May 2018 Vol.9 Ed.5

 Joachim Wuermeling on central bank reserve strategies  Kat Usita on Indonesian infrastructure  Gary Smith on China’s Treasury holdings  Otaviano Canuto on Fed balance sheet unwinding  Alexander Petrov on Bank of Japan ETF quandary  Mark Branson on regulating cryptocurrencies

Exploring reserve management strategies Post-crisis choices for central banks

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SCH56103Untitled-2 1OMFIF advert 260x210mm.indd 1 12/04/201827/04/2018 11:5914:36 Contents

May 2018. Vol.9 Ed.5 8

4 ABOUT OMFIF Worldview 5 LEADER 18 WOMEN LEAD UK 6 REVIEW / AGENDA EMPLOYMENT BOOM Matteo Richiardi, Brian Nolan and Filippo Cover: Exploring reserve Cartiglia management strategies 19 INDONESIA TARGETS 10 RESISTING TEMPTATIONS INNOVATIVE FUNDING Joachim Wuermeling Kat Usita 11 LOWERING FED BALANCE SHEET 20 THE GEOGRAPHY 6 OF MONEY Otaviano Canuto Ousmène Jacques Mandeng 21 REGULATORS FACE UP TO CRYPTOMANIA Mark Branson

Moscow 22 FED NOMINEES FOCUS Rotterdam Duisburg Almaty ON INFLATION Huoerguosi 20 Venice Bishkek Urumql Darrell Delamaide Istanbul Samarkand Athens Dushanbe Lanzhou Xi’an Tehran Fuzhou Beihai Kolkata Quanzhou Hanoi Guangzhou Inquiry Zhanjiang Haikou 23 CHART OF THE MONTH: Colombo Kuala Lumpur INDIA’S STRONGER

Nairobi CURRENCY THREATENS Jakarta 12 Silk Road Economic Belt GROWTH Maritime Silk Road 23 BOOKS: EURO’S ROOTS IN 1968 PARIS REVOLT Roel Janssen 12 CHINA PLAYS THE LONG CHESS 26 OMFIF ADVISERS GAME NETWORK POLL Gary Smith Facebook faces struggle to repair user faith 14 BANK OF JAPAN FACES ETF QUANDARY Alexander Petrov 15 FLEXIBILITY IN ALLOCATION Cover illustration: STRATEGY Eugene and Louise Ben Robinson 23

OMFIF.ORG MAY 2018 BULLETIN 3 About OMFIF

Dialogue on world finance and economic policy

Africa THE Offi cial Monetary and Financial Institutions Forum is an independent think tank for central banking, economic policy and public investment – a non-lobbying network for best practice in awaits worldwide public-private sector exchanges. At its heart are Global Public Investors – central banks, sovereign funds and public pension funds – with investable assets of $33.8tn, equivalent to 45% of world GDP. With offi ces in London and Singapore, OMFIF focuses on global policy and investment themes – Asset and risk particularly in asset management, capital markets and fi nancial supervision/regulation – relating to central banks, sovereign funds, pension funds, regulators and treasuries. OMFIF promotes higher management standards, performance-enhancing public-private sector exchanges and a better understanding of forum the world economy, in an atmosphere of mutual trust.

OMFIF, the South African Reserve Bank and the World Bank Membership Treasury’s Reserves Advisory Membership offers insight through two complementary channels – Analysis and Management Program and Meetings – where members play a prominent role in shaping the (RAMP), convene public sector agenda. For more information about OMFIF membership, advertising or asset managers, as well as select subscriptions contact membership@omfi f.org private market participants, over two days. The Forum focuses on Analysis governance, macroeconomic and OMFIF Analysis includes commentaries, charts, reports, summaries of fi nancial developments, as well as meetings and The Bulletin. Contributors include in-house experts, advisers the challenges and opportunities network members and representatives of member institutions and academic for public sector investment and offi cial bodies. To submit an article for consideration contact the editorial managers. The aim is to discuss team at analysis@omfi f.org best practices and offer an avenue for an interactive dialogue.

Venue: South Africa Reserve Meetings Bank, Pretoria OMFIF Meetings take place within central banks and other offi cial Date: 14-15 June 2018 institutions and are held under OMFIF Rules. A full list of past and For more information or to forthcoming meetings is available on www.omfi f.org/meetings. For more register your interest, please information contact meetings@omfi f.org visit omfi f.org/meetings

OMFIF Advisers Network The 178-strong OMFIF advisers network, chaired by Meghnad Desai, is made up of experts from around the world representing a range of sectors: monetary policy; political economy; capital markets; and industry and investment. They support the work of OMFIF in a variety of ways, including contributions to the monthly Bulletin, regular Commentaries, seminars and other OMFIF activities. Membership changes annually owing to rotation.

OMFIF.ORG

BTN_05.18_004-005_About_Leader (copy tc).indd 4 30/04/2018 11:41 Leader

Offi cial Monetary and Financial Institutions Forum Exploring reserve 30 Crown Place, London, EC2A 4EB United Kingdom T: +44 (0)20 3008 5262 F: +44 (0)20 7965 4489 management strategies www.omfi f.org @OMFIF fter declining gradually since 2014, central bank reserves have begun to BOARD recover. For the fi rst time since OMFIF started tracking the assets under David Marsh, Chairman A Jai Arya management of global public investors, central bank assets expanded, and did Pooma Kimis so at a pace of 8%. This trend was relatively broad-based: only Middle Eastern Edward Longhurst-Pierce central banks’ assets declined on average. Phil Middleton Mthuli Ncube The People’s Bank of China played a leading role, increasing its reserves John Nugée by more than $100bn. Against the backdrop of a trade dispute with the US, John Plender Chinese offi cials will have to balance diffi cult issues as they shape their Lauren Roberts Peter Wilkin future strategy, particularly in relation to their signifi cant holdings of US Treasuries, as Gary Smith argues in this month’s cover story. ADVISORY COUNCIL Meghnad Desai, Chairman Other types of public investors, sovereign funds and public pension funds, Johannes Witteveen, Honorary Chairman also increased their assets, according to this year’s Global Public Investor Louis de Montpellier, Deputy Chairman report. Norway’s Norges Bank Investment Management, the world’s largest Frank Scheidig, Deputy Chairman Xiang Songzuo, Deputy Chairman sovereign fund, led the charge. OMFIF will be launching the full fi ndings of Hani Kablawi, Deputy Chairman this research on 23 May in London. Gary Smith, Deputy Chairman While reserves grow, the strategies for managing them are becoming Otaviano Canuto, Aslihan Gedik, Robert Johnson,William Keegan, trickier. Encouraged by a low bond yield environment, public investors are John Kornblum, Norman Lamont, increasingly tempted to diversify away from traditional allocation strategies Kingsley Moghalu, Fabrizio Saccomanni, focused on fi xed income and expand into a wider range of assets. There has Niels Thygesen, Ted Truman, Marsha Vande Berg, Ben Shenglin, Chair, been a particularly strong shift from sovereign funds and public pension OMFIF Economists Network funds into real estate and infrastructure assets, as documented in a report

EDITORIAL TEAM prepared by OMFIF and BNY Mellon, which will be launched next month. Danae Kyriakopoulou, Head of Research Central banks, however, remain broadly conservative. As Joachim Simon Hadley, Production Manager Wuermeling, executive board member at the Deutsche Bundesbank, Julian Frazer, Subeditor Jearelle Wolhuter, Subeditor argues, security and liquidity remain important criteria for defi ning Ben Robinson, Senior Economist reserve allocation strategies. While some of the factors infl uencing the Bhavin Patel, Economist macroeconomic landscape are slowly reversing, others are more structural. Kat Usita, Economist William Coningsby-Brown, Editorial Assistant Weak demographics, slow productivity growth and persistently low long-term Darrell Delamaide, US Editor interest rates will continue to determine the overall framework MARKETING Chris Ostrowski, Head, Business Development within which public investors Sarah Butler, Deputy Head of Development pursue their asset management James Fitzgerald, Senior Marketing Executive strategies. Strictly no photocopying is permitted. It is illegal to reproduce, store in a central retrieval system or transmit, electronically or otherwise, any of the content of this publication without the prior consent of the publisher. While every care is taken to provide accurate information, the publisher cannot accept liability for any errors or omissions. No responsibility will be accepted for any loss occurred by any individual due to acting or not acting as a result of any content in this publication. On any specifi c matter reference should be made to an appropriate adviser. Danae Kyriakopoulou Chief Economist and Head of Research Company Number: 7032533. ISSN: 2398-4236

OMFIF.ORG MAY 2018 BULLETIN 5

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»24 April, London ECB must not be ‘only game in town’

GERMANY and other euro members should press on with reinforcing monetary union, including setting up a European Monetary Fund, so ECB policy will not be the ‘only game in town’ in the next crisis, said François Villeroy de Galhau, Banque de France governor, at an OMFIF City Lecture on developments in the euro area. Discussions included strengthening institutional architecture in Europe, with aspects related to the euro area budget and finance ministry, the role of the European Stability Mechanism and completing the banking union.

