Samoa's central bank governor offers view on safe havens

Australian and New Zealand dollars are more of a safe haven than many of the world’s major currencies, Samoa’s central bank governor tells AsianInvestor in an in-depth interview.

But Leasi Papali’i Tommy Scanlan, who is also chairman of the Samoa International Finance Authority (Sifa), admits the central bank must raise its reserves substantially before it can consider redirecting assets further afield or into riskier asset classes such as equities.

He met AsianInvestor on a stopover in Hong Kong to meet trustee companies that operate in Samoa and to watch the rugby sevens tournament – sadly for him, 2010 champions Samoa were defeated in the cup semi-final by eventual runners-up England. It came after a tour of second-tier coastal cities in China to promote Samoa as an offshore financial centre.

Scanlan has served as governor of Samoa’s central bank since 1989 and is happy to share his experience with fellow Pacific Island central bank governors, who meet each year. Samoa, in fact, is preparing to host the next meeting of South Pacific central bank governors later this year.

“What we normally do in these meetings is talk about the latest developments in the world and the Pacific region’s economies and exchange individual country experiences,” says Scanlan.

He notes that Samoa’s economy has been growing at close to 3% in real terms for the last 10 years, while inflation has been maintained at an annual average rate of less than 5% and FX reserves have been quite healthy. “With these kinds of results, I feel that there are a lot of good experiences we can share with other central banks,” he adds.

Samoa’s central bank has $180-$200 million in reserves, equivalent to the value of seven months of imports. But growth was slow last year amid reconstruction after an 8.1 magnitude earthquake and tsunami struck the islands in September 2009.

As a result, the economy contracted about 5% in the 2009/10 fiscal year, with tourism – its chief driver on the back of a decline in agriculture – and infrastructure suffering. But Scanlan expects Samoa to deliver 2% growth in real terms this financial year, which ends in June 2011.

The majority of the central bank’s reserves are invested in treasury bills and bank bills in Australia and New Zealand of 12-month tenor or less. It used to hold the bulk of its reserves in US dollars, but it switched five years ago and now holds 60-70% in Australian and New Zealand dollars, with small amounts in US dollars, yen, sterling and euro.

This decision meant Samoa’s reserves escaped relatively unscathed by the global financial crisis that wreaked havoc elsewhere.

“Against advice from international organisations like the IMF, which said we should be keeping most of our investments in safe-haven currencies like the yen and US dollar, we felt that we needed a return on our investment,” says Scanlan.

“If you are getting less than 1% on your investments, that’s not very sensible. We have witnessed now that our decision five years ago to move most of our investments to Australia and New Zealand has been very responsible.

“The world is becoming a very big risk in terms of investments at the moment, so I would rather stay close to home. But in the longer term when the world becomes a more stable place to invest in then we may look at redirecting some of our assets to other destinations.”

Asked if he could foresee a time when the Samoan central bank might invest in riskier assets, he replies: “Up to now I have been able to sleep well at night knowing that the country’s reserves are relatively safe. Only when we have a lot more reserves to play with will we consider investing elsewhere.”

Asked to explain “elsewhere”, he adds: “In the medium term, when the current global uncertainty settles down, the United States and Hong Kong, those would be the two places.”

Accompanying Scanlan on his China trip was Sifa CEO Erna Vaai-Aiono and Martin Crawford, CEO of Offshore Incorporations Group, which provides company formation and associated services in jurisdictions to professional intermediaries throughout Asia.

Samoa set up its offshore centre in 1988 mainly as a source of revenue for the government and of foreign exchange for the country. Sifa has given the government close to $40 million to date, and provides $7 million to the government budget every year. Its contribution is close to 10% of GDP.

Samoa has 30,000 foreign companies on its register, about 80% of which are Chinese, “so there is a lot of room to grow”, notes Scanlan. He adds that Samoa is competitive on prices for incorporation, with a fixed $300 government fee, and flexible on products.

Crawford points out that Samoa is also in a friendly time zone. “If you get a call from a client today, you can actually incorporate a company with an incorporation date of yesterday,” he says.

He describes the Samoan regulators as very progressive, with 50% of companies in Samoa now registered with both English and Chinese character names.

“As we are marketing in China and places like Singapore, Taiwan and Hong Kong, there is a huge demand for Chinese character names, Chinese legal documents, Chinese registers and so forth. It has been a very progressive step for Samoa,” says Crawford.

The country adheres to international corporate legislation governing offshore finance and has legal and registry systems to handle Chinese language memorandums and articles of association.

Crawford suggests Samoa also punches above its weight in terms of participation on international panels and think-tanks. “From our point of view, it has all the ingredients it needs.”

He does, however, suggest that Samoa needs to develop as a trust jurisdiction and notes that the area of funds as investment vehicles is still at an early stage.