Appendix 2: Survey responses and comments

Below are comments provided by reserve managers to the survey questions. 

1. Which in your view are the most significant risks facing reserve managers in 2023? 

As high-rated government bonds are the main reserve assets, we consider the factors that affect their yields as the main risk factors for reserve managers. Above-target inflation is one of the main risk factors, as the stickiness of such inflation rates will be decisive in where and when the major central banks stop the tightening cycle. Here, inflation expectations, wage growth and geopolitical tensions come to the forefront as the main factors that should be monitored. In this context, despite the recent resilience that the European economies have shown thanks to the mild winter and easing of supply-side constraints, we continue to see the escalation of geopolitical tensions as one of the main risk factors, with negative effects on growth and inflation that ultimately affect monetary policies. On the other hand, the strong responses of the major central banks to above-target inflation rates have also triggered the expectations that the growth will be negatively affected from this cycle and inflationary pressures will fade down, causing a pause and even a pullback of monetary tightening. However, if such a monetary policy easing cycle starts prematurely, it will clearly increase volatility in the markets with the policy turns. We believe the other factors in the list will mostly be shaped by these factors.

From the perspective of our portfolios, all holdings are in government debt focused on short to medium maturities. The risk from a returns perspective is focused on duration risks from rates being higher for longer.

Geopolitical tensions and above-target inflation have moved closely together recently and we expect this trend to continue in the future.

High inflation rates with tightening monetary policies by major central banks continue to be a major risk in 2023. Although the pace of policy rate hikes are expected to decelerate in 2023, the global growth rate is projected to slow and this could negatively impact credit markets.

In addition to being a source of market risk, controlling the level of inflation is also core to the mandate of central banks. In that regard overshooting inflation represents the highest risk. We rated the next three risks based on our assessment of their impact on both market risk and financial stability.

Inflation and resulting central bank actions remain the main risks for reserves this year.

Inflation will fall but still remain above target in many countries. Central banks may feel pressure to ease policy, given low economic growth.

Intensified geopolitical risk could decrease yields and might imply lower reinvestment rates for the following period. On the other hand, persistently high inflation could put upward pressure on yields, which, in addition to restrictive monetary policy, might worsen credit markets conditions. In terms of economic growth, in an environment where developed market growth is much lower than the potential rate of growth, the central bank might pause in the current cycle of tightening, which could foster investors to start pricing interest rate cuts.

It is difficult to answer this question in general terms, as various countries do not face the same challenges and difficulties. As a small and fragile country, exchange rate volatility is the most significant risk we are facing. A reduced capacity for intervention on the FX market could translate into a faster rhythm of currency depreciation, which in turn would further impact the level of prices in the economy.

It seems geopolitical risks weigh more and more on the markets and have stronger spillover effects, inflation is persistent and it is a question of how it will all impact economic growth.

Rising inflation together with accelerated monetary policy normalisation may lead to foreign exchange outflows for emerging markets with high levels of public debt. 

Since inflation erodes the value and return of the investment portfolio, this risk is of major concern to portfolio managers.

Since the interest rates are higher, some risks have been reduced.

The challenges of rising inflation is still one of the main issues central banks are facing, and we think that this issue is still one of the risks for monetary policy and will have a significant impact on financial markets.

The changes in liquidity are a real concern because they limit our ability to have the necessary resources in the moment of need.

The escalation of geopolitical tensions could have far-reaching consequences with further disruption of supply chains, deterioration of the macroeconomic situation as well as risk-off market sentiment, capital outflows from certain (mainly emerging) markets and increased volatility. Also, under the scenario of persistent or recurrent inflation, global economic growth may slow down significantly, and in consequence credit conditions may deteriorate and stability of the financial system may be threatened.

The mounting credit risks (sovereign and corporate) are the most significant for reserve management, with an increasing number of countries facing fiscal challenges fuelled with rising interest rates and limited access to financial markets.

The risks associated with the stickiness of high inflation will definitely figure prominently in the investment decision-making process for 2023 since the Fed’s previous rate path has already been impacted.

The Russia/Ukraine and China/Taiwan/USA tensions present major risks for 2023. Central banks have taken steps to address inflation and the impact of rate increases have already been priced in. Credit markets are recovering from 2022 volatility.

Tightening monetary policy and high inflation are preoccupying reserve managers due to their impact on capital preservation and volatility.

We consider that the resilience inflation has shown is the major source of uncertainty in the markets. Inflation is still the main driver of global monetary policy, which increases the likelihood that other risks will arise, like a slowdown in growth, credit events, liquidity and volatility issues. Wind-down of central bank balance sheets could lead to a reduction in liquidity in certain markets. Geopolitical tensions have remained hot in the past couple of years and, aside from the other risks they imply, these tensions have also fuelled inflationary pressures.

We see inflation as the current highest risk because failing to tame it will lead to greater instability than we’ve seen in 2022. 

Whatever ranking could be used, the risks are not comparable. Some risks are associated with just market views and market values, while geopolitical tensions risk is a much deeper threat going across whole state politics.

2. In the current environment of high inflation and tighter monetary policy, what steps have you taken to protect the value of your reserves portfolio?

Already in 2020 we decided to reclassify part of our securities as held-to-maturity in order to reduce the impact of unrealised losses on our profit and loss account. Besides, we hope that over a longer period higher interest income can overweight temporary capital losses on actively managed bond portfolios.

Due to expectations of monetary policy tightening, we have shortened the duration of most of our portfolios. 

Duration shortened somewhat to reduce exposure.

Inherently our positioning is properly structured to weather these turbulent times, therefore there was no significant change in our strategy in the past 12–24 months.

Maintained the majority of currency exposure of international reserves in USD, given the safe haven status of the currency, keeping in compliance with internal strategic asset allocation, investment policy and guidelines.

No additional steps have been taken because our investment horizon is long-term, not affected by short-term events.

No change.

No changes were implemented at the strategic benchmark level.

None of the above – we are looking at duration though.

None of the above.

Our reserves are primarily in euro. We started to reinvest late in 2022 after holding extraordinarily high cash balances. However, we started cautiously and continue this process in 2023 as the central bank tightening cycle comes to an end.

Remain the same; long-term SAA not affected by short-term developments.

Some steps are not just taken for value protection but also as an adjustment to eurozone entrance.

[The central bank’s] reserves are 100% invested in the US market. Higher yields available on the shorter end of the curve have allowed reserves management to reduce duration while obtaining good income potential.

[The central bank] aims to slightly increase [duration] but maintain a relatively short duration of the portfolio to frequently reposition [the portfolio] following monetary policy tightening in 2022 and expectation of further tightening in 2023 with the aim to be more resilient to interest rate risks related to our reserves portfolio.

[The central bank] continued to invest in shorter-dated US Treasuries seeking safer investment with higher returns, since inflation persists and longer-dated securities are riskier.

Decrease duration as a whole and decrease the spread duration in particular.

The duration of the investment tranche has been reduced to take advantage of better money market yields.

The institution has marginally increased the credit exposure of the portfolios as a way to generate excess return over our benchmarks (US Treasury indexes).

The majority of active positions are held at a shorter duration than their benchmark in order to outperform in a rising interest rate environment.

The reduction in duration has resulted in lesser options available for investment thus resulting in increased exposure for the available ones.

The SAA of the reserves portfolios was revised in late 2021, and expectations of higher inflation were one of the primary market assumptions. As such, duration was reduced and non-USD exposure was revised, on expectations of higher interest rates and dollar strengthening.

There were no substantial changes in the portfolio’s main characteristics since markets entered the current environment.

This year, given the complex context where high inflation is the main risk, we are planning to maintain a short-duration portfolio. The main change will be a recomposition of the US fixed-income assets [that tend to have] bigger credit exposure in order to take advantage of higher interest rate levels. Finally, we are also planning to increment our gold exposure, as a hedge against a recession scenario.

We did not modify our long-term strategic asset allocation. 

We did nothing. Because the causality is tricky. Higher rates decrease the price of fixed income assets but increase the cashflow from coupons. And central banks live generally from coupons. Higher rates decrease the attractiveness of other asset classes like equities, which may be used as an opportunity to buy them. And so on. So we did nothing that would be related to the factors named in the question.

We have changed the share of each asset in the portfolio.

We have increased duration to reflect the new, higher than before, yield levels. This is a first step towards normalisation from ultra-low duration levels.

We have not really changed anything in order to protect the value of our reserves. Indirectly the result of high inflation, monetary policy tightening and higher government bond yield is that we have postponed a planned increase in credit exposure.

We have reduced our overweight USD position and generally increase duration from mainly short positions to neutral and a few long-duration positions.

We haven’t made modifications to the SAA of international reserves in the last year.

We look to reduce duration to be able to tap into the uncertain rise in interest rates and also venture more into floating rate instruments.

We moderately increased duration, perceiving that till the end of 2023 yields could fall due to lower inflation expectations and consequently completion of the current hiking cycle in the first half of the year. In terms of credit exposure, the appetite for riskier bonds has decreased due to the relatively high nominal yields for the core and semi-core eurozone governments bonds.

With high rates of inflation and tighter monetary policies, internal and external investment managers reduced their duration exposures to short-to-neutral.

3. Do you anticipate that over the next year reserve managers broadly will accelerate, slow down or not change the level of diversification?

2022 showed how highly correlated “traditional” reserve assets are, which increases the need to find new sources of diversification.

2023 will be a wait-and-see approach but diversification will likely be a priority for many central banks beyond 2023. 

Bond yields rise when investors are selling bonds with the expectation that interest rates will increase. As such, investors tend to increase their appetite for riskier investments that would yield higher returns, which may result in additional diversification.