OMFIF at the IMF Spring Meetings

»17 April, New York »17 April, Washington DC »20 April, Washington DC Economic recovery OMFIF-Barings Harnessing new in Brazil panel technology

ILAN Goldfajn, governor of the Banco OMFIF and Barings organised a seminar OMFIF organised a breakfast discussion in Central do Brasil, gave a City Lecture to analyse the US economy’s prospects. partnership with Principal Global Investors. on the future of the Brazilian economy, Speakers included Dennis Lockhart, Key topics for discussion included including prospects for continued former president, Federal Reserve Bank technology’s influence on productivity, and growth and recovery, fiscal reforms, and of Atlanta, and Tamim Bayoumi, deputy the rise of automation and its disruptive overhauling the public pension system. director, policy and review, IMF. effect on the labour market.

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»16 April, Paris The future of the euro area

EUROPEAN governments, in »Wednesday 2 May, London fi nding ways to reinforce monetary union, should pay far more The state of UK public fi nances attention to structural factors such A breakfast discussion with Nicky Morgan, as the persistent large German Conservative UK member of parliament for current account surplus, Jacques Loughborough. Topics will include assessing the Brexit de Larosière, former Banque de negotiations and the nature of a transition agreement, France governor and IMF managing as well as implications for the City of London. director, told an OMFIF seminar. The meeting looked at the institutional reinforcement of »Thursday 3 May, Manila Europe’s monetary union in the light of political changes in France OMFIF-Asian Development and Germany. Bank seminar OMFIF convenes a panel of experts to review the search for long term sustainable investment returns in Asia. Topics include demographic trends, expanding intra-Asian investment and attracting investment fl ows from high growth and mature economies.

»Thursday 3 May, London Brazil economic outlook A briefi ng with Tiago Berriel, deputy governor for international affairs and corporate risks at the Banco Central do Brasil. The meeting will cover the economic climate in Brazil, projected growth in the »4 April, Singapore country and expected fi scal and monetary reforms. Balancing opportunities and risk »Tuesday 22 May, Bucharest THE fourth OMFIF Asean debate, co-organised with the Monetary The euro area and accession Authority of Singapore, was held to coincide with the Asean+3 fi nance conditions ministers and central bank governors OMFIF organises an Economists Meeting in Bucharest, meetings in Singapore. The debate held jointly with the National Bank of Romania. Key focused on fi nancial technology, topics for discussion include the macroeconomic cybersecurity and cryptocurrencies. outlook for central and eastern Europe, monetary policy Speakers included Muhamad Chatib and challenges to the European banking system. Basri, former Indonesian minister of fi nance and Duvvuri Subbarao, former governor of the Reserve Bank of India. For details visit omfif.org/meetings

OMFIF.ORG MAY 2018 BULLETIN 7

BTN_05.18_006-007_Review.indd 7 30/04/2018 10:19 Cover story: Exploring reserve management strategies

8 BULLETIN MAY 2018 OMFIF.ORG

BTN_05.18_008-009_coverOpener(tbc).indd 8 30/04/2018 10:20 Exploring reserve management strategies

A decade of quantitative easing, low interest rates, slow productivity growth and aging populations in advanced economies has led to intense debate over which asset classes and strategies public investors should pursue.

OMFIF.ORG MAY 2018 BULLETIN 9

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Resisting temptations Benefi ts from the segregation of duties

Joachim tensions in the financial system. in-depth checks before new from investing its foreign Wuermeling For some time, many central instruments and assets are exchange reserves with issuers Deutsche bank reserve managers have adopted, rather than quickly or entities of banks in its Bundesbank been looking at alternative following trends. A deviation domestic currency area. Basing currencies and instruments from these principles might have an investment policy mainly t the end of March 2018, to improve risk/return resulted in more active reserve on the criteria of security and AGermany’s official reserve relationships. Private market management, investments in liquidity could come under assets were €166bn ($206bn), participants have championed higher-yielding asset classes criticism for being too orthodox, of which €117bn, or 70%, was mortgage-backed securities or the implementation of an but the resulting asset mix has invested in gold and €49bn or corporate bonds to increase optimised and active investment served the Bundesbank well in foreign currency reserves, returns. These investments framework. This would have during periods of market stress. including the Special Drawing are often outsourced to generated more credit risk, Of course, a certain degree Right and claims against the external managers. After 2008, more reputational risk and, in of optimisation was still being International Monetary Fund. alternative reserve assets and many cases, sacrificed foreign considered even while a careful These assets include a large currencies came into greater exchange liquidity. approach was being applied. amount of gold because of the focus among central bank To this end, the Bundesbank Bundesbank’s obligation to reserves managers on account Avoiding risk reviewed its gold storage act under various exchange of the prevailing low interest The investment policy within and cautiously added further rate regimes throughout rate environment, and the use of the Bundesbank’s reserve currencies to its reserves – the the last century. Under the derivatives has become standard management has not primarily Australian dollar was a first Bretton Woods system, foreign practice. been geared towards diversifying step. exchange purchases became The cost of holding reserves risk. Rather, the objective has Investment policy for the necessary whenever the D-mark on their balance sheets puts been largely to avoid risks that Bundesbank’s foreign reserves appreciated against the dollar. pressure on reserve managers are not necessarily determined is based on the classic tenets The reserves also act as to enhance returns. There by policy goals. This entails of security and liquidity. The precautionary holdings and is always a temptation for the acceptance of exchange Bundesbank has been relatively enhance confidence in the portfolio managers to extend rate risk resulting from the immune to temptations from stability of the currency. In the investment to achieve a decision to hold reserves, and the asset management industry recent years, multilateral swap better return, as they are tasked the acceptance and management to mirror private investor lines between the world’s major with optimising the return of a degree of interest rate risk behaviour. The validity of the central banks have extended within a given framework. Their within currency portfolios. The decision cannot be tested in a their capacity to provide foreign willingness to accept more risk experience of the financial crisis normal market environment. exchange liquidity and to fund is often in contrast to the overall has underpinned this analysis. Instead, it will be tested under intervention, such as to alleviate objective of controlling risk. Reserves need to perform stress scenarios.  These differing views are the under difficult circumstances Joachim Wuermeling result of a typical segregation and it is imperative to judge is Executive Board of duties within reserve them from their performance in Member at the management. Ultimately, this crisis situations. An investment Deutsche 70% provides stability. Since the policy for foreign reserves Bundesbank Percentage of Germany’s Bundesbank has always been should not be procyclical. For and an offi cial reserve assets guided by the principles that instance, while being in line Honorary invested in gold at the end currency reserves must remain with a narrow interpretation of Professor at of March 2018. secure and highly liquid, it has the IMF reserves definition, this the University been indispensable to perform has prevented the Bundesbank of Potsdam.

