Emerging Markets: Timor to revamp sovereign fund, PNG to launch one

Emerging Markets, May 5 2011

Two of Asia’s frontier markets have given new details of the sovereign wealth funds they hope will radically change their prosperity. Papua New Guinea plans to launch a new fund based on its reserves of liquefied natural gas, while Timor-Leste’s fledgling fund is set to make a major shift in its investment approach.

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

Yesterday Timor-Leste’s Emilia Pires, Minister of Finance, told Emerging Markets that she has submitted a recommendation to change the allocation considerably 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 from Papua New Guinea’s Department of the Treasury outlined plans to build a sovereign wealth fund to handle the revenues that will come from the country’s transformational PNG-LNG liquefied natural gas project, which he said was expected to start producing revenues from 2018 and should generate a total of around US$30 billion over the lifetime of the project.

The government and central bank have now set up a basic structure for a consolidated pool of three offshore funds: one for infrastructure, one for economic stabilization, and one future fund. The funds will be integrated with the budget and fiscal framework and will aim for international best practices of governance and transparency. Drawdown rules will be governed by legislation, which has yet to go to parliament, and an investment board will oversee allocation, including external fund managers.

Both countries are dealing with the challenges as well as the bounty that a discovery of commodity assets can bring to a small country. “It is likely that the scale of LNG as a new and major 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,” especially for agriculture in 80% rural PNG, said Mr Oaeke.

In Timor-Leste’s case, there has been an acute challenge to balance the need to improve the country today, and to save for future generations when the existing fields run out, expected in approximately 20 years time. “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,” Ms Pires said. “You do need a balance on this.” Since then the country has taken funds out to develop infrastructure, but must go to parliament for withdrawals over about 3% of the fund in any given year. The fund is considered among the most transparent in the world.

Mr Oaeke said communication would be 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 the largest sovereign funds in the world, such as those in Kuwait and Abu Dhabi, disclose very little about their holdings or performance. But SWF commentators said it was the right approach. “Transparency is a good thing for three reasons: it stops abuse; it is public money; and because it leads to better decisions,” said Professor Simon Chesterman of the National University of Singapore Law School.