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 2024?

All are very significant, but we have ranked them with regard to their impact on our portfolios.

Escalation of geopolitical tension could stimulate risk-off flows and broadly impact financial markets. Election results are an element of this geopolitical puzzle. Risk of recession or volatile inflation should be already priced in to a large extent.

From the perspective of our portfolios, all holdings are in government debt focused on short- to medium-[term] maturities. The risk from a returns perspective is focused on duration risks from volatility in rates.

Generally, the scenarios have a direct or indirect impact on countries’ reserves. The level of impact may differ case by case.

Geopolitical escalation cannot be built into models yet, and they can have devastating consequences, like oil supply shocks, which can be inflationary.

Geopolitical escalation, in particular over Taiwan, could significantly impact global growth trajectories and supply chains.

Geopolitical risks remain the major risk to global growth. It could lead to an escalation in oil prices and consequent inflation.

Having a fixed income-centric portfolio (with the lion’s share being in US Treasury bonds), we are very much affected by the impact of Fed actions on US rates (US Treasury yields) which explains our concerns with respect to policy errors and impact of potential corrections thereafter. Also, inflation data remain the main drivers of Fed action.

Our main worry is spread widening in the case of an economic slowdown.

Markets expect US Fed rate cuts soon, but the central bank has indicated that it will probably loosen monetary policy in 2024, but more slowly than investors are betting.

Monetary policy decisions and expectations seem to be one of the most important themes for reserve managers in 2024 through their effects on yields of money and bond markets. Thereby we put the Fed and ECB’s [European Central Bank] monetary policy actions to the forefront. A policy error in this area and a resulting inflationary shock or a recession may rapidly change the setting for reserve managers. Volatile inflation resulting from increasing uncertainty on monetary policy decisions can be an important risk factor for reserve managers. Geopolitical escalation and a resulting or an independent energy shock can also affect the positions of reserve managers through their effects on inflation and risk appetite. Although recession is an important risk factor, as the expectations and the statements by the central bank officers are mostly on the side of rate cuts and investment positions are built accordingly, we put the recession to the 5th rank. Election shocks can be a risk factor, especially for USD portfolios, but based on the fact that Fed governor [Jerome] Powell’s term will end in 2026, we do not expect a significant change in [the] Fed’s stand in 2024, which makes us put it last. Saying that, an election shock may increase the geopolitical tensions and affect the value of USD. [Therefore,] we see all these factors as important risk factors for reserve managers.

Recession had been predicted since the Russo-Ukraine war began in February 2022. However, inflation remained high, yet the labour market has been robust and a recession did not happen as predicted.

Regional conflicts or a major power struggle could significantly disrupt energy supplies and trade, further destabilising markets. Additionally, the global economy has demonstrated surprising resilience amid monetary policy tightening. This is on account of stronger-than-anticipated consumer spending and robust labour markets. Despite a moderation in inflation in major economies, it remains elevated. Consequently, central banks may maintain a tight monetary policy stance, posing recession risks.

Some risks look just temporary. When asset prices drop, it is not pleasant, but not a tragedy. But geopolitical risk is about use of reserves, restructuring of reserves or even about losing them. And solving geopolitical risk is not in the hands of a central bank – if the government, for instance, supports some policies, then [the central bank] could hardly go against it (without breaking the independence).

The current consensus of a soft landing is in danger from several sides. Geopolitical risk is difficult to incorporate in those scenarios but might have the biggest impact.

The Israel-Hamas war, with the resulting attacks by the Houthi rebels on vessels passing through the Red Sea, can affect the global economic landscape and impact reserves. The US presidential election is also coming up in 2024 – this may likely have implications for US economic policies especially with the possibility of the [return] of Trump.

These are all significant risks.

Volatile inflation and its impact on the Fed rate path is a major concern with impact on the capital-preservation objective.

Volatile inflation is often a top concern due to its broad economic implications, and energy shocks can have far-reaching consequences as well by amplifying inflationary pressures. Central banks closely monitor inflation and energy shocks as they both affect the path of monetary policy decisions (they can trigger adjustments to interest rates and other monetary tools to curb rising prices). In the current markets, geopolitical escalation can indirectly influence monetary policy decisions through its impact on inflation.

Volatile inflation readings could cause central banks to be more cautious about cutting reference rates, while an energy shock could impact prices and have this same effect. On the other hand, a sudden or deeper recession than expected could cause central banks to cut rates faster.

