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
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.

`Urgently Diversify’

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:
Lin in Singapore at Llin15@bloomberg.net.

Last Updated: May 26, 2008 02:38 EDT


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