Cannot really talk about others – I do not think we will change anyway. 

Decrease allocation in MBS in order to shorten portfolio duration. Refinancing activities are becoming less attractive for mortgage borrowers as interest rates increase. Therefore, MBS issued by US agencies with a slightly longer tenor are scarce on the market.

Definitely the process of reserves diversification will continue, benefiting also from the development of investment vehicles like ETFs, but several central banks have already quite considerably extended the spectrum of currencies and asset classes in which they invest their foreign reserves. Even equities should no longer be considered non-traditional central banks’ investment. So we do not expect a significant acceleration of the diversification process.

Diversification trend among reserve managers was partly due to the low-rate environment.

Diversification would decrease credit and exposure associated risks. 

During Covid-19 pandemic, the historically low-yield environment pushed reserve managers to seek higher yields in emerging market debt, meaning that more currencies were made eligible by global investors (for example, renminbi and Korean won). However, as yields went up in light of monetary tightening in the post-pandemic era, this search for high yield in emerging market currencies and new asset classes slowed down in 2022 and this year we do not expect much change in regards to diversification.

During the last 10–12 years reserve managers were looking for yield and therefore introducing new asset classes, but currently that is really not the case any more, as government bonds offer rather decent yield again. So that reduces greatly the search for yield and therefore diversifying into other asset classes.

Generally, central banks will continue to seek opportunities to diversify their portfolios in order to optimise returns and minimise risks.

I expect the investment universe to increase to generate more returns and reduce risk.

If risk-free assets are carrying decent yield, there is less incentive for taking more risk and diversifying.

In a context of higher economic uncertainty and geopolitical tensions, diversification strategies can help achieve a better performance, at least protecting portfolio market value.

In a situation with many different growing risks coming together the instruments’ diversification is not the best strategy.

Not change the level of diversification, but await better opportunities to invest. Nonetheless, diversification into sustainable assets may be considered by reserve managers.

Over the next year, with inflation continuing to loom over global markets, I expect most managers to sustain shorter durations within their portfolios. Exposure to broad currency bases will decline as most portfolios will try to rely on stronger (G7) countries as the foundation for their portfolios. With the geopolitical climate remaining uncertain, these countries will serve as the bedrock for portfolio building.

Provided inflation pressures continue and necessary monetary actions are taken by many central banks globally, reserve managers may increase diversification as a strategy to safeguard the value of reserve portfolios as well as managing overall portfolio risk.

Reserve managers put more weight on safety and liquidity than on return to respond to the potentially higher reserve need. However, while global central banks are reducing the pace of monetary policy adjustment amid peaking inflation, the global economic outlook has improved, which increases the chances the economies might escape severe recession. In this manner reserve managers are more inclined to diversify out of safe haven assets into more risky assets, ie, equities, credit bonds and FX markets. Of course, investments into the first two asset classes could reverse if yields continue to increase, amid higher for longer inflation due to the tighter labour market, as central bank speak continues to be dominated by concerns over inflation.

Spreads are decreasing as negative outlooks about the economy hold. Therefore, diversification as a way to generate alpha is sometimes not attractive enough to position in some assets.

The aim is to be cautious while expecting an improvement in market conditions.

The change in the geopolitical order also changes the perception of the safety and liquidity of currencies.

The current interest rate level across main economies, the recent negative returns on several traditional asset classes and the uncertainties regarding inflation and growth that still lie ahead of major markets may prompt reserve managers to recalibrate their portfolios towards allocations that benefit from a better balance between risk and return. However, typically central banks’ conservative stance on risk may result in small changes (if any) in allocation until there is a clearer view on economic and geopolitical variables that currently impact expectations on assets.

The pace was quite high in the negative risk environment and with the rates becoming more appealing there will likely be less of a need to diversify into other asset classes. 

The recent break in historical correlations between assets makes it even more pressing for reserve managers to seek diversification in their portfolios.

The upward trend in diversification in recent years was mostly driven by a search for yield. Thereby as the yields rise, the motivation for more diversification may decrease. Increased yields, slowing global growth and recession risks may also increase the attractiveness of USD holdings and decrease the tendency for currency diversification. On the other hand, as long as real rates stay low, there will be demand for higher rates and thereby for diversification to protect the value of assets against high inflation. High inflation also increases the attractiveness of gold investments. Additionally, the new formal or informal mandates of central banks such as supporting the greening of the financial system may contribute to the further diversification of reserve assets. Still, excluding diversification towards green assets, we expect a slowdown in the pace of diversification.

This is due to increased geopolitical uncertainty and volatility in financial markets.

This will depend on the global macro environment. It is very difficult to make predictions in that sense although some elements might indicate that reserves managers will continue to diversify.

We could see an increase in money market investments.

We have gradually diversified our investment over the years in search for better returns but do anticipate further diversification given the risk parameters and high interest rate environment.

We view higher levels of interest rates [as providing] greater incentive to stick to the traditional asset classes.

With increased yields in USD, from a yield enhancement perspective, reduced pressure to diversify in higher yielding assets.

For your portfolio, do you anticipate that over the next year you will accelerate, slow down or not change the level of diversification?

After SAA at the end of 2022 we first have to implement decisions over 2023.

Allocations will be kept according to the strategic benchmark and no changes planned to the benchmark. During recent turbulent times hoarding euro liquidity was the main direction in our reserve management operations. As tensions ease, exposures will be adjusted back to the strategic benchmark, which will lead to more diversification compared to the current allocation but no change from the starting point.

Given the small level of our portfolio, we do not foresee any major changes in the level of diversification.

In addition to the factors commented above, the ongoing incorporation of SRI considerations in our reserve management framework will also lead to further diversification.

It highly depends on how the world and economy are going to develop further.

Not change the level of diversification, but await better opportunities to invest. Nonetheless, diversification into sustainable assets may be considered by reserve managers.

On a high level our allocations are in line with our SAA, some diversification may happen in the form of extending duration but not any further divergence. 

Our asset allocation review occurs periodically, with the next one planned in late 2024. At that time, new asset classes may be considered for diversification benefits. All the same, there are regulatory and risk constraints with new asset classes that may hinder them as eligible investments.

Our investment horizon is long-term, thus, we do not expect to make any strategic allocation changes only due to high inflation and tighter monetary policy. However, we could do some tactical allocation changes which will depend on individual decisions of portfolio managers.

Remained the same; long-term SAA not affected by short-term developments. 

Rising inflation together with an accelerated monetary policy normalisation may lead to a slow pace of diversification in our portfolio (decrease the % allocated in MBS) as we have to take loss budgets into account for every repositioning of the portfolio. Also, we may increase our holdings in US Treasuries given the very attractive yields.

Since the institution is following mostly specific indexes and deviations are limited, we do not see a drastic change in diversification efforts over the next year.

[The central bank] engages in passive portfolio management with a conservative risk profile. As such, the level of diversification will not change over the next year.

Diversification of the current reserve portfolio has to remain in line with internal investment policies, guidelines and the SAA.

The correct choice would have been “keep the pace of diversification” as we have diversified geographically and by asset classes during the last 10–12 years, but we, at least at the moment, have plans to continue – at least, there is no decision yet to end the project.

The further diversification possibilities are bound by the central bank law.

The portfolio is already geared towards fixed income and properly balanced between government bonds and credit with minimal exposure to equities. While we do not expect a significant change in the asset allocation over the next year, we will focus more on duration within the respective asset classes.

This is due to increased uncertainty and volatility in the global financial markets.

This may occur as the strategy shifts to a more passive posture with investments in shorter-dated instruments.

We always seek to have a portfolio that is resilient in different scenarios, which is more easily achieved by maximising our diversification.

We are looking to broaden asset classes.

We are planning to further expand equity investment, but otherwise we have already achieved the appropriate currency and asset class composition of foreign reserves.

We believe that by diversification we will be able to hedge against rising interest rates. 

We believe that rising yields will not create a significant difference in our tendency to diversify reserve assets as the rise in yields seems to be valid for all markets we are investing or considering investing in.

We have increased our diversification in the reserve portfolio over the past years and we think that for now we have gotten closer to our long-run diversification target.

We plan to introduce commercial paper and certificate of deposit. 

We will not modify our long-term strategic asset allocation.

We have got good diversification, but I see us looking into newer sources.

With our unique pegging position, it is paramount we maintain our reserve levels and try to build on them before seeking to expand our investment activities. With this in mind, the concept of increased diversification is attractive, but not something feasible in the short term.

4. What percentage of your FX reserves is in equities? Has this changed in the past year?

All depends on the outcome of the SAA review that we undertake every three years.

As [the central bank] is a conservative investor with a mandate of safeguarding FX reserves (safety and capital preservation), return enhancement is of secondary importance meaning that the institution does not intend to invest in more volatile asset classes such as equity.

At this time, equities are not eligible assets in our foreign currency reserves.

Due to charter constraints.

Due to our strict conservative mandate, we are hesitant to expand the investable universe into equities.

Equities are a very small portion of [the central bank’s] portfolio.

Equities are not eligible assets for our FX reserves.

Equities have never been considered as an eligible asset class.

Generally, we do not actively invest in equities.

In the last 12 months, the share of our investments in equities has slightly increased (by 1pp).

Increased, but not because of adding more capital into equities, but rather because of a decrease in the size of reserves.

It is a model-based calculation, so higher yields create higher expected return for the portfolio, therefore a bigger buffer for absorbing possible losses, so the share of equities has increased lightly.

Most of our reserves are in domestic currency, where we can hold up to 2% in equities, but did not in the last three years.

Not investing in equities. 

