Pacific nations outline sovereign wealth plans

04/05/2011 | Chris Wright

Papua New Guinea and Timor Leste are banking on the launch of sovereign wealth funds to secure their future prosperity

Papua New Guinea and Timor Leste have both released more details of the sovereign wealth funds (SWFs) that they hope will underpin future prosperity.

Papua New Guinea plans to launch a new fund based on sales of liquefied natural gas (LNG), while Timor-Leste’s fledgling fund is set to make a major shift in its investment approach.

Timor-Leste’s Petroleum Fund was launched on the back of oil and gas revenue that began accruing in 2006 and brings in about $2 billion per year. The fund has $7.7 billion under management – 90% is invested in US Treasuries or similar instruments, and 10% in equities managed by Schroder Investment Management.

Emilia Pires, Timor-Leste’s Minister of Finance, yesterday told Emerging Markets that she has recommended changing the allocation to 50% global equities and 50% bonds. “The 50% bonds will not just be US Treasuries,” she added. “It is diversification we are after: increasing the risk, but also diversifying to counterbalance that risk.”

Andrew Oaeke of the Department of the Treasury of Papua New Guinea outlined plans to launch a SWF with revenues from the country’s transformational PNG-LNG liquefied natural gas project, which is expected to start generating income from 2018 and earn around US$30 billion over its lifetime.

The government and central bank have set up a structure for a consolidated pool of three offshore funds: one for infrastructure, one for economic stabilization, and one future fund.

Drawdown rules will be governed by legislation, which has yet to go to parliament, and an investment board will oversee allocation, including with external fund managers.

Both countries are dealing with the challenges as well as the bounty that natural resources can bring to small nations. Oaeke said: “It is likely that the scale of LNG as a [...] revenue resource will give rise to major macro pressures, such as the appreciation of the exchange rate, potentially undermining the competitiveness of our export sector.”

The pressure on agriculture, which accounts for 80% of the Papua New Guinea economy, will be considerable.

In Timor-Leste, an acute challenge is to balance the need to improve the country today, and to save for the future after the oil and gas fields run out in about 20 years’ time.

Pires said: “There was major civil unrest in 2006, [when] we were sitting on a growing bank account while many ordinary people were in desperate need to be lifted out of poverty. You do need a balance on this.”

Since then Timor-Leste has taken funds out to develop infrastructure. But the government must go to parliament for withdrawals of more than about 3% of the fund in any year. The fund is considered among the most transparent in the world.

Oaeke of Papua New Guinea said communication is vital. “It is important people understand how [assets] are going to be used and why they will be kept abroad and not onshore.”

The insistence on transparency is striking, given that some of the largest SWFs, such as Kuwait’s and Abu Dhabi’s, disclose very little about holdings or performance. Transparency is a good thing, Professor Simon Chesterman of the National University of Singapore said. “It stops abuse; it is public money; and it leads to better decisions.”

Related stories

  • JOSEPH STIGLITZ: The world needs a sovereign debt ...

    It is 13 years since the IMF called for an international agreement on how to wind up defaulted sovereign debt. Still there is no mechanism, and regrettably the vulture funds pursuing Argentina still seem to hold sway in the US. It's time for change

  • AFRICA IN THE INTERNATIONAL BOND MARKETS: African ...

    Africa has been on the cusp of mainstream capital markets for years. While the continent made a breakthrough in the variety of issuance it produced in 2012-13, 2014 looks like it will be the year when African borrowers finally become established

  • MONGOLIA: OT mess holds up Mongolia's advance

    Falling commodity prices have hurt Mongolia’s economy, which relies heavily on its abundant natural resources. Improving relations with China are helping it through the squeeze but the country has yet to show its true potential to global investors

  • Securitization breakthrough as Europe struggles to rekindle ...

    The big announcements on asset-backed securities by the European Commission and European Central Bank could mean that these securitized products become more commonly used.

  • ASIAN BANK CAPITAL: Basel spurs bank paper rush across ...

    Bank debt issuance across Asia is soaring this year, driven by the need to comply with Basel III regulations. Fresh impetus from China is set to send volumes higher still


Editor's Picks


In Focus

  1. AFRICA IN THE INTERNATIONAL BOND MARKETS: African sovereigns go mainstream as investors shift focus away from Russia

  2. KAZAKHSTAN: Kicking Kazakhstan back into gear - Nazarbayev tries again at transformation