Volatility and uncertainty surrounding geopolitics have taken shape as the main risk of this year, with perspectives of severe market stress in case it materialises at more profound levels. The summation of military outbreaks that still have room to escalate (Russia-Ukraine, Israel-Hamas war escalating into a regional conflict, prolonged pressure in the Red Sea region, China-Taiwan tensions, etc), alongside many election events of critical importance (about half of the world’s population has election events this year) can potentially drive most of the evolutions on the financial markets this year, either directly (through instant impact on risk-on/risk-off assets) or indirectly. Indirectly, geopolitical tensions can trigger energy shocks (the continuation of Red Sea strikes and thus shipping delays could ultimately inflate costs, and hence lead to additional inflationary waves), which would put additional pressures on central banks to revisit the trajectory of their monetary policy rates. Last but not least, in case a ‘hard landing’ scenario comes to materialise, it would impact high-beta currencies.

We believe the Fed might be tempted to ease monetary policy for political reasons while inflation is not fully under control. Another factor which is not on your list is the fiscal situation in the US. We believe that could cause issues on the bond market.

We see the geopolitical situation as the main risk [for] energy prices and hence future inflation pressures. Also, as we are into the election year in the US, we might see some volatility on the financial markets.

We think that a mild recession of the US economy and possible election shocks are the most significant risks in 2024.

We think that geopolitical escalation is the most significant risk, because it can be a trigger for many other risks like energy shock, inflation and a need for bigger fiscal stimulus.

We think that the main risks that the global economy might face during 2024 are more related to geopolitical escalation and its contagion consequences.

We think that volatile inflation will remain the main reserve management risk in 2024, as it influences central banks’ monetary policy decisions that somehow impact on reserve management strategies.

2. In the past 12 months, how have you positioned your reserves portfolio, given interest rate and other market dynamics?

As our portfolios are mostly euro-denominated, we have increased the amounts invested significantly. That involved of course a lengthening of the duration profile. We did not increase credit risk, as we focused on high-grade investments only in 2023.

Due to recent uncertainties we decided to increase the share of the liquidity tranche and we have relatively lowered credit exposure.

For complex and structured portfolios further diversification makes little sense. Therefore, the picture of diversification will be rather mixed. Also, we do not take positions on an SAA [strategic asset allocation] level. On the other hand, if increasing duration was on the radar, then the level of yields at their peak in 2023 could be attractive and trigger some ideas. The level of interest rates and coupons is high enough, and therefore escaping from fixed income is not an issue.

Given the higher expected return, the portfolio was able to be adjusted and assume a better risk/return profile.

Given the increase in interest rates globally in 2023, the central bank maintained its foreign currency exposure by rebalancing to the benchmark as and when required. We also increased investments in the shorter end (Treasury bills and deposits), maintained duration in the lower range, and reduced credit exposure after the banking crisis in the US.

In a rising interest rate environment, the central bank pursued a proactive strategy by reducing both the duration of mark-to-market portfolios and the credit exposure.

In early 2024, we are implementing a new SAA approach. As part of a new benchmark, we are investing in countries with lower credit ratings (such as Japan). Additionally, we are moving from 1–3 indices (US Treasury, non-US sovereign and corporate) to 1–5 indices.

In the past 12 months, we have mostly increased the duration of our active positions from short against our benchmark to more neutral against our benchmark as central banks globally reach the peak of their hiking cycles.

Increased duration. Credit exposures are within the allowable limits and markets.

Increased duration during summer 2023.

No change.

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

No material changes to the portfolio.

No significant changes were implemented.

No strategic (SAA) changes in the past 12 months. However, various tactical positions have been taken in terms of duration and credit positioning where opportunities availed themselves as part of active management.

None of the above.

Only made technical changes to the reserves composition – no major changes in any of the categories above.

Reallocation from money market credit securities to government bonds.

Rebalanced out of HY and DM equities as upper bandwidths have been reached.

Reduced duration of some investments to take advantage of the high rates at the shorter end of the curve.

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

The central bank adopted measures needed to guarantee capital preservation.

The central bank increased investments in the long term to take advantage of better yield to maturity and to mitigate any expected US Fed rate cut.

The currency exposure and credit exposure (via SSAs) remained roughly unchanged throughout 2023 (versus the previous year), while we decreased duration and remained short positioned versus the benchmarks. Given inflation levels persisted at elevated levels (even though in a descending path), central banks were in the midst of the hiking cycle, with perspectives of ending it only as year-end approached.

The reserves management division has increased portfolio duration over the past 12 months to position the portfolio for rate cuts (eg, locking yields on longer tenors to avoid reinvestment risk) and for an eventual steepening of the yield curve. Credit exposure has been increased slightly for an additional yield pick-up versus USTs under strict eligibility guidelines (eg, high-quality, investment-grade credit rating).

Underweight in duration until November/December 2023.

We decreased the interest rate sensitivity by positioning on the shortest part of the curve, by slightly increasing the credit exposure (short-term MM instruments).

We didn’t make any adjustments in 2023 to any of the above. While we look at duration targets on an annual basis, our SAA is done over a three-year period, so we are unlikely to make short-term decisions on currency allocation, etc.