Our assets consist of (1) deposits with central banks and other institutions of foreign countries and (2) securities issued by governments and other institutions of foreign countries with maturity not exceeding 5 years. We have not changed such principal terms and conditions for the management of foreign currency assets since 2012.

Our guidelines do not allow investment in equity.

Our investment policy precludes equities currently and no change is anticipated in the near future.

[The central bank] has a minor position in [a multinational bank based in the region], as a strategy from the government to promote exports from the country. The position has never changed since the first purchase occurred.

[The central bank] has never had equities in its FX reserves portfolio.

[The central bank] only invests in government-guaranteed US Treasuries with maturities that do not exceed 10 years and in fixed deposits.

The governing legislation and investment policy prohibit investments in equities.

We are in a currency board and a central bank, we are not allowed to invest in equities.

We are more constructive on fixed income than equities. Although we do believe equities have a role to play over the long term, tactically we prefer remaining underweight in equities due to earnings headwinds and margin pressures. 

We are not allowed by law to invest in equities.

We are not authorised to invest in equities.

We decided to get exposure towards equity markets in 2020, and since then we have gradually expanded it.

We do not invest in equities.

We review the SAA after 5 years (we are reviewing now). 

Are you considering any change in 2023–24?

At this time, no consideration is being given to equity investments.

Considering investing in ETFs in the following years. 

Due to charter constraints. 

Equities are not eligible by constitutional law. 

Equities are not on our investable horizon in the near future. We are primarily focused on US Treasuries, agencies, corporates; munis and supranationals.

It is allowed in our mandate already to invest in equities (<5%). However, we will probably start buying some equity index or even more likely some equity ETFs. 

Law restrictions.

New tranche to track climate benchmark.

No changes anticipated, but will be reviewed before the end of 2023.

No changes are anticipated.

Not considering.

Potentially, we will increase equity exposure again when the valuations appear more in line with fundamentals.

SAA time horizon is 2023–25. 

The board must approve equities as an eligible asset class before we could include them in the portfolio.

The central bank is analysing the possibility to sell the position in equity. However, current prices might not be at accepted levels to execute the transaction.

[The central bank] prefers to maintain its conservative risk profile.

The governing legislation and investment policy prohibit investments in equities. 

The price volatility of equities makes this asset class not well suited for our reserves, given the expressed risk tolerance.

This does not form part of our SAA. 

This is not projected to change in the future due to the size of our overall portfolio.

We are not considering investing in equities.

We are planning to further increase and diversify exposure towards equity markets.

We review the SAA after 5 years with a view to increase allocation to equities. 

What is the main goal you pursue investing in equities?

Benefit from diversification over the longer term.

Central bank does not wish to pursue investment in equities.

Currently we do not actively invest in equities. 

Diversify.

Equities have been part of our strategic asset allocation since 2015. We are currently underweight equities compared to the long-term neutral allocation for tactical reasons. We find fixed income is a more attractive space with decent carry. However, equities, being almost 25% cheaper, represent a good point of entry for long-term total return.

Despite the effect of correlations which indicates diversification as the reason, the return is the main driving point for investing in equities.

Equity as an asset class has a high risk premium which makes it a very good investment for the long run. It is very volatile, but it also functions as a good diversifier for FI in a portfolio with medium-/long-term horizons.

In the previous asset allocation reviews, equities were modelled to enhance the overall returns of the portfolio while diversifying risks.

Returns and diversifying portfolio.

Our goals of investing in equities are increased returns and to diversify portfolio risk. By 2025, we intend to incorporate some SRI practices in the management of our equity investments (passive investing in SRI equity ETFs).

The idea of investing in equities was to diversify risk and gain exposure to higher-yielding securities. This decision was taken around 2012 when interest rates were still very low in the US market.

We are under pressure to grow the reserves organically.

We decided to enter equity markets in order to diversify sources of financial risk and return. Despite considerable standalone volatility, equities can reduce overall portfolio risk. Over the long-term horizon, they should also enhance return on investment portfolio, supporting capital preservation.

We have a dual mandate to generate a positive excess return over the funding cost and to contribute to environmental and social value creation, through good governance while accepting a prudent risk level.

We hold equities for capital preservation (increase return and diversify risk).

5. Over the last three years, several events have impacted bond markets in the US, UK and eurozone. Do you expect bond market volatility and dislocation to be a key source of risk in 2023–24? What will be in your view the main risk? 

1 – US Federal Reserve quantitative tightening. 2 – Excessive policy tightening in the EU.

Due to various factors (sanctions by US authorities thereby freezing sovereign countries’ reserves assets, US’s problematic fiscal situation, global uncertainties), we anticipate both a decrease in demand and an increase of supply of Treasuries, which could lead to potential volatility in the level of yields in 2023.

In general the return to positive rates and the reduction of the excess liquidity changes the supply and demand function in the market. In addition, in a less globalised world the volatility of inflation will increase too.

Liquidity issues are something to keep monitoring, although the fact that the FIMA REPO was made permanent should ease some concerns.

Not having buyers for US securities and quantitative tightening will lead to lack of liquidity in the US Treasury markets.

Over recent years central banks have faced several market challenges during both the easing and tightening phases of monetary policy. Such experience should make them more aware of the potential impact of monetary policy on financial markets and better prepared for possible disturbances. Of course, this does not fully eliminate the risk of sudden, unforeseen fluctuations on the bond markets.

Risk remains in the public debt levels of eurozone countries.

The bond portfolio in the foreign currency reserves is mainly benchmarked against a short-term US Treasury bond index. As such, the US Federal Reserve monetary policies and overall liquidity in the market are major risks to the portfolio.

The lack of liquidity in the US Treasury market includes issues that could arise from QT and risks from the lack of international buyers, as is the case for Europe, ie, an excessive policy tightening in the eurozone can lead to fragmentation risk.

The main risk can be either too tight or too loose monetary policy by central banks. 

We do not expect any of the mentioned risks to be significant in 2023. 

We also believe geopolitics to be a risk factor. The Ukraine war and US-China competition have fuelled fragmentation and the emergence of geopolitical blocs. Furthermore, on [the] one hand, we see the risk that inflation could be persistently above pre-pandemic levels on top of geopolitical fragmentation. On the other hand, there is also the risk of central banks deliberately causing recession by over tightening policy rates.

We saw what happened in the UK re LDI – that could happen again, but in a global context. Lack of liquidity generally not just in the US could be an issue – maybe not with us, but more generally.

While the increase in rate hikes may be less than in 2022, the illiquidity in US bond markets is likely to become a key theme as the Fed continues to roll down its asset purchases leading to an increased supply-demand mismatch. In the eurozone, in spite of the anti-fragmentation tool being introduced by the ECB, it is possible that periphery debt markets in the EU will be stressed as ECB hikes rates higher, likely leading to a lower terminal rate than what is otherwise necessary.

6. Due to falling asset prices and FX interventions, some reserve portfolios have declined. Do you think your current reserves level is adequate? If no, do you intend to increase your reserves in 2023–24? 

As part of our recently announced [framework], we have indicated that we expect to increase the size of our foreign reserves to increase our ability to intervene in markets if necessary.

Based on traditional metrics, our reserves are considered adequate.

Central bank reserves are positioned USD billions above the adequate level, given the IMF ARA metric, which for the country’s characteristics represents almost 82% above the adequate level.

Current reserves level is adequate, especially in the light of eurozone entrance.

Due to the impact of the global shutdowns over the past two years, our reserve levels had to be sustained through external injections. This is not something we view as sustainable or beneficial in the long run. To mitigate this risk, the organic increase of our reserves is critical.

Fluctuation in portfolio value did not impact long-term objectives.

Our level of international reserves is well within the bounds of several measures of reserve adequacy.

Overall increase in reserves levels acts as a buffer to protect against any external shocks globally, given persistent uncertainties and global market volatilities.

Reserve level adequacy is induced by monetary policy.

[The central bank’s] foreign exchange reserves are considered to be at an adequate level.

[The country] has a fixed exchange rate regime which mandates that approved external assets should be no less than 40% of domestic demand liabilities. Over the last year that level exceeded 60%.

The intention is to increase the level of our reserves in 2023 by buying USD on the FX market, but this will be challenged by the currency depreciating.

The [central bank] does not have a specific target. However, when opportunities do present themselves, it will be considered on a case-by-case basis.

Under the free-floating FX regime, foreign reserves are held mainly for precautionary reasons – supporting sound macroeconomic and fiscal policy. Our foreign reserves are in line with major, commonly used adequacy measures, as well as with internally developed ones tailored to the specific structure and dynamics of the country’s balance of payments.

Using the IMF ARA metric and/or the number of weeks of balance of payments support, our reserves are more than adequate.

We actively participate in the domestic market to purchase FX so as to build the level of reserves, so that we can have some room for diversification. 

We are in the process of increasing international reserves to a suitable and more comfortable level.

We do not use the reserves portfolio for FX intervention purposes. I cannot say definitively here yes or no – I think there are more options available now than even as recently as 2021. That also brings more risks as we saw in 2022. 

We have 10 months of import cover. 

We intend to increase the level of our reserves as soon as possible. 

We intend to increase the level of reserves in the coming year.

We see strengthening foreign currency reserves as essential for effective monetary policy and financial stability. Thereby, one of our main priorities is to strengthen international reserves as long as the market conditions allow.

While asset prices have fallen in 2022, our foreign currency reserves increased as government’s revenues from the energy sector rose with relatively higher energy prices. Although our reserves are currently adequate with an import cover of eight months, strong demand for US dollars in the local economy continues to place pressure on the reserves balances.

7. In the current geopolitical and inflationary environment some central banks boosted their gold investments in 2022. Do you think the trend will continue in 2023?

