RAMP Workshop Participants Challenged to Match Growing Reserves with Investment Tools

  MEFMI, in partnership with the World Bank Treasury conducted a workshop on Market Risk, Indexation of Treasuries and Performance Measurement during the period 6 to 10 May 2013 in Accra, Ghana.

The objective of the workshop was to provide participants with tools and techniques for the indexation process in the central bank reserve management framework. The workshop conveyed tools for managing a portfolio versus a market based benchmark which is comprised of one or more market indices.

The opening ceremony was conducted by the Deputy Governor Bank of Ghana, Dr.Henry Wampah who welcomed participants and thanked the World Bank RAMP team and MEFMI for hosting the event in Ghana. He pointed out that foreign exchange reserves of emerging economies were growing and the management of these reserves was very important, stating that the instruments of management also needed commensurate growth and sophistication thus the transition from money market instruments to fixed income. He reminded participants that foreign exchange reserves instil investor confidence in a country’s ability to manage external shocks.

Dr. Wampah used the case of Ghana, stating that following a study, the Bank of Ghana realised it required four (4) months of import cover and thus foreign exchange reserves have grown approximately 86% in the last five (5) years driven mostly by rising commodity prices and inflows into the country from non-residents. Ghana has been an oil exporter since 2011, exporting approximately 100 million barrels a day and currently oil inflows outstrip cocoa earnings. He also highlighted the fact that Ghana uses inflation targeting and the Cedi is a free floating currency, thus, the Bank of Ghana uses reserves to keep the currency stable. In addition, he indicated that 35% of the reserves are managed internally where they use short-term money market instruments, while 65% of the reserves are managed by external portfolio managers employing active bond strategies.

With the prevailing high risk environment, Dr.Wampah pointed out that it was not enough to rely solely on credit rating agencies to measure risk , Central Banks, asset and fund managers needed to do more. He also stated that like most central banks in developing countries, the Bank of Ghana buys foreign currency (US Dollars) from the local market and invests it in the international market. This action of buying foreign exchange currency in the local market has the effect of injecting the local currency, Cedi, into the economy. Thus, to sterilize the action, the Bank of Ghana issues securities which are taken up by the local commercial banks at the current prevailing high interest rates. He stated that this creates a mismatch between the yield which the Bank of Ghana receives for money invested abroad and what it pays for funds from the local market thus compromising their profitability. He challenged participants to find solutions to overcome this disparity.

The workshop which had resource persons from the World Bank Treasury Department – Mr. Bernard Murira, Mr. Nilakanta Venkatesh and Mr. Stephane Piot as well as the MEFMI Director of the Financial Sector Management Programme Mr. Alphious Ncube, was attended by 30 participants from Afghanistan, Azerbaijan, Botswana, Dominican Republic, Ghana, Kenya, Malawi, Moldova, Mozambique, Nigeria, Oman, South Africa, Suriname, Tunisia, Uganda, Ukraine, West Bank and Gaza and Zambia.

MEFMI Programme Officer – Reserves Management, Foreign Exchange Operations and Domestic Market Development, Ms. Michelle Mutinda also attended the workshop. MEFMI also invited non-RAMP nominees from Angola, Botswana, Malawi and Zimbabwe.

Participants at the workshop were drawn from central banks. The participant mix included officials responsible for moving from money markets to the management of a bond portfolio versus a market benchmark index, analysts responsible for benchmark management, performance and risk measurement as well as at portfolio managers who manage a fixed income portfolio versus a benchmark using a passive indexation strategy. 

The workshop covered practical portfolio indexation techniques, rebalancing, and benchmarking operations. It also addressed the risk measurement and risk control processes using the ex-post portfolio performance. Participants were grouped into teams and solved problems requiring them to index an actual portfolio and rebalance it as the benchmark would rebalance. The workshop was also an opportunity to closely interact with, and benefit from, colleagues from other organizations.

It was interesting to note that the experiences shared by participants outside the MEFMI region were similar to those of the participants within the MEFMI region. It was also clear that the region has moved in tandem with the rest of the world in applying best practice in the reserves management area and in some cases even moved ahead. The workshop provided MEFMI with an opportunity to continue to work with the World Bank Treasury staff in an effort to build and strengthen future capacity building relationships.