Asia SWFs to resist pressure for emergency funding
Governments around Asia Pacific are agonising over how best to cover the cost of the economic fallout from the ongoing Covid-19 pandemic. One option several governments in the region have is to tap the assets of their sovereign investment funds.
While this would be an extraordinary measure, it would not be unprecedented: Ireland and Norway both did so with their sovereign wealth funds during the global financial crisis in 2008-2009. And SWFs in oil-rich countries appear likely to make asset sales to raise funds.
Several state investment funds exist in Asia. Hong Kong, for example, has the Hong Kong Monetary Authority’s $500 billion Exchange Fund and its relatively new Future Fund as potential contingency pools of capital. And with the city facing a sustained recession and the government having committed to handing out HK$10,000 to each permanent resident, that pool of capital might become tempting.
A spokesperson for the Financial Services and the Treasury Bureau of the Hong Kong government confirmed that financial secretary Paul Chan has discretion over the exact usage of Exchange Fund assets.
“The Exchange Fund ordinance stipulates that the fund should be used primarily for such purposes as the financial secretary thinks fit affecting, directly or indirectly, the exchange value of the Hong Kong dollar,” he told AsianInvestor.
In addition, Chan may, “with a view to maintaining Hong Kong as an international financial centre, use the fund to maintain the stability and integrity of the monetary and financial systems of Hong Kong”.
However, drawdowns appear unlikely for the moment. “Usually the Exchange Fund is cited as being the financial support for the economy, without the need to use it other than for maintaining the Hong Kong dollar peg,” Stewart Aldcroft, managing director of Cititrust told AsianInvestor.
“The Future Fund has only just been set up, so they are unlikely to call on that.”
He also noted that the government has virtually no debt. “It could, if it chose, issue bonds [to raise funds].”
FUTURE FUND TAPPING
Australia is another market facing tough economic times. The country’s financial markets have taken a battering, like many others, courtesy of the effects of Covid-19, with its economy headed for its first recession in close to 30 years.
However, a drawdown from the $115 billion Future Fund doesn’t appear likely in the immediate future. Current prime minister Scott Morrison, in his former capacity as federal treasurer, said in 2017 that it was not the Australian government’s intention to draw down on the Future Fund in July 2020, when the option to drawdown is available.
“We could, but the cost of that is quite dramatic,” he said at the time. “If we hold on for another 10 years and don't draw down, it will reach maturity and go to a point where all of the unfunded superannuation liabilities will be paid for. If you raid the fund now, the fund depletes quickly but the liabilities remain.”
The Future Fund declined to comment on the possibility of an emergency drawdown, citing the government’s previously stated intention not to take such a course of action.
Chart: How drawdowns would affect the Future Fund's assets
Source: Australian government data
However, the investment team at the Future Fund knows they may face a call on its assets at some point. The team has been trying to improve the liquidity of the portfolio in the event of a drawdown, actively selling some of its substantial illiquid assets, which have produced good returns.
A senior superannuation industry executive in Australia, speaking to AsianInvestor, said one of the key questions will be how about how the country quickly rebuilds its economy with a focus on creating jobs.
“The issue for the outcome with the Future Fund is that the government in the short term is living off debt and the political imperative to balance budgets has gone.”
The national government’s debt stood at A$772.71 billion ($463.89 billion) as of Wednesday (March 25), while total government debt was A$1.1 trillion.
The commentator noted that after the next federal election, slated for 2022, the government could well sell down the Future Fund to reduce debt.
“But in the short term, the question may shift to considering changing the mandate of the Future Fund to invest in Australian companies that generate jobs.”
MOUNTING PRESSURE
While questions linger over the eventual fate of the Future Fund’s assets, its peer portfolio in New Zealand denies any possibility of potential drawdowns.
A spokesman for NZ Super told AsianInvestor there is no contingency for emergency drawdown within the fund's constitution. “The legislation that governs the Super Fund does not encompass it,” he said.
That said, pressure may mount if the economy careens into recession. New Zealand finance minister Grant Robertson announced on March 17 a NZ$12.1 billion ($7.06 billion) financial package, equivalent to about 4% of GDP, to prevent that.
In Southeast Asia, Singapore’s $440 billion GIC and its $300 billion state investment fund Temasek, plus Malaysia’s $39 billion SWF Khazanah Nasional all face some pressure to release funds to ease the economic burden of the virus impact.
Singapore’s president Halimah Yacob has said that Singapore must consider tapping past reserves to help individuals and businesses that are “bleeding” from the impact of the virus. But recent market losses by Temasek have worsened the payments it makes to the state.
Spokespeople for GIC and Temasek declined to comment on the possibility of any call on their assets taking place.
Meanwhile Khazanah’s managing director Shahril Ridza Ridzuan recently announced a record $1.79 billion profit from investments in 2019, but warned that the Covid-19 outbreak is making a positive return in 2020 much less likely.
Asia’s other main sovereign wealth funds – Korea Investment Corporation and China Investment Corporation – did not respond to requests for comment on the possibility and likelihood of future drawdowns by their respective governments.