A continued rise in geopolitical tension may support further allocation to gold.

According to the World Gold Council survey of central banks, continued geopolitical tensions make gold a favourable investment choice and official investors such as central banks and sovereign funds will ramp up their gold reserves meaning that the trend will continue in 2023.

An expectation of a slowdown in growth for the next year makes gold more attractive.

Apart from its normal trend, the gold demand by the central bank community may be a relevant factor insofar as the current geopolitical and inflationary risks keep shaping the global macroeconomic environment.

As a protection mechanism.

Central bank buying is not broad-based, but selective and will likely increase during 2023. 

Central banks increasing gold holdings to hedge portfolios. 

Due to its physical properties, resistance to credit and geopolitical risk, gold is treated as a strategic asset and protection in the event of a crisis of various origins. The current unstable geopolitical situation reinforces the importance of gold in the foreign reserves. However, the scale of further accumulation can be contained to some extent by the high gold price and deteriorating investment opportunities on the gold market.

Driven by continued interest in EM central banks.

Due to geopolitical tensions between the major economic powers, a new parallel global monetary system can emerge in which gold may play a more significant role in our view.

Due to the uncertainty about the evolution of economic activity and to the high level of inflation, the demand for secured assets, such as gold, may increase.

Falling inflation due to restrictive monetary policies worldwide will be the main reason for decreasing gold investments.

For reserve managers that are actively managing their gold reserves, market conditions in 2023 are expected to further support investments in gold. Two conditions that are worth [mentioning] are: (i) weaker US dollar amid continuing slowdown with the Fed tightening and consequently lower yield differential between US rates and other interest rates, which is positively correlated with gold prices; (ii) gold is subject to investors’ sentiment about risk and not only real and expected inflation rates – as investors move into more risky assets, increasing gold proportion in their portfolio could serve as a good hedge against extreme fluctuations of the US dollar.

Geopolitical tensions and the inflationary environment will remain key risks during 2023, which may benefit gold as a reserve asset.

Gold acts as a hedge to minimise risk in times of volatile asset price movements.

Have not followed [it] so closely, but to my knowledge [it has] been mostly emerging market countries’ central banks. If the geopolitical tensions remain high or even increase, I believe central banks, especially EM ones, might still boost their gold holdings.

I cannot answer that as I don’t know what other central banks may/may not do with gold.

If the current geopolitical and inflationary environment persists in 2023. 

If geopolitical issues increase, gold could see an uptake, but for now we think most gold investments have already been made.

In the current inflationary environment, the gold price is supported. On the other hand, in case the major central banks stop the tightening cycle as expected and the real yields fall consequently or the geopolitical tensions escalate, gold prices may rise further, increasing their attractiveness.

Last decade was quite impressive in delivering scenarios for moving away from “credit risk bearing assets”. GFC, downgrade of the US, downgrade of France, sovereign debt crisis in the eurozone, default of Greece, fragmentation in eurozone, Covid, Russia in Ukraine, China being questioned, Japan being out of radar, sudden increase of inflation, zero or negative coupons over a decade in the eurozone – all of them support the idea “Go away from that stuff”. 

Likely yes, particularly in EM countries as policy-makers may look to diversify reserve holdings away from USD.

Major central banks have been purchasing gold as a way of diversifying their foreign exchange holdings and reducing dependence on the US dollar.

Many central banks’ gold holdings are legacy assets and they should continue to remain stable.

Since inflation has been above target over the last year, gold is a hedge against inflation as it appreciates when currencies and investments depreciate.

Some central banks might be inclined to move away from USD following the unprecedented sanctions imposed on the Central Bank of Russia.

[The central bank] practically has no gold in reserves. Less than 1%.

The risks of a severe economic downturn due to interest rate hikes have waned compared to last year. This would benefit more risky assets than gold. However, any geopolitical tension flare-up and weakening of the US dollar as inflation falls is positive for gold. On balance, investment in gold is expected to remain stable and unchanged.

The tendency might continue because inflation is still considered high worldwide, and geopolitical risk has not decreased, rather than increased in the last couple of months.

They could increase due to the geopolitical tensions.

We are not investing in gold.

We believe gold investments will increase for some of the reasons listed above, mainly the US freezing sovereign countries dollar assets for political reasons (Afghanistan, Russia) and the US’s fiscal situation (higher debt repayments, lower budget receipts).

We believe that gold will continue to be an attractive diversifier going forward.

We believe that the current inflationary and geopolitical tensions are a positive for the central bank demand [for] gold. Recessionary risks would also boost demand for gold.

We ourselves have considered increasing our holdings in physical gold, but chose against it due to no significant financial benefit. I believe the banks that did increase their exposure are not going to increase further and those who chose not to, missed the opportunity.

What percentage of your FX reserves is in gold? Has this changed in the past year? 

2% in relation to the potential portfolio size if fully invested. 

Both due to increase in price and domestic supply.

Despite the increase in the amount of gold in FX reserves, the share of gold has declined because FX reserves have increased more.

Due to the increase of the total reserves with no change of gold.

Gold has a cost for storing and/or transporting, which, given the size of [the central bank’s] reserves portfolio, may offset any gains from returns it provides or may be outright unaffordable.

Gold is not actively managed and hence left out of scope. However, if we compare it to the size of our SAA portfolio it would be 370%. 

Gold is not one of the permissible asset classes. 

Gold’s share of allocation has increased because of relative price changes: prices of other asset classes decreased and gold increased in 2022.

Gold position has been unchanged over the last decade. It is viewed as a last-resource asset and it is currently not taken into account when setting a strategic asset allocation.

Higher percentage of reserves is due to increase in market value of gold.

No gold is purchased. Gold percentage of reserves has increased due to decrease in overall reserves level.

Not investing in gold, but considering it. 

Our gold holdings in tonnes are unchanged over the year and we are bound by law to hold a minimum amount. The FX reserves have increased over the year. 

Small increase in the last year or so, but from a very low base.

The central bank purchased 25,200 ounces more of gold in 2022.

The central bank has a passive policy towards its gold holdings.

The euro equivalent value of the [central bank’s] holdings of gold and gold receivables increased in 2022 owing to an increase in the market price of gold in euro terms, while the size of these holdings in fine ounces remained broadly unchanged.

The gold holdings remained unchanged in the past. The proportion of gold varies.

The [central bank] manages its gold reserves passively. 

The share of gold in FX reserves has decreased due to foreign currency accumulation and temporary gold depreciation, but the nominal gold resources are maintained.

We continue to hold gold as a legacy asset.

We currently are not considering investing in gold. 

We currently have no gold holdings. 

We decreased our gold allocation at the beginning of the last year resulting from our optimisation process. But we are planning to increment in 2023.

We did not trade gold in the past year.

We do not actively invest in gold. 

We do not hold gold. 

Are you considering any change in 2023–24? 

As mentioned previously, because of the cost associated with storing and/or transporting gold and the relative size of the external asset portfolio, it would not be a cost-effective solution.

At [this] time, no consideration is being given to increase our gold holdings.

Even though our gold reserves are passively managed, the size of gold reserves relative to other official reserve assets can increase or decrease during the year amid changes in gold market value.

Gold is a good diversifier for our portfolio, and, even though it has a large level of volatility, risk-adjusted expected returns remain attractive.

Liquid funds will mostly be reinvested in short-term Treasury securities due to the current level of yields.

No immediate change is expected in the short to medium term.

No, but a better question would simply be if you have/will transact in gold, so that percentage changes are not due to price fluctuations. Gold is not a liquid asset that you want to balance an allocation strategy with.

Not decided on it at this point.

Our allocation to gold is strategic in nature.

The [central bank] expects to maintain its current level of gold holdings, as measures in fine troy ounces, unchanged.

The [central bank] also holds gold as a strategic asset, which helps to diversify the risk profile of the overall foreign currency reserves. We strongly believe in the long-term store of value of gold and its properties as an inflation hedge. We also reckon the value that gold is likely to bring to our overall reserves as a tail risk hedge in this difficult time, marked by overshooting inflation and geopolitical conflicts.

The central bank will continue to purchase gold in 2023 and is expected to purchase gold in 2023.

The decisions regarding the gold resources will be driven by strategic considerations and market conditions.

The price volatility of gold makes it a challenge to include in our reserves given the expressed risk tolerance.

We are considering increasing gold holdings in the coming year.

We currently are not considering investing in gold.

We have been diversifying to more yielding asset classes.

We think our strategic asset allocation in this asset class is appropriate.

8. Have geopolitical tensions led to changes in your asset and/or currency allocation in 2022? If yes, could you briefly explain the nature of these changes?

Closed our Chinese government bond portfolio after Russia invaded Ukraine.

During the year we significantly downsized our exposure to the eurozone.

Indirectly. Tensions stemming from the conflict in Ukraine adversely impacted inflation, which in turn … contributed to further monetary tightening. We are currently redeploying liquidity towards shorter-term Treasuries.

Less currency exposure and shorter fixed income duration. 

More liquid and short-term duration investments.

We avoid investing in regions close to Russia (countries and institutions).

We have increased our investments in AAA assets and sovereign issuers.

We have reduced our currency risk exposure.

First, [the central bank] had to intervene considerably in the local FX market. Second, it changed its reserves currency composition.

Increased allocation to safe government assets. 

If no, do you plan to implement any related changes in the future?

Asset and currency allocation considers mainly fundamental factors and overall return/risk characteristics of the portfolio. Geopolitical risk affects the macroeconomic environment.

Based on our principals, the currency composition is adjusted so that it tracks the benchmark currency composition, which is calculated based on the market capitalizations of the government securities with maturity of 1-5 years. We have not changed it since 2012.

