Asian central banks have been watched intently in recent months, after a series of interest rate cuts throughout the region made it clear that monetary stimulus measures were to be a major weapon in the battle to restore growth. Accompanying this has been renewed consideration by central banks of where their considerable assets should be allocated.
Bank Indonesia, with $112 billion in reserves, is looking at diversification into Asian and/or emerging markets. The Indonesian central bank, which started investing in emerging market sovereign bonds in 2010, is moving to boost its EM asset exposure, with a view to diversifying risk and enhancing returns.
In an exclusive interview, AsianInvestor talked to Budianto, executive director and head of the reserve management department at Bank Indonesia:
Q: Can you outline Bank Indonesia’s asset mix?
A: Mostly we invest in sovereign developed-market bonds and supranational, sovereign-agency bonds and sovereign emerging-market bonds. All those are classified as liquid and secure instruments. We can only buy investment-grade debt and above.
Do you invest in corporate credit?
Yes, through external managers. We have noted the positive performance of corporate bonds, so we are tending to increase exposure. We started buying in 2013 – only developed-market bonds so far, mainly in the US and Europe. It’s a small portion of the portfolio, but the allocation is likely to grow as our reserves grow.
To what extent do you use external managers?
We have a policy for a small portion of our reserves to be assigned to external managers. Essentially there are four objectives of this: benchmarking our internal performance; diversifying our asset allocation; building our staff capabilities as well as our knowledge of market developments; and return enhancement.
Is your range of external managers increasing?
How long have you been using external managers?
More than 10 years, although there has been some progress on how we use them depending on the size of our reserves, the new asset classes we want to diversify into and our benchmarking needs. When considering whether to outsource, we look at our reserve size, [a manager’s] expertise in the asset class and performance.
We also consider another objective. We have agreements as to how we monitor them and how they submit their performance reports. And maybe they have plans to discuss the probability of new asset classes that we can develop. Our system and our mechanism is well established for discussing these things with them.
Have you looked at investing in equities?
We are looking at new asset classes, but timing is important for us to enter this kind of new market.
How about alternative assets?
We always do some market assessment and analysis to see opportunities in many asset classes along with our strategic asset allocation (SAA) policy.
Do you use investment consultants?
For the time being we have seen no need to use them because we feel we can still manage our portfolio mostly internally with a small number of external managers. We might consider consultants in the future, depending on our future SAA, staff capabilities and requirements around reporting, accounting and other factors.
Do you talk to institutional peers?
Yes, we have discussions with other central banks. We also have hundreds of counterparties – including custodians and portfolio managers – that we can invite any time to improve our capabilities.
Has your internal investment team grown?
We have grown significantly in staff, and we have an in-house training programme to maintain and improve their professional capabilities. We have also rotated staff to enrich their knowledge and help with building experience.
Do you have plans to add to your overseas offices?
We have had representative offices since the early 1990s in Singapore, London and New York. We have no near-term plans for others. They have broadly two functions: to manage a portion of our foreign reserves; and to manage the international liaison function and the analytical research, as our ears and eyes in overseas markets.
Read the full feature on Asian central banks in the current (March) issue of AsianInvestor magazine.