for at least 40 years, a discovery that could see a repeat of the North Sea oil boom. Estimates suggest 1,300 trillion cubic metres of shale gas reserves lie beneath the ground in the North of England. Blackpool can become the hub for expertise in onshore oil and gas. Other possible sites for the extraction of shale gas have been identified across the north of England, from Morecambe Bay and Cheshire across to North Lincolnshire and Humberside. The Weald Basin and the central belt of Scotland also harbour potentially valuable deposits.

British Government believes fracking could herald an “energy revolution” that will boost the home economy, make Britain more self-sufficient and bring down the high bills from energy firms. British Business and Energy Minister Matthew Hancock said it was estimated that at least £3.5 billion a year in net benefits could flow from shale extraction. For this reason, the HM Treasury has offered generous tax breaks to kick-start the technology.

Gillian Tett has commented the British decision as “more like a vote-grabbing gimmick than a concrete plan“. The reference is to the elections of May 2015 when Westminster composition will be renewed, and when Salmond would run for a seat in order to help ensure Scotland gets the extra powers it was promised.

Every UK SWFs-related project, then, starts quite constrained and complex. This explains a generalized skepticism around its constitution.

DISCLAIMER: Any views or opinions presented here are solely those of the author and do not represent any official position of the Italian Ministry of Foreign Affairs and International Cooperation.

LinkedIn: what a negative surprise!

Since yesterday evening, LinkedIn has blocked my account without any explaination, despite three e-mails for protest and, above all, despite I was a paid LinkedIn Premium customer.

I wonder how an influential magazine, like Forbes, can think about LinkedIn all content published a few days ago, in the face of a so poor customer service and a so inefficient organization. I browsed on the Internet, in fact, and I have found many cases like this, for example Linkedin Complaints, Linkedin Discrimination, Poor Customer Service.

I had more than 3K connections and I’d like to contact those who may have wondered why I don’t exist anymore. I hope someone will want to share this post.

It was not my choice.

How Temasek is pushing Tech’s boundaries

High technology is a major focus for Temasek, Singapore’s sovereign wealth fund.

Three case studies are brought to the attention here.

Recently it agreed with Ramot to invest a 21% stake (US$5 million) in the US$23.5 million Momentum Fund, a Ramot’s technology transfer fund. Temasek will be a lead investor in Ramot along with India’s Tata Industries. The target of Ramot, a Tel Aviv University’s (TAU) technology transfer company, is to convert TAU research into commercial products (earning back from the sale or licensing of intellectual property), and to invest in advanced technologies like cell therapy, sensor technology, nanotechnology, cleantech, and life sciences.

Another remarkable agreement for Temasek concerns FiscalNote, a start-up that predict, through data-mining software and artificial intelligence, the fate of the bills proposed by state legislatures and by Congress each year with 94 per cent accuracy. Temasek financed FiscalNote, together Cameron and Tyler Winklevoss, with US$7 million. The investing was led by several investors, including Visionnaire Ventures, a joint fund between Taizo Son and Temasek, Jerry Yang (Yahoo co-founder), Mark Cuban (Dallas Mavericks owner) and Steve Case (former America Online chairman).

Third example of dedication by Temasek to the cause of high technology is represented by Temasek Life Sciences Ventures, an investment holding company whose mission is to commercialize life science technologies and intellectual property developed by Temasek Life Sciences Laboratory (TLL). TLL was established in August 2002 by the National University of Singapore, Nanyang Technological University and Temasek Holdings to undertake cutting edge research in molecular biology and genetics in the broad field of life sciences.

DISCLAIMER: Any views or opinions presented here are solely those of the author and do not represent any official position of the Italian Ministry of Foreign Affairs and International Cooperation.

We hear wedding bells: Celtic and Bengal Tigers growing links

The Irish government has pledged a social housing construction programme for the coming years and is hoping to attract capital from the market. Recently, the Irish Council for Social Housing (ICSH) has called on the Government to tackle the deepening housing crisis in Budget 2015 as a national priority, targeting the housing needs of the most vulnerable in society and those in priority need of affordable rental housing.

Among the alternatives for financing, it is setting the stage for an interesting experiment of use of public funds for public interest purposes through the Irish National Pensions Reserve Fund (NPRF). This Fund would be open to investing in social housing, allocating part of its €7bn capital to economic impact projects, according to Investment & Pensions Europe. The NPRF, which will soon become a sovereign development fund and rebranded the Ireland Strategic Investment Fund, will assess small-scale public-private partnerships impact based around the amount of construction involved.

In this context, it is important to highlight some interesting connections between Ireland and the United Arab Emirates (UAE) that could incentivate the participation of the UAE in the Dublin’s housing program.