Buying more short-term bonds (T-bills). 

Considering currently mapped risks, no plans in changing currency allocation.

Decreasing investment in CNY. 

Diversified currency composition of our foreign reserves protects against FX risk as well as sovereign risk. Majority of reserves is invested in safe, highly liquid sovereign bonds.

I would say no for now, but cannot definitively say no well into the future.

In case geopolitical uncertainty persists, we expect an increase in gold holdings will help us cope better. 

Increase exposure to EUR, given the higher interest rates.

No changes are planned in terms of SAA, but the active management approach could change. For example, exposure to supras, agencies or banks for 2023 will depend on the geopolitical situation.

No changes were made to our reserves portfolio in light of geopolitical tensions, but the situation is continually monitored.

[The central bank] does not plan to change its asset allocation/currency allocation in 2023 materially. US dollar is the main reserve currency as monetary policy is implemented in USD and trade of the country is carried out in USD, EUR and GBP in the mentioned order. Hence, maintaining exposure to USD, EUR and GBP is reasonable. 

No immediate change is expected in the short to medium term resulting from geopolitical tensions.

Not at the moment, but of course we monitor the situation continuously and will act if necessary.

Of course, in the case of strong geopolitical tensions, it could influence our asset and/or currency allocation.

Our current currency allocation is determined in line with our main FX exposures, which have not changed significantly over the past years. 

Our international reserves are already invested in a range of very conservative instruments.

The current SAA was implemented in 2022, and the SAA is reviewed on a 3-year cycle. Capital market assumptions and prevailing risks will be assessed as necessary.

The effect of the most prominent geopolitical event in the last year, the Ukraine-Russia war, has caused energy prices to soar and help drive global inflation. The [central bank] will continue to monitor market outcomes and adjust its investments to mitigate against inflation and other market risks.

We always look into geopolitical situations to assess our SAA, but no change is planned for now.

We are reviewing and revising our SAA in response to the market conditions – geopolitical and otherwise.

We believe geopolitical risks are reflected into an inflationary environment. More than a play on geopolitical risks, we prefer managing duration risks as inflation has a bearing on rates.

We will make changes, but these are not driven by geopolitics. 

We do not expect to change our asset and currency allocation in the future. Our local currency is pegged to the US dollar. The [central bank] aims to maintain its currency risks low. Therefore, all fixed-income securities are solely denominated in USD.

9. Last year, the European Central Bank (ECB) abandoned negative interest rates. With yields in positive territory across the eurozone, have you changed your view on the euro as a reserve currency? 

After sitting on EUR cash most of 2022, we will invest more in fixed income. Maybe [we will have] slightly more currency exposure to EUR in 2023 than 2022. 

An increase in EUR holdings will likely take place in 2025 with the review of the SAA, should market conditions be favourable. 

As a euro area central bank, our balance sheet is in euros and we have not changed our view on it as a reserve currency. It is possible we will increase our share in 2023, but cannot say now.

Depends on the market situation and further development on the eurozone’s economy

Despite its low yield in the past, the euro has been one of the major reserve currencies, offering high liquidity, a broad and mature market of premium securities, developed payment infrastructure and relatively low volatility against our base currency. Thus, the change in market conditions has enhanced investment opportunities but has not had a significant impact on our attitude towards the euro.

Due to the fixed exchange rate regime between [the central bank] and the EUR, our FX reserves are mainly EUR-based. We aim to hedge all other currency exposure back to EUR. 80 pct. is placed in EUR before hedge.

EUR is more interesting, but yield differentials are more interesting than level of yields. 

EUR is our numeraire currency, so it is not considered within our FX reserves.

EUR is the main currency we invest in due to the currency board arrangement and the fact that euro is our peg currency.

Euro investments are expected for 2023, given the shift from negative to positive territory of the currency, while maintaining currency exposure in line with approved SAA.

Given the positive outlook on euro-USD rate, we believe that euros will bring diversification benefit to the reserves portfolio. 

If interest rates reach a high enough level where they are above our funding costs, we will consider reopening the EUR portfolio. However, as a eurozone central bank, EUR would not be a reserve currency for us. 

In our case, the share of euro-denominated investments in the reserves follows a number of strategic objectives. The yield level plays a limited role in the allocation process, but, everything else kept unchanged, being in positive territory makes the euro more attractive than otherwise.

Interest rates in the US continue to be more attractive than rates in Europe.

It is not attractive from a risk-return perspective.

It was increased from 25% to 30%. 

Our currency allocation in the reserves is determined by our currency benchmark, which includes only reserve currencies, and their weightings are set by long-term considerations, which also includes long-term return in local currency. This basket is expected to be relatively stable over the years. 

Our currency allocation is determined by the SAA, [which] is based on the asset-liability matching principle. [Therefore], the share of euro in our reserve portfolios depends on the currency structure of our FX liabilities and the course it will follow as well as the expected trajectory of Eurodollar parity.

Our view on the euro has not changed.

Since the central bank has started an agreement with the World Bank to improve reserve management capabilities, the agenda limited investments in currencies different to the numeraire USD to decrease currency risk exposure. The programme does contemplate investment in currencies different to USD – however, it is not planned to be implemented at least during 2023.

[The central bank’s] foreign investments are denominated in US dollars, which support the fixed exchange rate [with] the USD. There is very little currency risk exposure.

[The central bank] does not have sufficient external commitments in euros to justify investing parts of its reserves in that currency.

The [central bank] keeps its investments in USD-denominated assets in order to keep its foreign exchange risk as low as possible, and we are not considering a change in our investment policy. This decision is based on the existing fixed exchange rate [with] the USD.

The euro is our domestic currency – however, we invest a large portion of our reserves in euros.

The rates on other currencies are expected to remain higher than in the eurozone, and therefore there is no plan to increase euro investments in 2023.

The role of EUR for the trade and monetary policy of the country is not likely to change considerably in 2023, justifying the current portfolio proportion invested in this currency. 

The share of EUR is based on international trade flow – not based on the attractiveness of the euro as a currency.

We anticipate this will remain the same.

We are a euro area central bank.

We are evaluating to invest in assets in euros.

We are fully invested in euros.

We are on a currency board and pegged against the EUR. We are a EUR investor. 

We continue to monitor if the rates will stay positive and at good levels going forward.

We hedge all currency exposure to the US dollar, while investing globally in markets.

We liquidated our euro portfolio in the beginning of 2021 because of negative yields, but, as the yields are back in positive territory, we are considering starting investing in euro bonds again. It might not happen this year, though.

We maintain EUR for working balances and SDR basket matching. We view the current percentage as adequate in the current environment.

We plan to increase to 16%. 

We reduce the allocation to cash and increase the duration of the EUR portfolios substantially. 

While we find it is important to keep a portion of our portfolio in euros, we do not see any incentives to increase this allocation yet since yields remain more attractive in the US and our numeraire is the US dollar.

Will be reviewing later in 2023 as we analyse and decide on investment policy for 2024.

Yes, on a tactical basis.

What is the main hurdle for your institution to start investing in euro-denominated assets, or increase current allocations?

A combination of factors, including low exposure to Europe, being a country in the USD area of influence where the USD is extendedly accepted and the fact that the liquidity on government bonds [in] the eurozone is smaller than that [in the] US.

Although rates have become positive in Europe, there is still a rate differential. We believe the gap will narrow, but remain positive. 

As it was mentioned before, it is more of a capacity-building restriction, which will eventually be achieved. However, yields will be a key factor to take into account when analysing alternatives.

As our currency allocation is mostly based on the asset-liability matching principle, our FX liability structure may be the main hurdle in increasing current allocations.

Currently the yields are still relatively low and will likely decrease in the future. 

As [the] USD plays a key role in the monetary policy of the country and the highest proportion of trade occurs in USD, it is not reasonable to reduce it in the portfolio and expand investments into euros. 

Currency risk. 

Euro area central bank. 

Heterogeneous credit quality within the EMU countries.

High FX volatility. 

If interest rates reach a high enough level where they are above our funding costs, we will consider reopening the EUR portfolio. 

In addition to low yields, the main international currency (in terms of trade, investment flows, external debt, etc) is the US dollar.

Investments in the eurozone have been paused since the negative interest yields were introduced in the eurozone. After more than 7 years, [the central bank] relaunched [its] EUR investment portfolio in 2023.

It is less appealing for us to hold a high allocation of euro assets unless the yield on those assets [is] able to outperform yields in other currencies.

Low exposure to EUR and relatively low yields offered in the market.

Most investments in euros are in conflict with monetary policy operations of the ECB. 

Mostly eurozone monetary policy-related reasons holding us back at the moment.

Negative yields.

Not a major currency in our banking sector.

Other currencies/economies are more attractive in terms of risk-adjusted return.

Note that the [central bank] is already invested in EUR, albeit a smaller allocation than previous years. Eurozone yields were low without providing significant liquidity benefits in 2021/22, but this can change by the time the [central bank] reviews its SAA.

On the sovereign/supra/agency space, there is no major hurdle. However, moving to other asset classes, like corporates, liquidity and market depth may be an issue.

Other allowable investable currencies as per the investment policies and guidelines, such as the US dollar, continue to be more competitive for investments, as well as having the safe-haven status.

Our domestic currency is pegged to the US dollar, so it is difficult to allocate a significant proportion of FX reserves to the euro.

The [central bank] keeps its investments in USD-denominated assets in order to keep its foreign exchange risk as low as possible, and we are not considering a change in our investment policy. This is due to the fixed exchange rate with the USD.

The country does not have foreign debt obligations denominated in the euro.