We have been very passive over the past 12 months. We could not disinvest because of prior allocation decisions, but all new inflows were invested at attractive rates. Duration has naturally decreased in this context.

We have increased and expanded exposure towards equities, switching from equity index futures to exchange-traded funds (ETFs) replicating selected indices.

We have not performed any major changes in the portfolio during the past 12 months.

We have reduced the duration of our fixed income investments to reduce the impact of rising yield on the value of the portfolio. We also maintained a shorter maturity period for our fixed-term deposit placements to avoid locking in a lower rate for a longer period considering the rising yield environment during the last 12 months.

We increased duration with the change in central bank guidance on policy. Most are likely to cut rates in 2024.

We increased our exposure in SSA products as part of the enhanced indexation scheme.

We made no movements in our SAA, but in the tactical allocation we took a long-duration position.

We reduced duration while the certainty of future rate hikes was still in effect, and then when there was more volatility or uncertainty, we maintained neutral duration.

We reduced the duration of our portfolios during the monetary tightening period that covers most of the past 12 months, but recently we started increasing the durations as a result of rate cut expectations.

We slightly increased the duration in anticipation of a less aggressive Federal Reserve. Additionally, credit assets have remained attractive in the context of higher rates.

We were expecting the end of the tightening cycle in major economies.

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

After the different shocks to the global economy since the start of the pandemic that increased risk aversion, we expect the diversification trend to resume. Also, this is consistent with the overperformance of short-term US Treasuries since 2022, making, in our opinion, some emerging markets (EMs) underpriced under a risk-return perspective.

As the global economy cools and risk of recessions comes into play, we expect portfolio managers to move into typical safe-haven assets.

Assets have been mainly responding to central bank actions. In this context, adding diversification provides an additional source of return or a hedge in case of central bank surprises.

At current interest rate levels, we consider that total rate cuts of 100–200 basis points in 2024 would not put too much pressure on the need for diversification to seek higher returns.

Because rate cuts are expected for 2024, investors will steer away from fixed income in search of higher returns.

Currency-wise, the geopolitical risk will support USD. Therefore, diversification in currency terms will be limited. As for asset classes, the coupons of bonds are still attractive enough, so that there is limited demand for escaping from fixed income. So, the only motivation for further diversification might be further accumulation of reserves (not only in the sense of a nominal increase, but also in the sense of an increasing awareness that reserves must make returns because in many cases monetary policy became very costly).

Current interest rates are high. So, diversification is less necessary.

Diversification is cardinal to risk reduction.

Diversification over the past few years has been into the China market. A combination of economic challenges arising from the real estate sector and a reversal in rate premiums should continue to slow down the pace of diversification. Pending recessionary concerns, though, should support diversification.

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

Expect diversification away from [the] US dollar as the Fed cuts rates.

Given what was observed in 2022, diversification is very relevant, and reserve managers should continue to pursue it.

I think they, on average, [will] continue with the current space of diversification, [so there’s] no need to speed it up.

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

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

In the current environment, reserves might get more needed – eg, to defend the currency, in particular EM.

It is very difficult to know what others are likely to do as we don’t really know where their starting point is and what strategic/tactical decisions they may make.

Most central banks have already quite considerably diversified their foreign reserves, investing also in non-traditional asset classes.

Most external reserves portfolios are already diversified to the level allowed by their investment policy statements and guidelines. Central banks generally allocate external reserve assets in such a way that meets their objectives while ensuring diversification to minimise risk.

Next year, there could be opposing forces that impact the level of diversification: in favour, the trend of investing in ESG [environmental, social and governance] bonds; and against, the high-rate levels that discourage investing in non-traditional assets.

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

Numerous central banks are incorporating ESG principles, leading to adjustments in their portfolio compositions. Conversely, amid policy tightening, many central bankers will tend to adopt longer positions in their investments.

On the one hand, volatility across markets in which central bankers typically invest is still high. And, on the other, sovereign and high credit fixed income markets are yielding significantly above zero carry return. That combination normally does not encourage conservative investors to seek further diversification, at the moment.

Portfolio managers will likely maintain current investment strategies, keeping in mind the dovish outlook by central banks.

There is still uncertainty related to the main central banks’ monetary policy decisions, and inflation is expected to remain volatile in the short term.

We believe that reserve managers are currently taking advantage of high rates from their traditional reserve assets. However as central banks start cutting rates, they may accelerate the pace of diversification once more in search of returns. Additionally, the new formal or informal mandates of central banks, such as supporting the greening of the financial system, may contribute to the diversification of reserve assets through investments in ESG assets.

We might observe a slowdown in diversification as a response to a likely increase in geopolitical risk.