1. Firstly, synergies could may result from the presence of an Irishman in a prominent position in the world’s largest SWFs, Abu Dhabi Investment Authority (ADIA, with Asset Under Management close to $1 trillion, €802bn). Andrew Macfarlane, after having been the Irish airline Aer Lingus Chief Financial Officer until August 2014, today is the current ADIA’s Head of Operations, Real estate and Infrastructure Department;
2. during the recent Abu Dhabi-Ireland Business Forum (January 2014), the Irish Prime Minister, Enda Kenny, announced that Ireland is going to establish a permanent promotion office in Abu Dhabi. In 2002, Enterprise Ireland already opened a regional office in Dubai.

The Irish skill in exporting made Ireland as one of the models of economic development studied by Abu Dhabi some years in the preparation of its 2030 strategy plan. Today the UAE has become Ireland’s second biggest trading partner in the Arab world, and is growing in importance. Bilateral trade between Ireland and the UAE in 2012 reached €1 billion (Dh5bn), a figure officials expect to rise together the export growth.

What can Ireland do in return to cement ties between the two economies? One area of opportunity is food. Ireland produces enough to feed 30 million people per year; the UAE has been scouring the world to find safe and secure food supplies. The synergies are obvious, especially if Ireland were to adopt halal standards for exported foodstuffs.

DISCLAIMER: Any views or opinions presented here are solely those of the author and do not represent any official position of the Italian Ministry of Foreign Affairs and International Cooperation.

Sovereign Wealth Funds and Islamic Finance: How Can Africa Benefit?

In November issue, Business Islamica (www.businessislamica.com) published my article about Sovereign Wealth Funds and Islamic Finance: How Can Africa Benefit? Check it out and, please leave comments!

Equity and Technology: the Asian SWFs’ weapons of choice

In 2013, according to the Cerulli Associates Asia‘s latest research – “Institutional Asset Management in Asia 2014: Stepping Up Their Game” -,  the Asian Sovereign Wealth Funds (SWFs) have based their portfolios on equity investments, despite stronger focus on alternatives such as private equity and real estate.

Real estate investments, in fact, appear to be losing their allure for the SWFs. In accordance with the Institutional Investor’s Sovereign Wealth Center, SWFs collectively closed US$5.9 billion worth of property transactions in the first six months of 2014 (-43% from the same period a year ago). The relative lack of activity came amid increased competition for these assets from other institutional investors, such as pension funds and insurers, with the result being a ride-up in prices.

Cerulli’s report details the preference towards equity exposures as follows:

• Temasek Holdings (Singapore): about 70% of the U$173 billion portfolio are in listed securities;
• Government of Investment Corporation (GIC, Singapore): its equities allocation jumped from 38% in March 2009 to 48% by end-March 2014;
• Korea Investment Corporation (KIA): the exposure to equities has been increasing from 41.8% in 2010 to 48.5% in 2013;
• China Investment Corporation (CIC): the ratio of its portfolio in public equities is of 40.4%;
• Government Pension Investment Fund (Japan): plans are about to double the equity exposure from 24% to 50%, selling a significant part of its domestic fixed income holdings.

Asian SWFs portfolio should remain dominated by equities for the foreseeable future since, following Yoon Ng, Cerulli’s Asia research director, “an increasing asset base, challenging investment environment, and the pressure of seeking alpha mean managers have opportunities for additional top-ups and new allocations“.

Another interesting aspect of this trend is the relatively higher level of Asian SWFs’ active trading, through investments and disinvestments, further confirmation of their dynamic wealth management.

In this regard, according to Bradley Ziff, senior risk adviser at Mysys, a risk management technology provider, due to the losses caused by the global financial crisis, many of the world largest SWFs have become increasingly self-reliant on the management of risks and therefore have invested more heavily in risk technologies, as frustrated by paying rich fees, disappointing returns and misaligned incentives of some of their external asset managers.

Institutional Investors’ Sovereign Wealth Centre data show the ten largest SWFs currently run more than 60% of their assets inhouse and outsource less than 40% (compared to 62% and 38% in 2013, respectively).

Given their accountability to national governments and citizens, technology is also playing a significant role in how SWFs measure and report investment performance, and facilitates a greater dynamism in asset allocation. According to Hans Jiang, managing director and head of Asia Pacific at technology provider eVestment, SWFs have an increased need for analytics and measurement technology to assess and compare those alternative investment vehicles against other, more traditional investment options.

DISCLAIMER: Any views or opinions presented here are solely those of the author and do not represent any official position of the Italian Ministry of Foreign Affairs and International Cooperation.