The currency allocation is determined in terms of strategic plan, taking into account other currencies comprehensively.

The major risk is the exchange rate volatility. A portfolio mostly denominated in a currency other than the US dollar does not provide the stability the USD provides to [the central bank’s] foreign reserves.

The medium-term risk-return profile of this investment is not attractive enough. 

The period of negative rates did not help. Neither the investors nor the countries in trouble. Therefore the low rates helped to survive rather than to build up a robust economic and financial bloc. Basically a lost decade. And the role of the ECB, its mandate that, in some areas, goes behind the traditional central bank mandate, is still not fixed.

There are more interest rate hikes on the horizon for the ECB. Yields will be better soon, at least on the shorter end. 

There are no hurdles as such; however, the allocation is constrained by the diversification considerations.

We already invest in euro-denominated assets. Our strategy in this portfolio is passive, so as not to interfere with the Eurosystem’s monetary policy objectives.

We can get better yields with USD-denominated assets.

We consider euro-denominated assets from a US dollar hedge perspective.

We invest in euro-denominated assets mostly according to our currency benchmark. 

While interest rates in Europe have risen, they continue to trail rates in the US. As a result, increased allocations in euro-denominated investments are unlikely, but asset managers may seek tactical opportunities in the market.

Yields are improving, but still low.

10. What is the main hurdle for your institution to start investing in yen-denominated assets, or increase current allocations?

Low trade level with Japan and lower importance in our investment mandate. 

Poor liquidity in certain sectors of fixed income does not encourage active management. 

Currency board arrangement. Being pegged to EUR, we are prone to avoid investing into other currencies. 

Current risk framework. 

Currently we do not have JPY holdings. 

Exposure/investments into the yen will depend on the internal SAA exercise.

It is not attractive from a risk-return perspective.

Japanese yields are too low.

Low level of foreign reserves, no further diversification required. 

Japan has no interest rate. The exchange rate and stock exchange are under the power of the BoJ. Despite the QE used in other economies, interventions on all three interest rates, exchange rates and equities in Japan became the normal.

Negative rates are a major stumbling block for us venturing in the yen. 

No intent at the moment to increase current JPY allocation. 

Not a major currency in our currency. 

Not in our strategic asset allocation.

Not investing in yen. 

Operational issues.

Our counterparty and credit rating constraints limit how much we can invest in these assets.

Our domestic currency is pegged to the US dollar, so it is difficult to allocate a significant proportion of FX reserves to the yen.

Persistently low yields and fragmented bond market discourage from investing in JPY.

Rising debt levels and declining credit quality.

Small share of the yen in the currency structure of external debt, which we try to replicate with the structure of foreign exchange reserves. 

[The central bank] does not have sufficient external commitments in yen to justify investing parts of its reserves in that currency.

The [central bank] keeps its investments in USD-denominated assets in order to keep its foreign exchange risk as low as possible and we are not considering a change in our investment policy. This is due to the fixed exchange rate [with] the USD.

The currency allocation is determined in terms of strategic plan, taking into account other currencies comprehensively.

The currency hedged JPY yield is high. The risk of yield curve control being abandoned or higher rates is a major risk to the portfolios. Yen is more risky than it was in the past decade and we factor this into our considerations.

The Japanese economy experiences a low-growth prospect and yen is at a two-decade low, meaning that it is not attractive [for the central bank] to expand into yen-denominated assets

The main reasons are low yields and credit rating.

The major risk is the exchange rate volatility. A portfolio mostly denominated in a currency other than the USD does not provide the stability the USD provides to foreign reserves.

There is no hurdle as such. The currency allocation mainly reflects an assessment made by decision-making bodies, informed by assumed intervention needs. Its risk-return characteristics are reviewed on an annual basis to provide information to decision-makers regarding their choice.

We are on a currency board and pegged against the EUR. We are not allowed by law to bear any currency risk. We are a EUR investor. 

We consider our global allocations from a US dollar hedged perspective.

We have a country risk limit for Japan. 

We invest mostly according to our currency benchmark. 

We invest only fully hedged in short-dated JPY instruments. BOJ policy I would imagine would preclude us from seriously looking at JPY as a reserve currency.

We are considering it from a TAA perspective. 

Will not invest according to our investment guidelines and risk. 

With a more accommodative monetary policy in Japan, interest rates are relatively low compared to rates in the US and Europe. As a result, increased allocations in yen-denominated investments are unlikely, but asset managers may seek tactical opportunities in the market.

With rates almost peaking in the US, the outlook for yen could be positive versus the dollar (with the dollar having already strengthened significantly against [the] yen). However, given the yield differential, we do not have an appetite yet for yen. 

Yen/Japan has not been really on our radar.

11. What is the main hurdle for your institution to start investing in sterling-denominated assets, or increase current allocations?

Weak growth prospects and a political environment which seems not trustworthy. Furthermore, lower importance in our investment mandate.

As USD plays a key role in the monetary policy of the country and the highest proportion of trade occurs in USD, it is not reasonable to reduce it in the portfolio and expand investments into GBP. 

As we apply asset-liability matching principle in our SAA, our FX liability structure may be the main hurdle in increasing the share of GBP in our FX reserves.

Brexit is believed to be a nightmare!

Brexit still not fully resolved.

Currency board arrangement. Being pegged to EUR, we are prone to avoid investing into other currencies. 

Do not have sufficient external commitments in GBP to justify investing parts of reserves in that currency.

High uncertainty due to Brexit. 

In addition to the low level of trade being carried in GBP, the volatility on GBP/USD also remains quite elevated. 

It is not attractive from a risk/return perspective.

Long-term SAA not affected by short-term developments. 

Low appetite for currency diversification.

No constraints, the GBP allocation remains unchanged. The volatility has decreased attractiveness.

No intent at the moment to increase current GBP allocation.

Not investing in sterling. 

Operational issues.

Our domestic currency is pegged to the US Dollar as it is [so] difficult to allocate a significant proportion of FX reserves to sterling. 

Political instability. 

Similar to EUR – although reduced allocation currently – remain invested in GBP. 

Small share of the sterling in the currency structure of external debt, which we try to replicate with the structure of foreign exchange reserves.

Sterling market exposure is hedged to the US dollar.

The [central bank] keeps its investments in USD-denominated assets in order to keep its foreign exchange risk as low as possible and we are not considering a change in our investment policy. This is due to the fixed exchange rate [with] the USD.

The currency allocation is determined in terms of [a] strategic plan, taking into account other currencies comprehensively.

The currency has been relatively less competitive over the past year.

The increase in market volatility that we saw in 2022 puts in question the risk-return profile of the sterling-denominated instruments.

The major risk is the exchange rate volatility. A portfolio mostly denominated in a currency other than the USD does not provide the stability the USD provides to foreign reserves.

The share of GBP was decreased from 6% to 3%.

There are no hurdles as such; however, the allocation is constrained by diversification considerations.

We are on a currency board and pegged against the EUR, we are not allowed to bear any currency risk. We are a EUR investor. 

We are investing on gilts, but all the currency risk is hedged back to our currency (EUR).

We consider the recent fiscal challenges and unexpected political changes as rather incidental, but the lasting consequences of Brexit may weaken medium-term economic growth and the United Kingdom’s role in the global economy.

We divested our strategic position in the pound before the Brexit vote and have remained out of this market, since it shows a higher volatility than other currencies and lack of diversification benefits. We only invest through short-term tactical positions.

We don’t see any change in the status of the gilt market as a reserve currency.

We do not invest and have not for a long time – may look at it in the future, but would probably need more certainty and a more responsible political environment.

We may increase the weight of sterling-denominated assets in our FX reserve portfolio.

We previously reduced GBP holdings due to low yields.

We view the UK as a less attractive reserves destination and have low exposure to GBP in trade flows. 

We will not modify our long-term strategic asset allocation (2023–2026). 

With high levels of interest rate in the US compared to the UK, investments in sterling-denominated assets are likely to remain stable.

12. Which of the following best describes your attitude to investments and products in the onshore renminbi market? 

All exposures are via the ETFs or externally managed accounts. Share of the portfolio is very small 0.1%. 

China has potential. China made very nice progress in internationalisation of the financial market. However, its unclear attitude towards the conflict in Ukraine somehow decreased the attractiveness.

Central bank law, policies and procedures along with risk appetite do not support investment in this currency.

Currently invested in CNY. Our view on China still remains the same, that it is an attractive market to invest in and serves as a good yield diversifier to our investments.

Currently the main focus is government and policy bank bonds. 

Decrease in yield compared to the year before. 

Exposure to (safe) renminbi-denominated assets could provide diversification and attractive yield opportunities, but at the moment the lack of available funds mostly makes it a theoretical discussion at [the central bank]. 

In late 2021, onshore renminbi was approved as an eligible currency in the reserves. However, there have been challenges with hedging potential Chinese short-term debt investments to US dollars.

In recent years, as access to the onshore bond market became operationally easier, it was possible to develop internal capabilities to invest in sovereigns and policy banks.

No intention to invest in renminbi in the near term. 

No intentions for investing so far.

No investment currently. 

Only exposure in renminbi is via our SDR holdings with the IMF. 

Our CNY portfolio is invested in medium-term deposits with BIS. 

Renminbi currently forms a small part of our existing SAA – in future reviews it may be something we consider increasing our holdings in. 

Renminbi market presented a volatile nature in 2022 compared to previous years of positive outlook for the currency against major peers. Nonetheless, investments in renminbi were maintained for diversification purposes.

Strategic investment, no plans to increase/decrease.

The [central bank] keeps its investments in USD-denominated assets in order to keep its foreign exchange risk as low as possible, and we are not considering a change in our investment policy. This is due to the fixed exchange rate [with] the USD.