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BTN_05.18_010_Wuermeling.indd 10 30/04/2018 10:23 Lowering Fed balance sheet Releasing high-level collateral may have easing effect

Otaviano policy normalisation after contraction of the balance sheet. Canuto years of low interest rates and Furthermore, in accordance with Advisory quantitative easing. plans announced in June 2017, Council The Fed’s balance sheet the initial monthly portfolio $4.4tn started to grow in late 2008, reduction of $10bn is expected to Current size of the Fed t its meeting in March 2018 when it began to acquire assets reach $50bn by next October, a balance sheet Athe US Federal Reserve raised such as US Treasuries and much slower pace than if outright the target range of the fed funds government-backed securities on sales of assets were to take place. rate by a quarter point to 1.5%- a large scale. This was initially Bank reserves have diminished balance sheet unwinding 1.75%. Fed offi cials are projecting done to avoid a deepening of accordingly. ‘may not be tantamount to a steeper path of rate increases the financial destabilisation tightening’. Releasing high- for the next two years, and recent and bankruptcy of solvent-but- Releasing collateral quality collateral such as US infl ation data would hint at the illiquid financial institutions, and The impact of the balance sheet Treasuries to the market may central bank staying fi rmly on subsequently to fight economic reduction on short-term rates have ‘an easing effect’ and track for another quarter point stagnation and deflation risks stemming from lower levels of diminish excess reserves kept increase in June. as private agents deleveraged reserve balances on the Fed’s by banks on deposit at the Fed. In the light of rising inflation substantially. On the liabilities liabilities will be critical. Falk ‘US Treasuries in the hands and a tightened labour market side, bank reserves grew to Bräuning, senior economist from of the market, with reuse, are putting upward pressure on wage exceed regulatory minimum the Boston Fed, estimates that likely to lubricate markets, while growth, it in unsurprising that requirements. by January 2019, assuming a excess reserves (or money) have some analysts now expect the Fed Between 2008, when the portfolio reduction by $500bn, remained idle in recent years,’ to lift rates a total of four times quantitative easing programme ‘The overnight repurchase says Singh. In the long term, this year. At the same time, the began, and October 2014, when agreement (repo) spread (relative higher availability and the reuse Fed’s long-term plan to shrink its Yellen announced its conclusion, to the lower bound of the federal of this collateral by the market unprecedently large balance sheet the Fed balance sheet increased funds target range) will be 10 may damp interest rates. is in its sixth month. Janet Yellen to around $4.3tn (around $2.5tn basis points higher and the fed Opposing views of QE and Jay Powell, the former and in Treasuries and $1.8tn in funds spread will be two basis underlie these observations on sitting Fed chairs, characterised mortgage-related securities) from points higher than in October the two sides of its unwinding. moves on both these fronts as less than $900bn. Beginning in 2017.’ On the one hand, if the essential on the path towards October 2017, the Fed has stopped There are those, like expansion of the Fed’s balance reinvesting all the proceeds Manmohan Singh, International sheet was essential to preserve it received from maturing Monetary Fund senior easy monetary conditions, the assets, starting a gradual economist, who say the Fed’s reduction of the former can be expected to tighten the latter. Conversely, if the Fed’s asset hoarding was excessive, concerns about the macroeconomic effects ‘The impact of the balance sheet reduction of speeding up the tapering on short-term rates stemming from lower could be exaggerated.  levels of reserve balances on the Fed’s Otaviano Canuto is an Executive liabilities will be critical.’ Director of the World Bank and a Member of the OMFIF Advisory Council. The opinions expressed in this article are his own.

OMFIF.ORG MAY 2018 BULLETIN 11

BTN_05.18_011_Canuto.indd 11 30/04/2018 11:55 Exploring reserve management strategies

China plays the long chess game Beijing will adopt measured response against US tariffs

Gary Smith dollar. It is doubtful that this is hegemony, would be inconsistent at fi lling the vacated moral high Advisory an outcome China would want with the decade-long policy of ground in international relations Council against the backdrop of a trade internationalising the renminbi. since the election of President dispute that, in a wider sense, Moreover, there is nothing Trump. would threaten its own export to stop the Fed from simply China has been keen to position here has been speculation performance. However, the mopping up any Chinese sales itself as a defender of free trade Tthat the trade dispute situation might be more nuanced of US debt. China, even if it were at a time when the US is moving between the US and China could than it fi rst appears. Currency inclined to embark on a fi nancial towards protectionism. This prompt Beijing to sell down its movements do not always conform market skirmish, might be wise would also enhance China’s holdings of US Treasury debt. to theory. If retaliation were to avoid one that US authorities international standing but would While Chinese leaders clearly feel intended to trigger a US fi nancial could neuter with minimal be consistent with the objectives compelled to retaliate against crisis, the experience of the 2008 effort. Moreover, in 2015-16, of the Belt and Road initiative, Washington’s recently imposed crisis might be worth heeding. China liquidated around $1tn which may help establish a China- tariffs, it is unlikely that foreign A decade ago, as the US housing in foreign exchange reserves, of centric trade network and further exchange reserves would be used crisis morphed into a global crisis, which around two-thirds were boost international usage of the for this purpose. Progress on the dollar benefi ted from a ‘fl ight probably denominated in dollars. renminbi. some of the West’s legitimate to quality’. This perverse outcome During that period, US bond yields The Chinese response to US complaints about China’s trade was a consequence of dollar actually declined. tariffs will probably focus on trade practices seems remote, but so hegemony in the fi nancing of and investment, including tariffs does any Chinese response that international trade. China’s long-game strategy against US imports and further might trigger a fully-fl edged Beijing began the process of For China, the benefi ts of restrictions on US investment fi nancial crisis. establishing its own currency in maintaining a large and stable in China. A measured response Chinese offi cials will weigh the global trading network partly position in US debt instruments may encourage other nations to some diffi cult issues as they to ensure that China would be in a might be more useful than tone down their concerns about shape their strategy. Textbooks stronger position in a future crisis. weathering the consequences of Chinese trade subsidies or poor would suggest that selling Any Chinese reaction that risks liquidating that position. In fact, protection of intellectual property. dollar-denominated assets would triggering a fl ight to quality onto doing nothing might be a winning In terms of foreign exchange put downward pressure on the the dollar, and which boosts dollar strategy. China has been adept reserves, the views of Fan Gang, a member of the People’s Bank of China and adviser to the Moscow State Administration of Foreign Rotterdam Belt and Road Exchange, a subsidiary of the Duisburg Almaty initiative shows Huoerguosi central bank, are relevant. He has Venice Bishkek broad trade links Urumql between China, Istanbul Samarkand said that China should not buy Athens more US debt but should instead Africa and Europe Dushanbe Lanzhou Xi’an Tehran Fuzhou buy real assets. From the Chinese Beihai Kolkata Quanzhou perspective, this could be a good Hanoi Guangzhou Zhanjiang time to exhibit patience and skill Haikou in playing the long chess game.  Colombo Kuala Lumpur Gary Smith is Member of the OMFIF Advisory Council Nairobi Jakarta and Member of the Strategic Silk Road Economic Belt Relationship Management Maritime Silk Road Team at Barings.

12 BULLETIN MAY 2018 OMFIF.ORG

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Bank of Japan faces ETF quandary Large presence of a central bank in the stock market must be managed well

