East Timor to Diversify 40% of Wealth Fund Away From Treasuries
By Liza Lin
May 26 (Bloomberg) — East Timor is seeking to revise laws to allow the government to invest as much as 40 percent of its $3 billion petroleum fund outside of U.S. Treasuries, mirroring efforts by sovereign wealth funds in Norway, Singapore and Kuwait.
Southeast Asia’s newest nation plans to diversify its investments into higher-yielding assets such as European bonds, said Jose Ramos-Horta, the country’s president. East Timor, which expects the state fund to reach $3 billion by year-end, gets the bulk of its revenue from the oil and gas industry. Almost all the fund is invested in U.S. Treasuries, he said.
“We are looking into reversing the current arrangement whereby the government can diversify only 10 percent” of the fund, Ramos-Horta said today in an interview in Singapore. The country would “at least do what the Norwegians are doing now, which is 40 percent in diversifying, 60 percent in U.S. Treasuries.”
East Timor is seeking higher-yielding assets as the U.S. dollar fell against major global currencies, boosting the price of imports such as food, with the country’s farmers providing only a third of the rice it needs. The Japanese yen rose 8.5 percent against the dollar this year, and the euro gained 7.1 percent, data compiled by Bloomberg show.
The yield on German two-year bonds has widened to 1.78 percentage points more than U.S. Treasuries of the same maturity, Bloomberg data shows. The yields were the same in October.
The number of sovereign wealth funds has surged as Asian nations and oil exporters in the Middle East seek greater returns on their currency reserves by investing in companies. Morgan Stanley estimates the funds’ assets may increase fourfold to $12 trillion by 2015.
Some funds have also been hit by the credit crunch that battered financial markets. The Norwegian sovereign wealth fund, the world’s second largest, suffered the worst quarter since it was established in 1998. Investments in the fund, known as The Government Pension Fund – Global, dropped 5.6 percent in value in the first quarter, erasing a 4.3 percent return last year, the central bank said on May 23.
Ramos-Horta, the 1996 co-recipient of the Nobel Peace Prize, favors hiring two or three fund managers to manage the East Timorese fund, reviewing their performance every six months, he said in a Bloomberg Television interview.
“We have to urgently diversify our investments,” he said.
The country will also use state funds to start a “development bank” next year to boost industries such as agriculture, livestock, and fisheries by giving small enterprises access to finance, he added. An independent bank would be set up with about $100 million of capital to offer loans with interest rates of 7 percent to 8 percent, or half of what local banks now charge.
East Timor which became independent in 2002, voted to end Indonesia’s occupation in a 1999 referendum. A former Portuguese colony, the island borders part of Indonesia, and is about 500 kilometers (310 miles) north of Australia.
To contact the reporters on this story: Liza Lin in Singapore at Llin15@bloomberg.net.
Last Updated: May 26, 2008 02:38 EDT