We are currently working on our own capabilities for investing in Chinese government bonds to expand our opportunities in this asset without having to go through an external manager.

We are invested in the offshore (CNH) market. No exposure to onshore CNY at the moment. 

We commenced investment in the RMB in 2018. The allocation has not been increased. We are still in wait-and-see mode.

We have been in government bonds for a few years now and do not see any great change in the near future.

We recently started investing in policy banks.

We reconsider our investment in the light of lower interest rates, strong correlation to USD and reduced growth prospects, as well as slow progress on the increase in market liquidity. 

13. In 2022, the IMF increased the weight of the renminbi in the SDR basket to 12.28%. What percentage of global reserves do you think will be invested in the renminbi by end-2023, 2025 and 2030?

All depends on geopolitics and what role China has in the global indices. Consider the allocation from an SAA perspective.

As China takes on a larger share of global GDP, the Chinese renminbi will increase commensurately.

At the moment, we do not have any intention to invest in the renminbi.

Considering that the Chinese economy is still in recovery from zero-Covid lockdowns, it cannot be expected that the role of China will considerably change in the world economy, meaning that the current weight assigned by the IMF will remain intact in 2023. However, post-Covid expansion will enable China to tap into unutilised capacity of the economy, and it can be expected that the role of the Chinese economy will further rise globally. Nevertheless, there are limits to growth for China, as has been estimated by experts, which is likely to come from the declining productivity of capital-intensive growth, as the economy will reach its full capacity and enter a more mature phase. 

Don’t see this changing greatly from current level for some time. Geopolitical risk is the main issue here – if it were to worsen, I think the % will fall from here.

Due to the current yield differential on onshore CGBs and USTs, there has been a massive outflow for CNY assets. However, CNY is expected to gain its attractiveness eventually as long-term growth dynamics play out and as policy rates normalise.

Expect the weight of renminbi assets to steadily increase, but it really depends on the liquidity of the currency, the diversification benefit, operational difficulty and the availability of its assets.

Geopolitical tensions may easily deteriorate, which could lead to hectic changes in renminbi allocation in the upcoming years.

Given China’s strong trading relationships, renminbi could increase. However, increased geopolitical tensions may temper this trend as some entities may seek countries with less political risk to source their goods and services as well as make investments.

I expect investments in China to gradually increase. 

Increased geopolitical tensions and deteriorated prospects of the Chinese economy could dampen the trend of diversification into renminbi.

Renminbi is a good diversifier against traditional reserve currencies, so it makes sense that allocations to renminbi increase.

We expect that RMB proportion in global reserves will increase in the coming years.

The [central bank] keeps its investments in USD-denominated assets in order to keep its foreign exchange risk as low as possible, and we are not considering a change in our investment policy. This is due to the fixed exchange rate between the USD. Therefore, we don’t keep track of the renminbi.

We expect the pace of CNY to decrease as the world becomes more polarised.

We expect the share of the renminbi in global reserves to increase, but whether the increase is slow or rapid depends on what happens with and in China. It is still relatively closed to foreign capital, and there are great uncertainties about political developments, both internally in China, but even more on a geopolitical scale, especially the Taiwan question and attitude towards Russia invading Ukraine, so difficult to give you any numbers about the share of global reserves.

We see a gradual increase. 

The weight of the renminbi in global reserves has been increasing like a linear trend. As the Chinese economy continues to grow and influence global markets, it is conceivable that central banks will also gradually adapt their allocations to reflect the importance of the most relevant economies.

15. With losses sustained by many reserve portfolios in 2022, have you introduced modifications to the way to report your annual results? If yes, what have you implemented and why?

For some of the securities to be held until maturity, the central bank has changed their accounting classification to the “Hold to Collect” model of IFRS 9.

The central bank has not changed the way it presents its financial statements. However, additional information regarding FX reserves returns have changed from showing monthly returns to interannual returns, to reflect returns according to the investment horizon of the shortest-duration portfolio and decrease short-term volatility in returns observed on a monthly basis.

That is something we are exploring. We would like to understand how other central banks have modified it, particularly those who are following IFRS standards.

[The central bank] measures the performance of its portfolios both against relevant benchmarks selected and on an absolute return basis. 

We have to find a better way to explain unrealised losses… with the emphasis on UNREALISED! The recipients are challenged to appreciate this despite the global impact on fixed income securities in 2022. 

We already changed risk tolerance ranges in 2021. What happened is a rare event and clearly explained is understandable.

If no, do you plan to introduce modifications on how you communicate your results in the near future?

Already for several years we used to publish in our annual report information about the central bank’s mandate and explanations regarding [the] impact of market conditions and actions taken by the central bank in order to perform statutory responsibilities on the financial statements (balance sheet and financial results).

Apart from slight improvements (made every year), the communication regarding results is quite transparent and on a frequent basis. Organised data about reserves is released monthly to the public, and a yearly report details all the main drivers and numbers of the previous year’s management.

At this point in time, reporting of annual results does not warrant any change.

Extra care is being taken when explaining the results. We are explaining to the public how a central bank result is calculated in broad terms, and what affects it.

Focused on safety of reserves, rather than return generation, and as long as there is no risk to the reserve portfolio falling short of a threshold for safety, there is no pressure on FX reserves management to generate absolute level positive return. Instead, beating benchmarks for the period is considered adequate. 

I do not think that the public would [take it] positively. The risk is that seeing any change as a consequence of poor results would be considered as an attempt to hide something. And on top of it, our bank is producing losses every year.

Implementing IFRS methodology. However, this move is not related to the reserves portfolio. It is an institutional change that has been in the works for many years.

The [central bank] follows IFRS 9, which in the main is guided by the business model application test. As long as the business model does not change, the accounting and hence the reporting will not change. Also, the [central bank] is not planning on changing the way it reports annual results or how it communicates results in the near future. However, in order to address specific questions raised by the [central bank’s] executives, changes are made to HOW certain information is presented without necessarily changing the nature/type or structure of the reports.

It would be interesting to see what other central banks are doing in this regard.

No plans to make any modifications for now.

Perhaps a more detailed explanation of the reasons for the adverse results, if this is the case.

The central bank does not have any specific details at the moment, but we always strive to improve our reports.

The investment results are presented in accordance with the relevant legal stipulations.

We haven’t changed nor plan to change anything about our reporting.

We intend to increase the frequency with which we engage stakeholders on the performance of the FX reserves.

We will continue to be transparent and will continue to highlight the issues on profitability that all central banks are facing due to unprecedented actions that had to be taken.

We will maintain our reporting format. 

While reporting requirements have remained the same, even though losses were generated in the reserve portfolio, discussions on mark-to-market losses and yields have been and are expected to be more prominent.

16. Due to the pandemic, Russia’s invasion of Ukraine, higher inflation and market volatility, over the last three years, risk management frameworks have been severely tested. Do you think, in general, risk management of reserves has been effective? If no, what do you think needs to be improved? 

Better forecast models that include more factors such as geopolitical risks and their effects on markets.

Decision-making may need to occur at a faster pace.

More realistic estimate of the risk budget taking into account high correlations. 

Not everything can be predicted and be known. We always have the possibility the tail risk will realise. 

On the one hand, yes, because the market development was unusual. On the other hand, it seems to me that recent events like Covid, inflation and invasion underlined, or highlighted, the fact that risk management in central banks is passive, static and not capable of reacting proactively. It looks like the risk management produced something called diversification and used it as a cure against any disease.

Risk management comprises all the necessary resources and techniques used to provide the best information to the decision-maker. In that sense, risk management frameworks seem to have worked during the past years. However, risk theory also considers the existence of tail events and massive negative returns situations (however, with low probability). Events like those experienced recently call for improvements in tools available for risk management, like enhanced risk mapping between the decision-makers’ appetite and their long-term objectives, and also further understanding on integration of all sources of risks any central bank may face.

Risk management has been effective in the sense that (unrealised) losses were reflective of what the risk indicators were suggesting (duration).

The risk management framework was not designed to account for the huge volatility seen in 2022. Even the scenario (stress) analysis did not capture the interest rate risk exposure effectively. Having in mind that the risk models have a certain confidence level, however, the market risk in 2022 can be referred to as tail risk. This means that the risk framework does not necessarily have to be fully revised, but the impact on yields and prices in 2022 can be a scenario included in further scenario analysis.

Do you plan to modify your risk management framework in 2023–24?

Our asset allocation review occurs periodically and as part of the review process, the risk management framework is evaluated and it may change. Moreover, changes in the financial market may cause us to revise our risk management framework. 

According to the new SAA, we plan to split middle-office function and investment strategy [into] two separate units.

Current method of risk management does not warrant any change to be applied to the current framework.

Further formalise and refine risk appetite and framework. 

Implement risk management framework and provide training for portfolio managers.

It is in a continuous process of changing. Especially during the annual SAA.

Measurement of the credit VAR.

No changes are planned, but we will carefully monitor and adapt to the circumstances in the financial markets.

Our risk management framework is periodically reviewed.

Our risk management framework is sound and restrictive enough to prevent large realised losses such as in the current environment. The controls on operational processes are strong while the return on foreign reserves is optimised and sufficient to cover RBF needs.

Risk management systems will be even more applicable in years to come.

SAA, IPS, IG being revised in the first half.

Studying how to integrate ESG risk/climate change risk.

The [central bank] will keep its risk management towards credit, market, and liquidity risk unchanged.

The development of the financial risk management framework is a continuous process, driven by the evolution of the investment spectrum, market developments, previous experience, best practices and new technical solutions. But as our risk management system has proven to be really effective, we do not have to make immediate adjustments in response to current market conditions.