Alexander entire market or a specifi c theme, net asset value of Japanese equity private investors. Petrov but do not let them choose ETFs listed on the Tokyo Stock The BoJ’s presence in the State Street individual stocks. State Street Exchange stood at ¥29.8tn. The stock market, chiefl y via ETFs, is Global Advisors Global Advisors believes the 2002 BoJ held ¥17.2tn, or nearly 58%. signifi cant. The asset purchase legacy played a role in the BoJ programme remains open-ended moving to ETFs in 2010. BoJ may dominate ETF and there is no explicit cap on ll central bank asset- Initially, the BoJ announced market ETF ownership. Apurchasing programmes a stock goal of ETFs it intends There is a risk that the BoJ may The BoJ’s use of ETFs may be follow the same logic: when the to hold. In April 2013, after ultimately dominate the market considered unorthodox, but so price of money gets close to zero, the appointment of Governor to such an extent as to undermine far it has proved a useful policy they conduct monetary policy Haruhiko Kuroda and the start of its proper functioning. To date, tool. The BoJ’s refl ationary goals easing by directly increasing the quantitative easing, it switched such effects appear to be limited. may take a long time to achieve, quantity of money. Most post- to a fl ow goal of purchases – ¥1tn Although the BoJ has been a large in which case asset purchases 2008 fi nancial crisis programmes ($9.4bn) annually. The amount buy-to-hold ETF investor, the could continue over the medium primarily purchased government was tripled in October 2014 and volumes remain healthy enough term. Nonetheless, it is likely that bonds. Purchasing equities, via further doubled in September to support market liquidity and the BoJ may want to reduce its exchange-traded funds otherwise 2016. The bulk of the programme the BoJ’s stated intentions for balance sheet and divest assets remains rare and controversial. targets ETFs tracking large the programme did not include including ETFs at some point. The Bank of Japan’s indices, such as the Topix. supporting stock prices. The bank has said it will only programme, which started in Equities are not a large The BoJ’s high share of the sell ETF shares in a way that October 2010, included a wider proportion of the BoJ’s balance ETF market and continued limits market volatility and does range of assets such as corporate sheet. As of 31 January 2018, the demand have driven fi nancial not constitute too high a loss. bonds, equities and property balance sheet stood at ¥526.7tn, innovation and increased the use However, its big role in the ETF funds. The BoJ had to deal with of which the 2002 stocks were of ETFs across Japanese fi nancial market means any sale would need the consequences of the fi nancial ¥1tn and the later ETF purchases markets. The industry has had to to be orchestrated carefully.  crisis as well as persistent ¥17.7tn – a total of 3.6%. create specialist ETFs to meet the Alexander Petrov is defl ationary pressures in the The impact on the stock BoJ’s demand for vehicles that Assistant Vice-President, Japanese economy. It also had market has been more signifi cant. promote ‘human and physical Policy and Research, Offi cial more institutional experience of As of January 2017, the BoJ capital’, though these have Institutions Group at State unconventional monetary policy owned about 2.5% of the total attracted limited interest from Street Global Advisors. measures than other central market capitalisation of the banks. Tokyo Stock Exchange, which Between 2002-03, the BoJ was then ¥721tn. Such a share is bought shares to alleviate not necessarily alarming, but the the impact on major fi nancial indices purchased by the BoJ tend institutions of unwinding to include larger companies, and their cross-shareholdings in there are some companies where, big conglomerates. However, a if the indirect ownership stakes central bank, because of its size through various ETFs and direct and infl uence, may distort the holdings are added up, the BoJ market when it trades the shares holds over 10%. of individual companies. In the ETF market, the ETFs, in contrast, allow BoJ’s share is much bigger. In investors to capture either the December 2017, the combined

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BTN_05.18_014_Petrov.indd 14 30/04/2018 10:30 Flexibility in allocation strategy Build up in real assets as bond returns fl ag

Ben This combination of forces, with around $4.6tn in AUM, more traditional prime assets in Robinson exacerbated by a decade of more than 70% have increased core locations, which have been OMFIF quantitative easing, low interest or significantly increased (by up driven by strong competition rates, slow productivity growth to 6%) their allocation to these from other investors. and aging populations in assets in the last three years. Many institutions are advanced economies, has led to The role of real assets within bringing more of their asset onds have been the worst- heated debate over which asset the total portfolio has shifted. management in-house. This is Bperforming asset among classes and strategies public These are no longer viewed solely forcing external managers to habitual investment classes, investors should pursue. or primarily as part of a core or update their value proposition after commodities and hedge Recent reforms allowing great core-plus strategy. Value-add by offering new fund structures, funds, over fi ve-, 10- and 20-year flexibility in asset allocation and opportunistic strategies are greater transparency and horizons, according to PWC data. for European public sector gaining in importance, affecting flexibility, and lower costs, For public pension funds, which investors have helped intensify the types of assets investors to remain competitive. The have an average allocation to the shift into alternative assets, are pursuing and the way they potential rewards are substantial. fi xed income of almost 40% of the particularly real estate and access them. Over the next three years, total portfolio, this has created infrastructure. Some investors are targeting sovereign and public pension signifi cant pressure on their From July, the Swedish a higher share of private funds plan to increase their returns, forcing investors to seek pension buffer funds, which hold real assets, driven by factors investments by $334bn in alternatives. combined assets of more than including diversification, higher infrastructure and $130bn in real Sovereign funds, which are $200bn, will be allowed to invest yields and lower volatility than estate, according to the OMFIF dependent on oil revenues for a up to 40% in ‘illiquid’ assets, listed public assets. This allows survey. However, matching large part of their total assets, up from the current 5% cap on investors to access a wider range the supply of readily available have struggled to preserve their unlisted assets. The minimum of projects and to specialise in sums of cash with investment value in the face of the dramatic allocation to top-rated fixed non-prime real estate and other needs – estimated at more than decline in oil prices since 2014. income products has also been niche investments. $90tn over the next 20 years for Sovereign funds’ average 25% reduced to 20%, from 30% of the infrastructure alone – remains allocation to bonds, while lower total portfolio. More complex investments the biggest stumbling block. than pension funds’, is still In April the Norwegian Sovereign and pension funds In view of the long-term large enough to present further finance ministry signalled are pursuing larger and more nature of real asset investment, headaches for these investors. its intention to allow Norges complex investments and political, legal and regulatory Bank Investment Management, collaborating with limited certainty is vital. Improved which has more than $1tn in partners to reach deals of information, benchmarking assets under management, to sufficient scale. Interest in and hedging products are invest in unlisted renewable private equity is waning as the also needed. The hope among infrastructure, following years of large build-up of ‘dry power’ investors facing low returns lobbying by the fund. – estimated at around $300bn elsewhere is that the scale of $334bn These developments are part in the real estate sector alone – their demand for real assets spurs of a broader trend. The value of adds to the costs. on these reforms, expanding the Increase in real estate and infrastructure Direct debt and equity range of investable assets.  infrastructure within sovereign fund and public are instead becoming more Ben Robinson is Senior investments by pension fund portfolios has risen widespread as investors seek Economist at OMFIF. The sovereign and public by 120% and 165%, respectively, exposure to specific, carefully OMFIF report on real assets, in pension funds over since 2009. According to an selected projects. They are trying association with BNY Mellon the next three years OMFIF survey of public investors to overcome the high costs of will be available in June.

OMFIF.ORG MAY 2018 BULLETIN 15

BTN_05.18_015_Robinson.indd 15 30/04/2018 12:02 ADVERTISEMENT

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he next generation of mobile and capacity of 5G to truly engage Visit principal.com/ technology will revolutionise their potential. Other industries, like technologyandinvesting Tcommunications, disrupt industries manufacturing and healthcare, could see to fi nd out more: and create opportunities for investors. increased productivity in addition to new One trend with the potential to products and services. • Discover four industries dramatically affect people, businesses, By 2020, there will be an estimated 5.7bn ripe for disruption from 5G; economies and investing is the upcoming mobile subscribers around the world. rollout of 5G, the next generation of mobile With links between mobile technology, • Learn about regional technology. 5G will represent a drastic leap broadband access and per capita GDP, implications of 5G for Asia, over the current 4G standard and stands this holds implications for economies Latin America and Africa; to serve as a disruptor for many industries themselves, including: and economies. • Increases in labour productivity; • Explore smart cities and The massive increase in connectivity • Knock-on effects from smart cities and the potential they hold; speed from 5G will intensify an already autonomous vehicles; hyperconnected world. By some estimates, • Challenges for labour force skill; • Watch Jim McCaughan, nearly 3bn smartphones will ship in 2022 • Increased infrastructure investment. chief executive off icer of alone, 47% more than current levels. And Principal Global Investors, these 5G devices will tackle increasingly 5G will change investment opportunities and Richard Sear, senior data-heavy tasks. Disruption spurred by 5G will require investors to react. The increasing pace of vice-president at Frost & Sul- 5G will change industries technological change can make established livan, discuss technological Besides connecting billions of people, the business models obsolete. Asset managers disruption and opportunity. 5G transition will foster connections among will need to prove their worth by effectively trillions of ‘things’, as in the internet of separating winners from losers. things, a web of connected appliances and Patterns of adoption around the machines. world will create different investment 5G will foster innovation and serve opportunities in different regions. And the as a catalyst to unlock several other irrepressible ingenuity of people is likely to technologies. Smart cities and autonomous create entirely new industries that will need vehicles will require the increased speed capital for support and growth.