While diversification remains an important tool for managing unsystematic risk, the structural shift in the fixed income market (eurozone issuers exited the low-interest environment), diminished the benefit of the yield pick-up from holding other currencies. Also, ‘de-dollarisation’ might result in reallocation to other currencies (such as the renminbi, once the prospects of a rebound in the Chinese economy emerge), but we believe this would be a long-term process, with ‘de-dollarisation’ actually meaning a slight diminishment in the dollar’s supremacy, not an actual loss of its status as the world’s reserve currency. Also, we do not anticipate a flight in CNY to concretise next year, given the pessimistic prospects of the Chinese economy. Hence, we also expect diversification to remain roughly at current levels.

While fixed income remains attractive, as central banks start to cut rates this year, entry points into fixed income would become more expensive, which may warrant some level of diversification. The concerns around a possible US recession might incentivise reserve managers to focus on safe-haven assets. Also, geopolitical fragmentation is accelerating, as seen with recent events in Russia/Ukraine and the Middle East.

While we don’t expect reserve managers to change their portfolio mix, we expect central bank policy and asset class returns to be more divergent in 2024 compared with 2022 and 2023, so expect reserve managers to benefit more from diversification.

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

At a high level, our allocations are in line with our SAA. Some diversification may occur if we conduct a review of the SAA.

At least in our case, one (probably even main) driver for diversification was very low interest rates. This has dropped off, government bonds offer rather decent interest now, so this has also reduced our desire for diversification. Though I would say our level of diversification is rather decent already, so [there’s] not much pressure from that side either.

Diversification is cardinal to risk reduction.

During the recent turbulent times, hoarding euro liquidity was the main direction in our reserve management operations, and therefore we stopped reinvesting some of our non-euro exposures.

Exploring diversification into gold reserve assets.

In addition to the factors [mentioned in previous answers], the ongoing incorporation of SRI [socially responsible investing] considerations in our reserve management framework could also lead to further diversification.

In line with what is expected of other central banks.

In our case, it is not about starting with new asset classes. It is more about finding better ratios among the existing ones.

Increase currency exposure and asset classes.

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

Looking forward to introducing new eligible instruments (corporate bonds).

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

Our investment horizon is long-term, thus, we do not expect to make any strategic allocation changes due to recent market dynamics. However, we could do some tactical allocation changes which will depend on individual decisions of portfolio managers.

Over the past 12 months, while we have increased our exposure to USD, we have diversified the portfolio across asset classes and geographical regions. On portfolio positioning, we have been cautiously adding duration. Although the market has priced in several rate cuts for 2024, geopolitical fragmentation may add to inflationary pressures, and hence policy rates could stay above pre-pandemic levels. Greater geopolitical volatility and the rising number of conflicts worldwide have increased global uncertainty, hence diversification remains key.

The central bank has a conservative risk profile, and it is not expected to change its diversification levels over the next year.

The central bank has recently started to use an external manager to assist with the management of a portion of its portfolio.

The central bank is always looking into possibilities that increase the diversification of our portfolios.

The central bank will maintain its investments in its current asset classes (bonds, US Treasury bills, deposits).

The central bank’s willingness to move into new assets and currencies has been pinned on strategy.

The current plan assumes an unchanged allocation of reserves.

This may occur as the strategy shifts from a more passive posture to active management.

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

We are implementing the new strategic asset allocation. We expect this process to be completed in March. After that, we don’t expect to have any additional changes for two years.

We are planning to continue with the same diversification level.

We are very comfortable with the current portfolio allocation.

We have already reached currency/instrument diversification adequate to our risk tolerance.

We have been in the process of updating our investment policy. As a consequence, we now have a broader universe of eligible assets.

We have come to that time in the cycle that we could look at further diversification. But these decisions will be based as much on how easily we can make any changes internally or the cost of making any changes using external managers.

We may likely add more emerging market sovereign debt over the next year.

We plan to introduce commercial papers and certificates of deposit.

We will be looking at strategies to take advantage of the expected yield curve, also exposure to other currencies.

We will conduct our strategic asset allocation process in 2025, for implementation in 2026. In this process, we will likely change our asset mix, but currently unsure as to the extent of this change on diversification.

We will incorporate more SSA products, as we still have much room in our investment portfolio.

4. Do you expect bond market volatility and dislocation to be a key source of risk in 2024–25? If “Yes”, what do you think will be the main reasons?

A financial stability event could unfold in a scenario of more interest rate hikes combined with higher-for-longer.

Although we have seen inflation slowing down, inflation surprises and financial stability events may cause volatility and disruption in the bond market in 2024–25.

Central banks use policy rates as a tool to combat inflation, thus any data surprises would be critical to central banks’ monetary policy decisions.

Despite a moderation in inflation, it remains elevated. The presence of upside surprises to inflation data [is] likely to increase uncertainty regarding the central bank’s stance on monetary policy, and may trigger market volatility if investors unwind their positions.

Focusing on inflation data, market participants might create bond volatility to a certain degree if there is a surprise in relation to expectations (in both ways). Also, volatility may come from episodes of financial stress, such as in 2023, depending on the debt and duration of the stress. We also see [the] risk of excessive public debt in some eurozone countries, but to a limited extent.