The relaxation of a few parameters in the existing risk management framework is being contemplated in view of heightened market volatility that is expected to persist over the next few quarters.

The risk framework was already modified to include the expected return in the VAR model, as it is now material for the EUR investments.

The [central bank] constantly reviews its risk framework and modifies it, in response to market changes.

To reflect adverse scenarios and their impact on the portfolio.

We are carrying out improvements, but not changes in the framework.

We are trying to rethink our credit risk framework, mainly in aspects of risks from single issuers, and also trying to better calibrate our investment rules to be more consistent with each other. 

We don’t plan to make any major modifications to the risk management framework in the coming year.

We have no approved plans as yet, but are deliberating some measures to improve the decision-making process.

We introduced very recently an internal model of evaluating credit risk limits with our counterparties.

We plan to add more advanced tools of risk management to our current inventory, such as the application of Monte Carlo simulation, to obtain a more comprehensive picture of potential distribution of future returns, so that we are better equipped to deal with severe losses. Additionally, we are modifying our portfolio management and reporting system, which will also enhance the capabilities to manage risks.

We plan to introduce some new risk measures and variants of current measures.

17. Does your central bank incorporate an element of socially responsible investing (SRI) into reserve management? 

Besides our dedicated green portfolio, green, social and sustainable bonds are eligible in our other portfolios as well, and we do invest in all of them. Greenium seems to have almost vanished in our universe recently.

Considering the application of a best-in-class strategy.

Currently, investments in green, social and sustainable bonds represent 7% of our FX portfolio.

FX portfolios are ESG-compliant up to the maximum. EUR portfolios are generally invested in issuers with low-carbon intensity. 

In FX reserves we have some bonds labelled as ESG (around 7%), but there is no formal framework or strategy.

Incorporation of SRI/ESG integration is progressing on an iterative basis. The central bank has issued a sustainable investment charter and is focusing on exclusion policies, impact investing and ESG integration as its core strategies.

Lack of sovereign fixed-income and agencies securities with short-duration mainly in USD. 

N/A. We do not implement ESG yet, but we are seriously considering doing so in the near future.

No exact % estimate is currently available.

No specific SRI investment portfolio.

Only applicable to investments in corporate bonds.

SRI is one decision variable in all our investment decisions and manager/fund selection processes.

The funds allocated to SRI are done as a separate portfolio within the overall reserves.

Our investment in green bonds has been gradually growing since 2018. Currently they account for around 1% of our foreign reserves, and the exposure is to be increased further in line with the green bonds strategy adopted by the board in 2021. Besides, it should be emphasised that the dominant share of government securities and the stringent criteria for selecting corporate issuers make investments in foreign exchange reserves compliant with the SRI criteria.

The negative screening is applied to the entire foreign exchange reserves. ESG integration only in small standalone portfolio mandates.

The [central bank] would consider investment in green and other socially responsible instruments as and when the opportunity arises and within the allowed parameters. At the moment, the [central bank] has invested around 0.2% of its portfolio in social bonds.

This percentage includes green bonds and social and sustainability bonds.

This should be done this year. 

We are building a thematic (green bond) multi-currency portfolio.

We do not implement ESG, but are considering it. 

We have a dual mandate to generate a positive excess return over the funding cost and to contribute to environmental and social value creation, through good governance while accepting a prudent risk level.

We have allocated a portion of the reserves to an external manager that implements an ESG framework. This investment represents around 3% of the reserves as at the end of December [2022].

We have introduced ESG principles in all equity mandates which are managed externally. 

We have not implemented any change to our mandate because of SRI, ESG, etc.

We look at the carbon footprint of the whole FX reserves, but we might only do small changes in one asset/region to lower the CO2 of the whole portfolio. 

We’re looking into taxonomy and recommendations of relevant institutions as well as reliability of available data.

We don’t have any SRI implemented at the moment. But considering [introducing] some ESG principles in the near future. Currently, we do buy ESG bonds as ordinary bonds in our portfolio.

We are incorporating two SRI strategies for our fixed-income investments. Firstly, investments in thematic bonds (eg, green, social and sustainable bonds). Secondly, incorporation of the exclusion list for our investments in non-financial corporate bonds, based on environmental and social factors.”

Which in your view are the most significant obstacles to incorporating SRI into reserve management?

At the moment, investments for SRI generally underperform comparable traditional assets. However, the long-term benefits of SRI to the society as a whole are expected to be immeasurable. There have also been challenges with developing and adopting a widely accepted industry standard to easily identify ESG investments.

Lack of SRI product supply (bonds, equity ETFs, etc.) is the main obstacle.

Not well-established global best-practice, vague definitions and questionable connection between investment and real positive impact.

We have full support from the board on our dual mandate. 

18. Which best describes your attitude to the following asset classes? (Please check one box per asset class.)

All depends on board risk tolerance, objectives and outcome of SAA.

Although the [central bank] does not have a dedicated green bond mandate as yet, our current investment guidelines do allow for green bonds as long as these securities meet the current requirements.

Around 40% of the portfolio is externally managed. Only the fixed income (govs and SSAs) are internally managed. Gold is also internally managed.

Currently we invest only in financials in the corporate bonds asset class.

EM = China only.

Our risk appetite is more conservative. 

The answers reflect what is allowed for investment, but does not mean there is an actual position at the moment in all the asset classes that are marked “investing now”.

The position in equity is minimal, around 0.1% of FX reserves.

The reserves portfolio has a low-to-moderate-risk profile. As a result, investments comprise mostly high-credit-quality government bonds, supranationals, US agency bonds and ABS/MBS.

We are reviewing the SAA with a view to include infrastructure bonds

We can invest in green bonds or social and sustainability bonds – although we have not written/changed anything in our investment mandate. If it is in line with our liquidity/rating/risk/yield thoughts – then we can buy it.

We hold real estate investments in our pension fund. 

19. If investing in ETFs, please comment, especially on reasons for using ETFs. 

Adjusting portfolio with a low transaction cost and high liquidity. 

By 2025, we intend to invest in ESG-linked equity ETFs.

By investing in ETFs we could gain broad market exposure in different asset classes.

Diversification, liquidity and return enhancement.

Ease and [cost-effectiveness] and no security selection. 

ETFs come as a possible convenient instrument for a central bank to get access to asset classes whose complexity/operational cost/specificities the institution is not ready to deal with directly.

ETFs offer diversified exposure towards more complex and operationally demanding asset classes such as equities. Accounted as a single instrument, they reduce several operational challenges related to trading, settlement, taxation, corporate actions, accounting, reporting. They can be more liquid than underlying assets. The dynamic developing ETF market allows for quite flexible investment policy.

ETFs provide an attractive alternative to boost liquidity in the portfolios.

External managers that have equity mandates are allowed to invest in certain ETFs.

For portfolio diversification, and tactical exposure to over- or underweighting certain regions, countries, sectors on the basis of short-term views. It also provides accessibility and cost-efficiency in terms of taxation, as compared to direct equity investing.

Impossible to implement our SRI ambitions via ETFs.

Liquidity is one of the biggest concerns for us. ETFs are not very liquid.

Liquidity, “speed” of investment, relatively simple instrument to invest in, but could be expensive.

Low cost with wide risk spread.

Passively managed exposure against the benchmark, no corporate actions required.

The use of ETFs was a more suitable approach for the internal asset manager to gain exposure to a particular asset class.

We are assessing the use of ETFs as a way to introduce flexibility in our ESG portfolio management. 

We have used ETFs to obtain access to assets that require a higher level of knowledge or technology than what we have. We have also considered ETFs to get exposure to ESG-linked assets.

We use ETFs mainly to gain equities and MBS positions. It is a really easy and straightforward, operationally very efficient and relatively cheap way to gain exposure.

20. What proportion of your reserves is managed by external managers?

The central bank’s externally managed portfolio is currently managed by the World Bank, which is, at the same time, linked to a capacity-building programme.

Around 40% of the portfolio is externally managed. Only the fixed income (govs and SSAs) are internally managed. Gold is also internally managed. 

Currently we only have a small proportion under external managers.

Due to the level of reserves, it is not cost effective to hire external managers.

Less than 10% of our reserves are externally managed.

Provides good risk/return diversification benefits.

Referring to external mandates, would go up to 24% if investment in active funds/ETFs are included. 

Some portions of our reserves, in particular the bond portfolios, would continue to be managed externally for the foreseeable future.

The external managers share the same mandate as the internal portfolio, so they serve as an active benchmark.

We had an external management programme in place for around 18 years (from 2000–2018), but closed it as was operationally rather demanding (also for our back office) and created little to no (additional) value in the end.

We have internal capabilities to actively manage major asset classes. Passive exposure towards more complex and operationally demanding asset classes can be easily achieved with ETFs without the necessity to negotiate an agreement and grant powers of attorney. We could consider co-operation with external asset managers only if we decided to run an active investment policy on such markets.

We try to manage our assets internally where possible and if the expertise is available.

We view using external managers as important for diversification and also capacity building.

Where, over the next two to three years, do you see potential for the use of external managers in your central bank?

Another use for external managers is technology and information transfer.

In case of, for example, needing to enter liquid and deep markets the reserve manager does not have the capability to (for diversification purposes), external mandates seem to be useful.

Many central banks will continue to use external asset managers as they may have a competitive advantage in some areas of investing.

Risk-free assets are managed in-house and risky assets are managed externally, regardless of the style. 

The idea for the next couple of years is to increase the number of external managers and explore new asset classes and markets, as well as improving our factor-based investments.

We do not plan to add another asset manager in the immediate future.

We will not be using external managers in the next 2–3 years.