16 BULLETIN MAY 2018 OMFIF.ORG

BTN_Advertorial_Principal.indd 16 30/04/2018 10:53 Worldview This month’s expert analysis

Mark Branson on regulators facing up 21 to cryptomania 18 Matteo Richiardi, Brian Nolan and Filippo Cartiglia on women leading the UK employment boom Ousmène Jacques Mandeng on the 20 geography of money

Darrell Delamaide on Fed nominees’ focus 22 on infl ation

Kat Usita on Indonesia targeting innovative 19 funding

OMFIF.ORG MAY 2018 BULLETIN 17

BTN_05.18_017_Worldview.indd 17 30/04/2018 11:10 Employment

Women lead UK employment boom Current 16-24 year old cohort is fi rst to show no difference between genders

Matteo Richiardi employment rate for men has was little difference between genders are no longer to be seen. and Brian Nolan now recovered to its pre-crisis women and men in the 25-29 and This convergence mostly refl ects Institute for New level, but the rate for women has 45-54 age groups. Only in the the fact that the share of ‘Neets’ Economic Thinking reached 71%, an all-time high. oldest, 65 or older, age group did (not in employment, education This narrowing gender gap in the increase in male employment or training) among females has Filippo Cartiglia employment rates refl ects the exceed that for women by a dropped sharply. At the same Arrowgrass Capital Partners combined effect of legislative signifi cant margin. time, for both males and females, changes, the impact of the crisis The picture with respect to the the share of students increased he 2008 fi nancial crisis and longer-term economic, social number of hours worked is quite sharply in 2008-10, when Tand subsequent recession and cultural dynamics. similar. During peak childbearing employment prospects were poor, affected employment in the Moreover, the inactivity rate UK severely, but the number of (the share of people neither in ‘The narrowing gender gap in employment rates people in employment has now work nor looking for a job) of refl ects the combined effect of legislative changes, the soared. From late 2007 to late the working-age population, for 2017, total employment grew males and females combined, has impact of the 2008 fi nancial crisis and longer-term by more than 2.5m, making the fallen to an all-time low of 21.2% economic, social and cultural dynamics.’ UK an outstanding performer in Q1 2018, pointing to a positive internationally. Females aggregate shift in the supply of years from 25-34, on the other but this has not come back down accounted for 58% of this, and labour. hand, hours worked by womenn as those prospects improved, a remarkable three-quarters of From 2007-17, the increase in increased less rapidly than for despite the increase in university additional hours are being worked female employment in the 60-64 men. tuition fees. by women. Wages are, of course, a age group was much greater than Employment patterns display It is reasonable to expect that very different matter. the corresponding increase for a strong persistence, so we the gender gap for that age range Male employment was hit men. Women also outperformed should expect the reduction in will not reappear. How the gap harder by the onset of the men considerably in the 20-24 age the gender gap to be slower for evolves as this cohort ages and crisis, as it had always been in group, and to a lesser extent in the older cohorts. On top of that, reaches the family formation and previous recessions. The overall 30-44 and 55-59 age ranges. There the reduction in the gender child-rearing stage will be key to employment gap for older cohorts labour supply in the future.  Women leading the UK employment boom is also infl uenced by an increase Matteo Richiardi is Senior in the state pension age for Research Fellow and Brian Employment rate by gender, aged 16-64, % women from 60 to 65, which is Nolan is Director of the 100 being phased in during 2010-20. Employment, Equity and Growth 90 The increase in the employment Programme at the Institute for rate for older women has been New Economic Thinking at the 80 particularly marked for those Oxford Martin School. Filippo 70 between 60 and 64, who are Cartiglia is Chief Economist at affected by this change. Arrowgrass Capital Partners. 60 Focusing on the young, it This is an extract from a 50 is striking that the difference report from Institute for New 40 in employment rates has Economic Thinking, Oxford 1 disappeared. The current 16- University, accessed at: www. 201 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2013 2015 2017 24 year old cohort is the fi rst oxfordmartin.ox.ac.uk/ Male Female one in British history where downloads/briefi ngs/Briefi ng_ Source: Offi ce for National Statistics employment differences between Nolan_employment_2018(1).pdf

18 BULLETIN MAY 2018 OMFIF.ORG

BTN_05.18_018_Cartiglia.indd 18 30/04/2018 10:55 Infrastructure

Indonesia targets innovative funding Infrastructure projects fi nanced completely outside government budget

Kat Usita Anggaran Pemerintah, or can deter investors looking for Designing alternative ways OMFIF Non-Government Budget certainty. Pina gives investors of drawing investment will be Equity Financing, is Indonesia’s fl exible fi nancing options. One a crucial step for governments innovative scheme for injecting way is through direct equity ramping up infrastructure private and foreign capital into participation in an infrastructure spending, but it is not enough. national projects. In typical company working on a government As with other asset classes, espite the commitment public private partnerships, the project; another is through the diversity is key and a wide range Dof many governments government taps private investors purchase of equity instruments. of projects has to be available. to developing and improving to fi nance the construction and An advantage of the scheme Energy, transport, water and infrastructure, limited fi scal operation of an infrastructure is that investors are not forced other infrastructure categories space constrains what is being facility, and investors receive to commit to the entire project may all have similar commercial built. This is especially true in their return from the project’s cycle. In addition, institutional potential, but will carry very emerging economies, but as the revenue stream. When there is investors unable to invest directly different challenges and risks. US and western Europe have a shortfall between the needed in infrastructure projects due to A robust pipeline of bankable shown recently, even developed investment and expected return, regulatory issues may fi nd leeway projects gives investors options economies struggle to meet the government covers it through to do so through Pina. and can attract more interest. their investment needs. The previously agreed upon payments Aside from providing capital, Countries like Indonesia should infrastructure gap is one that called viability gap funding. Pina’s Pina also accelerates project also be mindful of maintaining global public investors are goal is to raise enough equity for implementation by speeding a healthy investment climate. strategically suited to help fi ll. infrastructure projects to fi nance up fi nancial close. As the fi nal Economic stability, steady Governments need to think them completely outside the step before a project proceeds, growth and good governance are of creative ways to attract government budget. fi nancial close can become a important factors in attracting outside fi nancing, especially Financial viability is an long-winded process when investment. since infrastructure is still a new essential criterion investors look infrastructure companies are Even with fl exible and diverse frontier for many institutional at when selecting projects. Pina unable to lock in suffi cient options, investors are unlikely investors. Locking capital identifi es the most bankable fi nancing, delaying delivery. to enter markets with high in immovable assets entails projects and offers to the regulatory barriers, signifi cant particular risks. The lengthy market those that are expected Robust project pipeline political uncertainty and construction time exposes to generate a return of more Launched in 2016, Pina has unclear growth prospects. To projects to political and regulatory than 13%. This boosts investor already facilitated fi nancing for be sustainable, infrastructure changes, which can be diffi cult to confi dence, making projects four projects in Indonesia, with development must move in quantify and which short-term fi nancially attractive even if two more approaching fi nancial tandem with economic expansion investors might be unwilling they do not come with sovereign close. Together the six projects and improving governance. to trouble themselves with. guarantees or the viability gap have a value of $11bn. In addition, Meeting infrastructure needs Greenfi eld projects also bear funding other projects may have. 34 projects collectively worth is one of the most critical tasks demand risk, or the risk that The time it takes to design and $26bn have been identifi ed for many countries face and will predicted usage of a facility is not construct an infrastructure project inclusion in the scheme . remain so in the coming decades. met. The long-term horizons of Fast-growing economies such pension and sovereign funds make as Indonesia will benefi t from them ideal investors because they ‘Designing alternative ways of drawing continued innovation in creating are in a better position to absorb investment will be a crucial step for governments tools like Pina and maintaining a these risks. desirable investment climate.  Pina, which stands for ramping up infrastructure spending, but a wide Kat Usita is Economist at Pembiayaan Investasi Non range of projects has to be available.’ OMFIF.