For the last couple of quarters, it has become clear how the ‘data-dependency’ discourse inflicted several episodes of very high intraday volatility in major sovereign debt markets, notably in the US market. Until [there’s] clear indication from policy-makers that they are headed towards a consistent stance with the new interest rate cycle, any minor data related to economic activity, inflation or debt level may cause large response movements from market participants. Regarding an event that may hinder financial stability, it is possible that the financial/economic consequences of such a rapid rise in yields are not totally absorbed by banks and other players, let alone ‘exogenous’ events like cyber attacks on the infrastructure of the global financial system.

In our risk assessment for 2024–25, we recognise the potential impact of inflation data surprises, understanding their capacity to induce market volatility. Simultaneously, we acknowledge the influence of US Treasury supply on bond prices and market dynamics. Additionally, identifying excessive public debt in the eurozone as a key risk reflects the end of ECB support via its bond purchase programmes.

Inflation data could surprise on the upside, despite central banks’ efforts to cool down price pressures due to structural market risk resulting from geopolitics and deglobalisation. The disruption of Red Sea shipping shows how the conflict in the Middle East can expand, hampering supply chains and driving up production costs (via rising shipping costs). These developments have accelerated global fragmentation and the emergence of competing geopolitical and economic blocs. These events can also increase financial stability risks globally.

Inflation data surprises will be key on both sides, either consistently higher or lower. Stubborn price pressures will bring back a ‘higher-for-longer’ market narrative and, in an extreme case, the market will begin to price in further interest rate hikes by central banks. On the opposite side of the spectrum, unexpected consistently lower inflation prints will bring about concerns that central banks overtightened monetary policy.

Inflation may still escalate.

Inflation surprises due to events that have not yet been priced in by the markets, such as the Red Sea shipping issues due to military strikes in the region, can still lead to selloffs that would affect a potential ‘going-long’ position. Also, large debt supply in both the US and eurozone would put additional pressures on the level of yields. Financial stability events are in the high-impact category zone, but less probable to happen.

Rate volatility will remain high, driven by large uncertainties in inflation development, diverging central bank policies and the effects of declining excess liquidity coupled with higher refinancing needs.

The central bank believes that bond market volatility will reduce back to historical averages, probably not reaching it quite yet, though. Difficult to say if it is the key source of risk. For our portfolio, it’s more or less equal with equities, though they both depend on broader macro and geopolitical developments.

The major central banks state to be very much data-driven in their upcoming rates decisions, therefore any surprises in the monthly inflation data might have a considerably bigger effect on the markets than what investors could have experienced (eg, in the past decade).

Uncertainty regarding inflation and economic outlook should continue to generate market volatility.

Volatility in inflation data could result in more cautious normalisation of monetary policy by central banks leading to rate volatility as expectations adjust.

US Treasury supply has recently been a source of volatility.

We expect a key source of risk in 2024–25 will be in equities.

We think that inflation data surprises can trigger significant moves in bond yields through [their] effects on monetary policy expectations and actions. [Therefore,] we see it as an important risk factor for bond market volatility. The high US Treasury supply for this year may also increase market volatility, depending on the demand for these assets. As we think the risk of lack of international buyers of US Treasury debt is also embedded in the risk created by high US Treasury supply, we did not give a rank to that factor. Although some of the eurozone countries have high public debt ratios, we think that this will not create an important market event in 2024, as the European Union decided to ask for a gradual debt-reduction plan, taking country-based differences (in fiscal positions, public debt and economic challenges) and the financing needs for a green transition, etc, into account. Therefore, considering the financial stability risks mainly emanating from the credit and housing markets in China and their possible spillover effects, we put financial stability events into the third rank.

We think that volatile inflation will remain the main reason for bond market volatility.

While bonds are offering attractive returns, the sheer size of debt issuance could be an issue, given the demand profile has significantly changed, with the Fed, for example, reducing its balance sheet.

5. Are geopolitical risks incorporated in your risk management/asset allocation decision-making? If “Yes”, which areas of your reserve management are impacted?

All of the above topics are important to us. Fortunately, we do not have any exposure to countries with higher current or potential geopolitical risk at this time.

All points are taken into account, but no changes have been made.

As we do have exposure in different currencies, when geopolitical events occur, they tend to affect our performance due to this exposure.

By choosing ‘considering changes’, we do not mean that we intend to make changes in the near future, but rather we are taking the geopolitical risks into consideration in our risk analysis for these areas.

