Savenaca Narube: Reserve management in Fiji
Opening remarks by Mr Savenaca Narube, Governor of the Reserve Bank of Fiji, at the IMF
PFTAC Workshop on Foreign Exchange Reserve Management Framework for Strategic
Asset Allocation, Suva, 17 September 2007.
* * *
Dr Susan Adams, PFTAC Coordinator
Resource Persons (Jay Surti from the IMF, Kristian Flyvholm from the IMF and, Tørres
Trovik, Senior Advisor (Research) and formerly Senior Advisor (Investment Strategy),
Norges Bank; Board of Trustees of the East Timor Pension Fund.
Participants
Ladies and Gentlemen
Introduction
Good Morning, Bula and Welcome to Fiji.
Let me thank the International Monetary Fund for bringing this important workshop to the
Pacific. I thank the resource persons and the workshop coordinatorsyou're your contribution
to this workshop. I thank you, the participants for taking time to attend this workshop. I am
told that such a workshop is very expensive to mount as it is usually coordinated by
investment houses. I am therefore glad to see so many participants from the region here
today.
Reserves management
Reserve management, as you will no doubt know, is a complex set of processes, guidelines
and strategies. They are made more complex by the financial crises that seem to be
happening now and then in the global financial markets. The recent crisis on sub prime
mortgages in the United States is a classical example. While this crisis appear to have a long
tail, we are somewhat insulated from its impact by our fixed exchange rate and the narrow
range of our allocation of foreign assets.
You see for Fiji we only have cash in our investment portfolio. This is not entirely by choice.
While we have a benchmark of 60 percent cash and 40 percent bond we have not been able
to replicate this benchmark. As a result, the average duration of our currency portfolio is well
short of the benchmark. This is largely because of our difficulty in dealing with the flow on
impact of valuation losses from falling bond prizes on our profit at year end. Our valuation
dilemma arose because of the accounting classification of our bond holding. While we had
classified these as and we were marking to market, we were in fact
"held for trading"
holding these bonds to maturity. Hence, by marking to market, we sometimes were booking
unrealized losses on our bonds at the end of the year. We have resolved this by reclassifying
the bonds as Our external auditors have advised us that under this new
"available for sale".
accounting classification, we do not have to take the unrealized losses to the profit and loss
statement of the Bank. Very recently, we therefore decided to liquidate all of our bond
holdings. We will then reclassify the new bonds that we are going to buy under the new
classification.
This example shows some of the issues around reserve management and the allocation of
assets. As I have said, we have a benchmark which is anchored on the maintenance of value
of our foreign reserves. We have liquidity guidelines. The question that is normally posed is:
What about return? This becomes more critical when reserves are falling as what is
happening in Fiji now. The temptation is perhaps to abandon your benchmark in search for
higher return. To me this is a dangerous road to take. You may end up in a win-win situation.
But you may also end up in a loose-loose situation too! My risk-averse nature as a central
banker compels me to keep to our benchmark and protect values then look for return in the
better allocation of assets.
This workshop addresses many of these asset allocation issues and I am certain will add
value to how we manage our foreign reserves. The contents of your workshop are relevant
and interesting. I know that you will have an interesting 5 days. We may have different levels
when it comes to reserve management methods and capacities. Therefore, please freely
share your country experience during the course of the workshop and in the case studies. I
find that this sharing is one of the best parts of what we take home after such workshop. And
please keep your network intact after the workshop so you may be able to help your
colleagues in some way.
There is also the related issue of how important is the central bank's profits. Reserve
management is the major source of our revenue. While we predominantly spend this revenue
on the important role of monetary policy and financial stability, I am of the view that we
cannot totally ignore the strength of our balance sheets. Not so much from the point of view
of funding the government budget, but more so from the confidence that a strong balance
sheet gives to the financial system.
Conclusion
I wish you all a fruitful week of discussions and deliberations.
Please also take some time away from your workshop to enjoy Suva.
Once again, I thank the IMF, the resource persons and the organizers for putting together
this workshop.
Official opening
I have much pleasure in declaring this Workshop open.
Thank you.