OMFIF.ORG MAY 2018 BULLETIN 19

BTN_05.18_019_KAT.indd 1 30/04/2018 10:40 Digital economy

The geography of money Bitcoin highlights advantages of international currencies

Ousmène Sudan, Ethiopia, the northwest changes inherent in dealing in congruent with national borders. Jacques coast of Africa and Madagascar, different national currencies. Currencies can fulfil different Mandeng to Turkey, Oman and as far as International currencies need functions, and while some may LSE China. It served as legal tender in to adapt only to changes in the be best suited to conduct national Saudi Arabia, Ethiopia, Nigeria, international economy. transactions and serve common he quest for international Yemen and Oman. functions of money, others may Tcurrencies is not new. The The coin was popular because Network effects take on more specialised roles. 18th-century Maria Theresa of its familiarity, high standard As with the Maria Theresa thaler, The Maria Theresa thaler was thaler was one of the first of quality and ornate design that network effects are critical for popular because it was minted international currencies and made counterfeiting difficult. success. The thaler achieved to serve international trade and may be considered something Bitcoin emerged in 2009. adoption not by political not a particular geography. The of a model for bitcoin. The It represents a private, power, as in the case of colonial new cryptocurrencies seem, denationalised properties of the unreserved and convertible currencies or treaties; the coin in principle though not yet in cryptocurrency have highlighted medium based on a pre- became a pure trading currency, practice, the better currencies to the advantages of such currencies. determined issuance algorithm. in particular during the 20th take over that old idea.  The case for international Its classification as currency century, because issuance and Ousmène Jacques Mandeng currencies is based on the remains disputed, and adoption circulation happened outside is Visiting Fellow at the premise that national currencies and circulation continue to sovereign interference. Institute of Global Affairs are ill suited to serve as be marginal. Bitcoin aims to International currencies have at the London School of international ones. The dollar substitute existing monetary a natural role to play in the Economics. A longer version is widely used, but the Federal arrangements. It advocates global economy. The supply and of this article was presented at Reserve pursues national policy strict peer-to-peer exchanges, demand of currencies to conduct the LSE-Reinventing Bretton objectives and is accountable eliminating dependence on international transactions should Woods Committee Conference: only to the US Congress. There is banks, governments or other not be constrained by national Innovations in global financial or may be a fundamental conflict trusted centralised parties to monetary policy considerations. governance and the role of of interest between the monetary conduct financial transactions There is also no reason emerging economies, in Buenos needs of the US and the rest irrespective of location. why currency areas should be Aires on 18 March. of the world, and the Fed will The bitcoin network is always address the former. highly decentralised. It has The Maria Theresa thaler was more than 11,500 participants, one of the main silver coins in or nodes, in 105 countries Austria from 1741. It became a that validate and record ‘The Maria Theresa truly international currency from transactions in a decentralised the middle of the 19th through ledger, or blockchain. Many thaler achieved the 20th century, long after it cryptocurrencies have emerged adoption not by lost its legal tender status in with similar or differentiated political power, but 1852 and was withdrawn from aims. because issuance and circulation in Austria in 1892. The Maria Theresa thaler circulation happened The coin fuelled trade in Europe, and bitcoin are private, the Middle East and Africa. Mints deterritorialised currencies outside sovereign in Austria, but also Birmingham, with decentralised issuance. interference.’ Bombay, Brussels, London, Paris, The advantages of international Rome and Utrecht issued the coin currencies lie in internalising the and it circulated widely, from transaction costs and valuation Marion Mandeng

20 BULLETIN MAY 2018 OMFIF.ORG Digital economy

Regulators face up to cryptomania Supporting innovation while curtailing fraudsters

Mark Branson blockchain, which many fi nancial during a crisis and confi dentiality FINMA institutions are testing. It is protected. Equally important is conceivable that parts of the the stability of third party service 64-fold fi nancial infrastructure will shift providers, who are mostly non- to this technology and render fi nancial institutions. The amount Bitcoin’s price here is a hint of hysteria existing processes, and even some Then there is market risk. rose over the last three years Taround the world of players, obsolete. Bitcoin’s price rose 17-fold in blockchain and cryptocurrencies, Finance has benefi ted greatly 2017 and 64-fold in the last three a heady atmosphere for fi nancial from technological advances. years. Some see this as the biggest and purpose of the issued regulators. However, these improvements bubble in fi nancial history. For tokens, which are categorised Regulators’ goal, without have not been passed on as lower others, this is merely a short stop into three types. Payment compromising on the core costs to the consumers. And they on the march to an anonymous tokens are synonymous with objectives of fi nancial have not halted the decline in the and free fi nancial system. In cryptocurrencies and have no supervision, should be to create industry’s profi tability. my view, an anarchic, parallel further functions or links to an environment supportive of monetary world is unlikely to grow other development projects. innovation. But they tend to have Cyber and market risk to critical mass. The best way to Utility tokens are tokens which a natural conservative bias and For regulators, fi ntech cannot only exploit the potential of blockchain are fully functioning ways of only rarely communicate with be about opportunity. Some of the technology is to accept that providing digital access to an the unproven next generation of risks associated with it are more innovation-friendly regulation application or service. And asset market innovators. The system is philosophical or societal. There and supervision is the best deal tokens are tokens that are issued stacked partly against innovation are questions about consumer there will be. in fundraising processes and are to the comfort of incumbents. autonomy as processes become functionally analogous to equities, That means regulators must be more algorithm-based, as well as Categorising crypto tokens bonds or derivatives. Payment consciously self-critical when concerns about adequate privacy Initial coin offerings of tokens like bitcoin and newer redressing the balance. protection. cryptocurrencies erupted utility tokens look like means That is why FINMA, The most obvious risk is cyber last year. Growing from a of payment and are therefore Switzerland’s fi nancial markets attacks. The fi nancial sector is the relatively unknown fundraising subject to anti-money laundering regulator, has cleared the way single most attractive target. Data method used in the blockchain controls. Asset tokens look like for blockchain innovation. The from Melani, the Swiss reporting community, ICOs raised over securities and therefore fall under country’s regulatory sandbox and and analysis centre for information $6bn in 2017 through almost 900 securities law. dedicated fi ntech licence were assurance, show that 62 out of 94 projects. Switzerland has become There is an assortment of ideas proposed by FINMA. incidents reported to it targeting a hub for ICOs, with four of the six innovators, imitators, regulatory Financial technology, critical infrastructure in 2017 largest offerings in 2017 taking arbitrageurs and fraudsters in undoubtedly, holds great promise. occurred in the fi nancial sector. place there. the cryptoworld. It’s the job of Mobile banking is broadening A second important risk is Cryptomania is everywhere. regulators to ensure that the access to fi nancial services. the extent of outsourcing. As Last year FINMA was fl ooded with innovators have the chance to Roboadvising – online investment traditional value chains fragment, enquiries about the applicability thrive if their idea is worth it, that advice based on mathematical risks migrate. Many fi nancial of its regulation to ICOs. There the arbitrageurs have nothing to rules and algorithms – can institutions outsource back offi ce were three basic options: anarchy, gain, and that the fraudsters end reap the benefi ts of artifi cial functions, increasingly across prohibition, or a third, more up where all fraudsters should.  intelligence and machine learning borders. The economic rationale reasonable approach. Mark Branson is Chief at low cost. Crowdfunding is compelling, but should not The third option is quite Executive Offi cer of FINMA, is opening new channels for come at the cost of stability. Data simple. In assessing ICOs, FINMA the Swiss Financial Market fi nancing. Then there is the needs to be instantly accessible looks at the economic function Supervisory Authority.