By its very nature, a geopolitical crisis is a factor that cannot be quantified, modelled or controlled. We therefore factor in geopolitical factors using mostly qualitative techniques in our asset allocation and portfolio construction decisions. While historically, the geopolitical crisis factor has resulted in short-term market shock (increased aversion to risk, leading to re-correlation and a fall in risky assets), we discuss the risk of escalation of the ongoing war between Israel and Hamas, Russia-Ukraine tension, and the impact of US support to allied countries, which has implications on its fiscal deficit. The best ‘hedge’ against geopolitical risk remains portfolio diversification and a dynamic approach to take advantage of volatility shocks.

Currencies and assets may be avoided if geopolitical risks are particularly high.

During periods of heightened geopolitical risks, moratoria are put in place on those counterparties that may be impacted.

External reserves are reported in USD, and, as such, investment in other currencies are impacted by relative performance against the USD. However, these changes do not affect currency composition on the strategic asset allocation. We may likely add more gold in the coming years.

Geopolitical risks can impact the credit rating of countries or counterparties. This can then impact our ability to gain exposure – due to credit limits.

Geopolitical risks potentially affect the tactical asset allocation – eg, duration exposure relative to the strategic benchmark.

Given geopolitical risk, we consider it optimal to maintain and opportunistically increase our exposure in safe-haven currencies.

I suppose we make decisions based on other factors. Occasionally, we do factor in [geopolitical risks] for some strategic decisions. For instance, we looked at Mexico some years ago, and felt it was too unstable at the time. Other countries may look at China, for example, but fail to think of the geopolitical risks that might be attracted to it – people with far more knowledge and paid far more than me will make decisions like that.

In general, increased diversification and lengthening the investment horizon should provide some additional level of protection.

In most cases, the areas are interconnected. Therefore, one change implies change in other areas.

It’s important to highlight that, given our focus on high-quality assets with investment-grade ratings, the current portfolio is designed to withstand geopolitical challenges. If significant geopolitical risks arise, we maintain the flexibility to suspend investments in the affected countries, ensuring security and liquidity of our reserve assets.

Most of our investments and counterparties aren’t exposed to geopolitical risk – the only exception are Chinese assets.

Most of the areas impacted are applicable for the outsourced funds programme.

Most of the reserves are denominated in US dollars.

Our SAA model allocates considering external shocks that impact the asset classes, countries and currency selection.

Overweight of Tips versus nominal Treasuries to hedge geopolitical risks.

Reduce exposure to geopolitical risks by avoiding some currencies.

The central bank incorporates geopolitical risks in its risk management and asset allocation frameworks. In the recent past, the central bank has not been impacted by geopolitical risks.

The geopolitical risks are taken into account when making investment decisions and allocating assets.

The geopolitical situation is taken into account while determining currency composition of foreign reserves. Country of domicile is also considered at counterparty/issuer approval.

Through our internally managed funds, we do not have exposure to countries with significant exposures to geopolitical risks except for some sovereign/sub-sovereign Chinese names. Through the externally managed funds, we monitor exposures to countries like Russia, which so far has been limited or removed by the external managers. We can consider changes to allocations such as China if we deem that risks have become too elevated.

We always look into geopolitical situations to assess our SAA, but no change is planned for now. We may apply precatory alerts or eligibility changes on some counterparties if geopolitical risks involve them.

We are in the process of updating our investment policy. As a consequence, our universe of eligible assets, currencies, sectors and requirements for counterparties’ qualification is now broader.

We are only investing in the safest countries.

We avoid any exposure and reputational risks to sanctioned countries (including Russia and Belarus).

We continuously assess our investments for geopolitical risks, which recently has led to divestment from issuers and a currency. If geopolitical risks were deemed too high for a counterparty or asset class, we would consider altering our activities.

We have made some tactical decisions by avoiding investments in certain regions affected by geopolitics.

While we have answered “No” to this question, we believe that the risk management approach does take into account geopolitical risk via the existence of minimum credit ratings. If counterparties, for example, are negatively affected by a geopolitical event, this should be reflected in their credit ratings.

6. There is much debate and speculation about increasing de-dollarisation. Do you agree?

A degree of de-dollarisation seems likely, partly driven by strategic competition as some economies look to boost the use of non-dollar currencies in global commerce. However, given the US dollar’s liquidity and wide degree of use, it’s unlikely to be a rapid change.

After the Covid, energy and bank crises, countries are trying to be less reliant on the dollar.

Although the importance of other currencies, especially the euro, is increasing, we believe that the US dollar will continue to be the main reserve currency in the following years.

Although we see more willingness to decrease the use of the US dollar to settle bilateral trade and payments between countries, so far, there were no significant changes.

Current geopolitical tension stimulates de-dollarisation debate/initiatives, mainly among developing economies. But the role of USD is supported by its strong economy, developed payment system, mature financial markets and stable financial system.

De-dollarisation is driven by concerns about US monetary policy, geopolitical tensions and the rising use of alternative currencies.

De-dollarisation is happening, but is unlikely to have a disruptive effect on trade or reserves management within the next decade.

