How Macau intends to manage its new SWF
Macau intends for its new de facto sovereign wealth fund to be managed by an independent corporate entity owned by the government instead of via its Monetary Authority, the Secretariat for Economy and Finance told AsianInvestor.
The former Portuguese enclave is planning to make special appropriations from its fiscal reserve to capitalise the 'Macau Special Administrative Region Investment Development Fund'. In an emailed response to AsianInvestor questions, the secretariat said the goal of the new investment development fund is to optimise Macau’s existing reserve management system, enhancing its returns by adopting commercial and market-oriented investment management models.
But the investment development fund will be managed independently of the city’s existing MOP508.8 billion ($63 billion) in fiscal reserves, which are managed by the Monetary Authority of Macau.
The new investment fund is also part of the Chinese territory's longer-term plans to diversify its gambling- and entertainment-dominated economy and maintain the sustainability of Macau’s financials, the secretariat added.
The government department declined to specify exactly when the fund will be set up and did not say how much capital it would initially receive.
Macau chief executive Fernando Chui said last month that the Macanese government will set up an investment development fund this year, according to a local media report.
The fund will also invest in projects linked to the Guangdong-Hong Kong-Macau Greater Bay Area, which underpins a scheme touted by officials to promote deeper integration and closer economic development between the two special administrative regions and nine cities in Guangdong province. Chui said that Macau is involved in 49 projects related to the Greater Bay Area.
The mere action of establishing a new investment fund does not guarantee better investment returns, but if a sovereign wealth fund has a defined purpose, it can identify and buy assets that can better meet its investment target, Janet Li, wealth business leader for Asia at Mercer, told AsianInvestor.
That means it makes sense for the SWF to be managed independently, given that Chui had stated that a specific purpose of the fund is to invest in projects in Greater Bay Area. The Monetary Authority may have certain investment limitations that do not fit this aim, said Li.
DIVERSIFICATION NEEDED
Macau initially established its fiscal reserves in 2012. It recorded a 0.57% investment loss for the reserves in 2018, while its average return since being established to 2018 was just 1.7% per annum, according to the Monetary Authority in Macau.
Most of the fiscal reserves' assets originate from the casino businesses that operate in the former Portuguese enclave. Last year, the world’s largest gambling city by revenue sourced 80% of its MOP134.2 billion fiscal income from tax on casino operations.
In 2018, the fiscal reserve earned MOP6.55 billion from deposits, its largest contributor to returns, while it sourced MOP4.24 billion from bond investments and MOP1.26 billion from foreign exchanges. But the reserve lost MOP14.97 billion from outsourced equity investments.
Besides fiscal reserves, the Monetary Authority manages a foreign reserve of MOP163 billion. Its investment income was MOP4.5 billion last year, or a little under 3%. It managed to enjoy a better return than the fiscal reserves because it does not make any equity investments, which performed badly last year.
The decision to establish a new investment development fund may be a sign the Macanese government wants to have a pot of money that can better weather uncertain markets ahead. The global economy is generally seen as being in the late stage of an interest rate cycle, which can be difficult for portfolios with mainly fixed income exposure to navigate. Given this, it’s important for the investors of Macau's fiscal reserves to try and add downside protection and interest rate risk management, Li said.
Even fixed income portfolios can be diversified by introducing more diversity and liquid alternatives. It would be a wise idea for the reserve fund to also look for growth opportunities such as emerging market investments, she added.