OMFIF.ORG MAY 2018 BULLETIN 21

BTN_05.18_021_Branson.indd 21 30/04/2018 10:42 US

Fed nominees focus on infl ation Policy-makers optimistic on US economy

Darrell to have the biggest impact on Delamaide monetary policy. After the 2008 US Editor fi nancial crisis, he acknowledged that he had mistakenly subscribed to the consensus view that central n April, US President Donald bankers should focus on infl ation ITrump nominated two more because markets would be candidates to the Federal Reserve suffi ciently self-regulating. board of governors. This brings When that proved not to be the the pending nominations to three, case, he advocated intervention matching the number of members that went beyond what Ben currently serving. Nominations Bernanke, chairman at the time, require Senate confi rmation, and and other Fed policy-makers Democrats are blocking Trump were willing to do: urging central nominations on principle. There is bank purchases of bonds to cap Fed board of governors nominees Richard Clarida and Michelle Bowman one further position to be fi lled on long-term interest rates. It is an the seven-member board. open question whether he would As expected, Trump named return to this view in a new crisis. over as New York Fed chief in June. growth to be ‘somewhat stronger’ Richard Clarida, a Columbia For managing monetary policy, The head of the New York bank is even than the consensus forecasts University economist, to the he has recommended focusing a permanent voting member on on the FOMC. He sees a short-term vice-chair position that has been on future infl ation as implied in the FOMC. risk from the administration’s vacant since last September. market prices, rather than current Williams expects at least trade policy, which is contributing Clarida is also a managing director infl ation, for setting interest rates. two more rate rises this year, to stock market volatility and has at Pimco, the global investment refl ecting the FOMC consensus. other ‘spillover effects’. Longer manager, demonstrating his ability Regional Fed views ‘All participants expected infl ation term, he urges keeping an eye to combine academic with market The Washington-based board on a 12-month basis to move up in on unemployment. A prolonged practice. of governors is instrumental in coming months,’ according to the period below what economists Trump nominated Michelle forging consensus at the Fed, so minutes of the March meeting. consider a ‘natural rate’ could Bowman, the Kansas state Clarida’s role will be signifi cant. The FOMC felt the outlook for presage a boom-bust cycle, he banking commissioner, to the The regional Fed chiefs may the economy had strengthened. suggests. slot reserved for community express their thoughts on The Fed’s core infl ation Loretta Mester, president of bankers or regulators. Bowman nuances, but policy is essentially measure, personal consumption the Cleveland Fed, agrees that was an offi cer at her family’s determined in Washington. Only expenditures excluding food and trade tariffs introduce a note of bank in central Kansas prior fi ve regional bank heads at a time energy, is at 1.6% and has lagged ‘uncertainty’, but otherwise sees to becoming commissioner in can vote on the Federal Open behind the 2% target for six years. the economy on a robust growth January. She previously ran a Market Committee, and they There are indications of upward path. ‘Assessing the impact on the lobbying consultancy in London are outnumbered by the board price pressures. A tightening US macroeconomy will ultimately and worked in the George W Bush of governors when at its full labour market, boosted by the depend on how other countries administration. complement. fi scal stimulus of the recent tax react, including whether they As a vice-chair with a John Williams, head of the San reform, will add to them. impose their own tariffs or other strong economic background Francisco Fed, expects US infl ation Eric Rosengren, the Boston Fed trade barriers in response.’  to complement Chairman Jay to reach the Fed’s 2% target and chief, believes three more rate Darrell Delamaide is a Powell’s lack of academic training stay there or above for ‘another hikes are on the cards this year. writer and editor based in in this fi eld, Clarida is likely couple of years’. Williams will take Rosengren expects economic Washington.

22 BULLETIN MAY 2018 OMFIF.ORG

BTN_05.18_022_Delamaide.indd 22 30/04/2018 10:44 Inquiry

Euro’s roots in West German D-mark to revalue. de Gaulle championed failed, political acknowledgement that Paris 1968 revolt In the autumn, tensions in the leading to his resignation. Money efforts to fi nd ways to stabilise exchange rate system increased. continued to fl ow out of France. the mutual rates were desirable. Roel Janssen At the request of the Germans, George Pompidou, de Gaulle’s A series of attempts at In May 1968 the ministers of fi nance of the successor, knew the exchange monetary coordination – students G10 and Switzerland met in rate was untenable. In August his including ‘the snake’, ‘the snake occupied Bonn. According to one of the fi nance minister, Valéry Giscard in the tunnel’ and the exchange Paris’s participants, Bundesbank Vice- d’Estaing, carried out the 11% rate mechanism of the European Sorbonne President Otmar Emminger, it devaluation that de Gaulle had Monetary System – would lead university, turned into ‘the most unpleasant blocked. By the end of the year, in 1999 to the linkage of the erected monetary conference’ he ever the D-mark was revalued by 9%. currencies of 11 countries in barricades attended. The currency skirmish of 1968, economic and monetary union. in the streets and fought with The Bundesbank pleaded for triggered by the ‘Events of May’, Thirty-one years after ‘le général French riot police. A week later a revaluation of the D-mark and as the student rebellion and a dit non’, the franc and the French workers went on strike, a simultaneous devaluation of labour strikes came to be called, D-mark were merged into the and the country came to a stop. the franc. The French central was the fi rst time the European euro.  The government seemed about bank accepted this. But Karl Community dealt with its internal Roel Janssen is a Member of to fall. Schiller and Franz Josef Strauss, exchange rates, ushering in two the OMFIF Advisory Board and In secret, President Charles de Germany’s ministers of fi nance decades of frequently acrimonious the author of 1968: ‘You say Gaulle visited the commander and economics, fi ercely opposed adjustments. It also led to the you want a revolution’. of the French occupying forces any change to the German in West Germany to ensure the parity. The franc was a French support of the army. Meanwhile problem, they claimed, and The chart the French bourgeoisie carried de Gaulle should swallow his Each month we take a look at a chart from the world’s money to banks in Switzerland. national pride. He had devalued central banks. This month, India. Normality returned after the the franc 10 years earlier, vowing The appreciation in the rupee’s real value could be a refl ection of the summer. Workers had gained his government would maintain economy’s rapid growth. However, the rising currency value and higher huge wage rises and universities the exchange rate as a symbol of domestic price levels relative to other countries, seen in a higher real reopened. De Gaulle was still in strength. effective exchange rate, have hurt export competitiveness. Exports have already been growing slowly and are unlikely to bounce back if power. After two days of talks, France the REER continues to increase. The looming US-China tariff war could But the money kept fl owing succumbed. François-Xavier also result in a slowdown of global trade growth and raise import costs out of the country. This put Ortoli, French economy minister, for India, potentially damaging its economy. pressure on the franc’s exchange agreed with an 11% devaluation India’s stronger currency threatens growth rate. The Banque de France was of the franc. Two days later the India’s stronger currency threatens growth Real effective exchange rate forced to sell $400m of its gold monetary committee of the Real effective exchange rate, index 2004 = 100 reserves to support the currency, European Community convened 125 and called for help from the US to formalise the reshuffl e of 120 Federal Reserve and Deutsche exchange rates. To everyone’s

Bundesbank. surprise, Ortoli announced, ‘Le 115 In 1968 the currencies of général a dit non,’ or, ‘The general western nations were still part has said no.’ 110 of the Bretton Woods system. De Gaulle refused to accept 105 The dollar was fi xed to the price the devaluation, as the franc’s of gold and other currencies strength was essential in his 100 were linked to the dollar with crusade against the dollar. A 95 9 1 3 4 4 6 5 7 8 0 5 6 7 the possibility of exchange rate devaluation was ‘the worst kind of 2 200 201 201 201 200 200 200 200 200 201 201 201 adjustments. absurdity’, he said. 201 201

There was pressure on the In April 1969 a French SoSource:urce: Re seReserverve Bank Bank of Ind iaof India franc to devaluate, and on the constitutional referendum that

OMFIF.ORG MAY 2018 BULLETIN 23

BTN_05.18_023_Inquiry.indd 23 30/04/2018 10:47 OMFIF Advisors Network

Louis de COUNCIL Montpellier CAPITAL MARKETS MONETARY POLICY State Street Global Advisors George John Adams Iain Begg China Financial Hoguet Meghnad Desai CFA Research London School of Fabrizio Services House of Lords; Foundation Economics chairman, OMFIF Saccomanni LUISS University Advisers

Yaseen Anwar Marek Belka Industrial & Soh Kian Frank Tiong former prime Otaviano Commercial Bank minister of Poland Canuto Scheidig of China DBS Bank World Bank Group DZ BANK

Irena Aslihan Ben Shenglin Asmundson Stuart Harald Gedik Zhejiang University California Mackintosh Benink OYAK Anker Academy of Internet Department Group of Thirty Tilburg University Bank Finance of Finance