De-dollarisation has become part of the policies and strategies of different countries to promote a more democratic international economic order.

Desire for diversification.

Don’t see a clear alternative to the USD at the moment.

For countries with difficult relations with the US, the USD is not the same safe-haven currency as in the past. In addition, the downgrades and the political debate on the US budget have increased the risk premium. The global tendency for increased fragmentation, the focus on independence and the reorganisation of supply chains lead to a lower use of the USD. However, as in the past, it remains difficult to replace the USD as a dominant reserve currency.

In relative terms, I do not see many reasons why such debates and de-dollarisation itself should occur. The size of [the] USD debt market will still be the driving factor.

Increased geopolitical risks could lead to further risk of sanctions. This may lead countries to continue to diversify away from USD as the preferred currency for trade.

Increased international fragmentation may encourage slow de-dollarisation over time, but we foresee US dollar supremacy to continue for the foreseeable future.

It might offer benefits to emerging powers, such as reduced currency risk and increased monetary autonomy. It also presents challenges, including exchange rate fluctuations, capital flight and potential impacts on global financial markets.

It will help developing countries to strengthen their economy. But at first, the countries must have a good governance structure to manage their economy.

Still have the dollar as the main investment currency.

The ‘de-dollarisation’ might result in a reallocation to other currencies (such as the renminbi, once the prospects of a rebound in the Chinese economy emerge), but we believe this would be a long-term process, with ‘de-dollarisation’ actually meaning a slight diminishment in the dollar supremacy, not an actual loss of its status as the world’s reserve currency.

The answer reflects long-term trends of commerce integration and regional economic developments, with corresponding gradual rise of alternative currencies’ usage.

The diversification trend will resume.

The dollar is still a very important currency for trade and cross-country exchange, and [the] US has the biggest bond and equity market. It would be difficult for a real de-dollarisation to occur.

The process of de-globalisation, started several years ago, is creating political polarisation which might contribute to changes in the global financial system as well.

The realised and potential geopolitical conflicts have created a tendency for some countries to decrease their assets in USD and move to other reserve currencies to limit their political risks. Particularly, despite some selloff recently, CNY has become an alternative reserve currency through China’s leading position in global trade and swap lines that central banks built with China. Similarly, the tendency of many developing countries to trade with other countries in each other’s local currencies and swap lines built for this purpose has been decreasing the need for USD holdings in reserves. Increase in gold reserves that provide protection in volatile periods may also add to a decrease in USD holdings. Therefore, we expect de-dollarisation in reserves to increase gradually.

The role of the US dollar may gradually evolve as other currencies gain prominence, driven by geopolitical shifts and changes in global economic dynamics. Factors such as the rise of alternative currencies, efforts by some countries to diversify their reserves and potential shifts in international trade dynamics could contribute to a gradual re-evaluation of the dollar’s dominance.

[The] US dollar will continue to be the dominant reserve currency.

There has been a lot of noise on de-dollarisation since geopolitical tensions emerged in recent years and sanctions were imposed on various countries, but we think that there has not been a significant amount with regard to the actual percentage of the US dollar as a means of trade payment and reserve currency.

There have been discussions about de-dollarisation in some global contexts, particularly in response to economic and geopolitical developments. However, in the vast majority of global transactions, the USD remains the most used currency. It is also the most utilised numeraire for expressing foreign reserves, according to the BIS [Bank for International Settlements] and World Bank.

US markets are very liquid. The US dollar is the main currency in world trade. So, there may be a de-dollarisation, but it would have to be gradual.

We believe that the debate on de-dollarisation will increase, though it will happen on a gradual basis.

We believe the US’s seizing of Russia’s FX reserves has sent a very negative message to all US asset-holders over the world.

We do think that the USD is still a very strong reserve currency compared to other currencies. However, we do think that the world needs more currency options to settle international payments/trade.

We have followed the trend over the past years and understand the major drivers behind de-dollarisation. However, [we] do not see that any currency could replace the USD’s reserve currency status in the short or medium term.

What options are there?

While the US dollar has maintained its transactional dominance, some de-dollarisation is taking place in FX reserves. In particular, the US sanctions on Russia have made some countries wary about being too dependent on the currency. The USD is also losing some influence in oil markets, where more sales are now being transacted in non-dollar currencies, as a strong US dollar is becoming more expensive for emerging nations. For example, Bolivia, Brazil and Argentina pay for imports and exports using the Chinese renminbi. However, we believe that de-dollarisation is not imminent, but more of a gradual, long-term trend.

7. Are your reserve levels/adequacy measures sufficient to invest in non-traditional or riskier asset classes?

A small portion of our reserves is invested in US mortgage-backed securities (MBS) for diversification benefits and long-term return potential.

A very conservative approach is still taken when investing the reserves. Non-traditional or riskier asset classes are still not permissible while we still build towards an adequate level of reserves.

