REMARKS
by
PPRROOFF.. NNJJUUGGUUNNAA NNDDUUNNGG’’UU
GOVERNOR
CENTRAL BANK OF KENYA
Fairmont Norfolk Hotel, Nairobi
Monday, January 20, 2014

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
1. Ladies and Gentlemen, it is my great
pleasure to be here this morning at
the commencement of this RAMP
workshop on Fundamentals of Fixed
income risk management. I would
like to thank the World Bank RAMP
team for inviting me. May I, first and
foremost, take this opportunity to
welcome you all to Nairobi and wish
you Happy 2014. The weather is
normally quite pleasant in Nairobi
at this time of the year and I hope
you will enjoy your stay. If you get
time, you may wish to visit different

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
places exhibiting our heritage which
include the Nairobi National Park,
which is not far from here, and other
important places like the National
Museum, the National Archives, etc.
2. Ladies and gentlemen, we are greatly
honoured as a country and thankful
to the workshop organizing team for
choosing to hold a RAMP workshop
for a third time here in Kenya since
Central Bank of Kenya joined RAMP
almost five years ago.

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
3. Official foreign exchange reserves,
ladies and gentlemen, as you are all
aware are in many countries a major
national asset. Even in the rich and
developed economies, foreign
exchange reserves are considered
important. First, for us they form the
appropriate buffer to cushion
ourselves from shocks as well as to
support the market in such periods.
Second, in a country with a floating
exchange rate and an open capital
account, foreign exchange reserves are

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
an important tool of monetary policy.
4. In recent decades, foreign exchange
reserves held by central banks have
surged to record levels. But there are
challenges of holding and managing
foreign exchange reserves. The risks
mostly relate to fluctuating value of
the base currencies and so alter the
balance sheet of central banks. The
foreign exchange reserves management
and investment has been hampered
by the aftermath of the global
financial crisis – with negative real

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
interest rates for a prolonged period of
time.
5. Prior to the global financial crisis,
the compensation structure and
incentives in the financial sector
created strong motives for excessive
risk-taking during boom years.
Derivatives created a room where risk
assessment and risk pricing were not

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
appropriately followed. Modern risk
management methods may also have
intensified the cycle because of their
reliance on metrics such as value at
risk that are highly sensitive to recent
performance, especially volatility. In
good times, volatility declined, and
value at risk along with it. This
pattern generated a pro-cyclical
willingness to take on risk and
leverage, amplifying and propagating
the boom-bust cycles.

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
6. Ladies and gentlemen, the
consequences of this excessive risktaking as you all know, was a vicious
cycle of a collapse of confidence, asset
fire sales, evaporation of liquidity,
and a deleveraging free fall that
followed, which was the mirror
image of the vibrant mortgage market
that preceded it. Governments and
central banks around the world took
extraordinary actions to prevent a
full collapse of the global financial
system and markets.

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
But what we have witnessed was bad
enough - the deepest and most
prolonged recession in generations,
with recovery being agonizingly slow,
held back, in part, by the ongoing
efforts of overleveraged households
and financial institutions to repair
their balance sheets. The governments’
banks bailout and economic stimulus
packages led to huge budget deficits
in sovereigns balance sheets which
culminated in the sovereign debt
crises, which were experienced in the
major economies, with the Euro zone

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
debt crisis threatening to get out of
hand.
7. Ladies and gentlemen, safeguarding
the foreign exchange reserves requires
prudence in their management, and
prudence can only be achieved if
central banks have well-trained and
highly skilled staff who understand
the risks inherent in investment
assets and how to mitigate those risks.
The World Bank’s Reserves Advisory
and Management Programme (RAMP)
has played an important role to this

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
end, by assisting central banks in
building and enhancing capacity in
foreign exchange reserves management
in central banks. Building a strong
talent base with deep risk expertise
in central banks through
recruitments and retention of the
necessary expertise continues to be a
critical challenge for most central
banks. However, I must hasten to say
that central banks participating in
the RAMP program have greatly
benefited from the advice, training
and capacity building imparted by

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
experts and practitioners in the
world of investment, from the World
Bank Treasury.
8. This workshop is worthwhile as it
seeks to provide a solid foundation and
framework for fixed income risk
management that allows the
participants to measure, monitor, and
report portfolio risk and performance.

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
The objective of this workshop is to
provide a strong understanding and
analytical capacity for risk and
performance measurement and
reporting for fixed income portfolios.
It’s my sincere hope that the knowledge
to be gained in this workshop will be
put to good use in our day to day
operations of central banks’ work in
foreign exchange reserves management.
9. Finally, it is now my great honour and
humble duty to declare this workshop
officially opened

Governor’s Remarks at RAMP Workshop- Fundamentals of Risk Mgt –
January 20, 2014
Thank you.