Robert Georgina Johnson Gary Smith Baker Paul Newton International London & Oxford Mario Blejer Institute for New Barings Banco Hipotecario Economic Thinking Finance Capital Markets Corporation

Hani Kablawi Xiang Saker Stewart Chairman EMEA and Songzuo Stefan Fleming CEO Global Asset International Nusseibeh Bielmeier Hermes Fund St Antony’s Servicing BNY Mellon Monetary Institute DZ BANK Managers College, University of Oxford

William Keegan Niels Thygesen José Manuel The Observer University of Copenhagen Hans Jukka González- Blommestein Pihlman Vivid Economics Standard Páramo BBVA Chartered Bank Ted Truman John Kornblum Peterson Institute for Noerr Brigitte International Economics Mark Burgess Colin Granville Jamieson Coote Robertson Queen Mary, Bonds SW1 Consulting University of London Norman Marsha Lamont Vande Berg House of Lords Stanford University Michael Cole-Fontayn Fabio Graham Association for Scacciavillani Oman Investment Hacche Financial Markets NIESR Johannes in Europe Fund Kingsley Witteveen Moghalu honorary chairman, Tufts University OMFIF Advisers Lutfey Siddiqi Akinari Horii Thomas Finke National The Canon Barings University of Institute for Global Singapore Studies NETWORK David Gao Haihong Harold James Bahar Alsharif François Heisbourg Robin Poynder Institute of World Suratgar BMCE Bank Princeton David Badham Frederick Hopson Poul Nyrup Rasmussen Economics and University Politics International Franco Bassanini Matthew Hurn Janusz Reiter Eduardo Borensztein Korkmaz Ilkorur Anthony Robinson Consuelo Brooke Karl Kaiser Philippe Sachs Volker Christian Hemraz Colin Budd Wieland David Kihangire Nasser Saidi Gärtner German Council Jankee Michael Burda Ben Knapen Pedro Schwartz DZ BANK of Economic formerly Central Bank of Mauritius Shiyin Cai Ludger Kühnhardt Vilem Semerak Experts David Cameron Celeste Cecilia Lo Turco Song Shanshan Forrest Capie Bo Lundgren Marina Shargorodska Trevor Katarzyna Pawel Stefano Carcascio Greetham Zajdel- Mariela Mendez Paola Subacchi Royal London Kowalewski Desmond Cecil Kurowska Murade Miguigy Murargy José Alberto Tavares Asset Narodowy Bank Narodowy Bank Efraim Chalamish George Milling-Stanley Moreira Management Polski Polski Moorad Choudhry Winston Moore Jens Thomsen John Chown Wilhelm Nölling David Tonge Philippe Vladimir Dlouhy José Roberto Novaes Jorge Vasconcelos Daniel Hanna Standard Lagayette Obindah Gershon de Almeida Gottfried von Bismarck formerly Banque Chartered Bank Jonathan Grant Michael Oliver Jack Wigglesworth de France Peter Gray Francesco Papadia Paul Wilson

24 BULLETIN MAY 2018 OMFIF.ORG

BTN_05.18_024-25_AdvisoryBoard copy.indd 24 30/04/2018 11:00 OMFIF Advisors Network

MONETARY POLICY INDUSTRY & INVESTMENT POLITICAL ECONOMY

Andrew Antonio Andrew Denis Large Joel Kibazo Armellini Hedge Fund Adonis JK Associates former MacShane Standards Board House of Lords ambassador, Avisa Partners OSCE

Jean-Claude Kishore Jürgen Frits Gerard Lyons Bastos de Mahbubani Bank of China Bolkestein National Krönig formerly European (UK) Morais Die Zeit University of Commission Quantum Global Singapore

Robert Laurens Jan Rakesh Oscar Bischof Brinkhorst David Owen Mohan German-British Lewisohn University of House of Lords Yale University Soditic Forum Leiden

Albert Boyd Vicky Pryce Athanasios Peter Bruce Centre for Orphanides Bressand McCleary Business Day Economics MIT Sloan School European 39 Essex & Business of Management Commission Chambers Research

Luiz Eduardo Nagpurnanand Caroline Melin Jenny Corbett Brian Reading Prabhala International Australia National independent University of Butler Walcot Partners Economic University economist Maryland Synergies

Willem Edoardo Nick Butler Robert Reviglio King’s College Middelkoop Reginald Dale Cassa Depositi e Commodity Atlantic Council Skidelsky London House of Lords Prestiti Discovery Fund

Célestin Maria Olivier John Monga Antonieta Del Michael Rousseau African Fonds de réserve Campbell Tedesco Lins Stürmer Campbell Lutyens Development pour les retraites University of São WELT-Gruppe Bank Paulo

Miroslav Danny Quah Hans Eichel Mark Crosby Lee Kuan Yew former German Christopher Singer Monash School of Public minister of Tugendhat Generali CEE University Holding Policy fi nance House of Lords

Natalie Shumpei Takuji Tanaka Jonathan John West Dempster Japan Finance Asian Century Takemori World Gold Fenby Keio University Ministry TS Lombard Institute Council

Jeffry Makoto Hans Genberg Daniel Utsumi The Seacen Frieden William White formerly Japan Titelman Harvard University OECD Centre ECLAC Finance Ministry

Tarisa Steve Hanke Linda Yueh The Johns Pasquale Elliot Hentov Watanagase State Street St Edmund Hall, formerly Bank of Hopkins Urselli University of Mazars Global Advisors Thailand University Oxford

Hans-Olaf Ernst Welteke Paul van formerly Henkel Roel Janssen Deutsche University of Seters NRC Handelsblad Tilburg University Bundesbank Mannheim

Mumtaz Khan Thomas Middle East & Asia Capital Kielinger Partners Die Welt

OMFIF.ORG MAY 2018 BULLETIN 25

BTN_05.18_024-25_AdvisoryBoard copy.indd 25 30/04/2018 11:00 Inquiry

Advisers network poll Facebook faces struggle to repair user faith Mixed reaction on whether regulation can help prevent future data leaks

Likelihood of regulation helping Facebook The poll for this month focuses on the revelations that user data maintain its consumer’s faith, % of ‘yes’ () or ‘no’ () votes was withheld from Facebook users without their knowledge. Participants were asked: ‘With Facebook’s recent data leak, is the promise of greater external and internal regulation enough to maintain consumer faith in the company?’ 58% There was a split of opinion from those who responded to the advisers network poll, with 58% saying ‘yes’ and 42% ‘no’. Reasons supporting continued user confi dence in the company included 22% factors such as consumer apathy towards data as a whole. Reasons against included the expectation of regulation having little effect. Many agreed, however, that Facebook had ‘misused’ its position, 42% and that the situation had presented a ‘strong case for regulation’. However, whether the controversy would have any lasting 78% detrimental effect on the company was questioned. The Twitter community was more confi dent in its opinion that faith in Facebook would be knocked, by 78% to 22%. Perhaps this was infl uenced by the poll being hosted on one of its social Advisers network Twitter media competitors.

Incoming regulation will be irrelevant Many people will still use Facebook As long as there are no real to the way consumers see Facebook. despite their lack of trust in the alternatives, consumers will stay No matter what actions are taken, company, because they think the with Facebook. There have not been confi dence is shaken, but at this stage data related to them are not that any direct consequences of the leak probably not too severely. important or sensitive. for individual Facebook users. Olivier Rousseau, Fonds de Philippe Lagayette, formerly Jens Thomsen, formerly réserve pour les retraites Banque de France Danmarks Nationalbank

Enough will be done to ensure that the While regulation can help, it cannot As digital platforms can be misused, consumer continues to use Facebook, compensate for a business model that there is certainly a strong case for though with a fall in profitability. sells data without consumer permission. regulating social media. Colin Robertson, Irena Asmundson, California Hemraz Jankee, formerly Bank of SW1 Consulting Department of Finance Mauritius

These statements were received as part of the May poll, conducted between 5-23 April.

June’s question:

Green bond issuance is hitting record levels this year. Is this a sign of meaningful future growth, or simply a fad?

26 BULLETIN MAY 2018 OMFIF.ORG

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