As a third-world country, without easy access to international markets, we do still need to accumulate reserves, to cope with our needs as a central bank.

As specified in our regulations, the central bank manages its reserves by considering the priorities of safe investment, liquidity and return respectively. In this context, the central bank manages its reserves from a very conservative perspective.

Capital preservation is the most important investment objective.

Considering infrastructure as a new asset class.

Currently, reserve adequacy is low.

Doesn’t really come into our thinking.

For now, traditional asset classes suit our economy on the financial market, and this is due to the less inflow and more outflow from the reserves.

I do not think that adequacy should enter strategic asset allocation decision-making. Despite the fact that we all are following this formula (we have little reserves so that we buy Treasury bills only), the formula is misleading.

In recent years, as our reserve level has increased, we have increased our investment in riskier assets: our equity exposure has increased to 23%, we have a 9% corporate IG [investment-grade] portfolio and a 1% corporate high-yield investment [portfolio].

Non-traditional or riskier asset classes are not approved in our current guidelines and reserve management objectives.

Not in a significant size.

Our investment universe ranges from US Treasuries through to emerging market equities. About half of our own assets are not callable for intervention, which means they are purely invested with the objective of return and impact, and thus we can invest in non-traditional reserve assets.

Our level of foreign reserves currently represents 1.98 times the ARA [Assessing Reserve Adequacy] metric level.

Our reserves management is primarily focused on security and liquidity – thus, our investment scope tends to be conservative.

Our reserves management policy only provides a conservative approach, with risk aversion to risky assets.

Reserve levels are sufficient, and we are exploring alternatives to include non-traditional assets.

Reserves adequacy level of the central bank has decreased. That’s why our plans to invest in non-traditional asset classes, like equities, have been postponed.

Reserves levels are trending at a critical level of three months’ import cover, and thus are mainly invested for liquidity management.

The central bank measures reserves adequacy using various techniques such as import cover, reserves to short-term debt, reserves to broad money, reserves to GDP, as well as the International Monetary Fund’s ARA metrics.

The central bank tends to invest in very low-risk assets.

The level of our reserves is adequate to invest beyond the prudential level, but, still, we prefer to maintain our risk exposure within what we consider acceptable levels.

Very conservative approach.

We believe they are, but currently not investing much in non-traditional asset classes. About 12% of our reserves is invested in equities, though, which is considered non-traditional for central banks.

We do not invest in riskier asset classes.

We have already started investing in equities.

We invest part of our financial assets in corporate bonds (down to A-) and globally diversified equity ETFs.

While we have answered “No” to this question, please note that we see our limited appetite for losses as the more relevant factor. Our risk tolerance is very conservative.

While we have sufficient reserves according to our measures, we don’t invest in non-traditional assets.

Yes. But keeping our investment principles: liquidity, sustainability, capital preservation and return.

Yes, but there are regulatory constraints for some asset classes.

Does your central bank tranche its reserves in different portfolios?

Aiming to increase the efficiency of liquidity management, the central bank tranches reserve assets in main reserve currencies into three groups as operational, liquidity and investment portfolios. While operational portfolios meet daily and very short-term liquidity needs, liquid portfolios are kept to serve short- to medium-term liquidity needs. Investment portfolios are managed to meet long-term liquidity needs, while contributing more to the return of reserves, provided that they remain within global risk limits.

Foreign currency assets in preparation for immediate use can be held mostly in the form of deposits with central banks and securities denominated in US dollars with maturity not exceeding one year. Other assets are mainly composed of securities issued by governments with maturity not exceeding five years.

Liquidity tranche is denominated 100% in USD. The currency exposure of the total portfolio is: 77% USD; 8% CNY; 5% EUR; 4% GBP; 3% KRW; and 3% AUD.

[Our] reserves portfolio is divided into tranches (working capital, liquidity, and investment) to address different objectives. The different tranches have distinct liquidity needs and risk tolerance levels.

The central bank adopts a reserves tranching methodology to manage reserves portfolios. The working capital tranche, which has a one-month investment horizon, holds mostly money market instruments and cash to meet day-to-day transactional needs. The liquidity tranche has a 12-month investment horizon, and holds mostly US Treasuries. All excess reserves are managed in the investment tranche with a five-year investment horizon, which gives the reserves management team and external managers more flexibility to invest across different asset classes and currencies.

The central bank uses three tranches; liquidity, income and capital tranches.

The portfolios are outsourced, and are managed by five external fund managers.

The reserves are held in three tranches: operational, liquidity and investment portfolios.

Tranched between liquidity and investment portfolios.

Under the free-floating FX regime, we have limited liquidity needs. In consequence, we feel that integrated portfolio management is more efficient than tranching, as it allows for consolidated risk exposure monitoring and performance analysis.

We allocate our reserves in different portfolios, such as working capital, liquidity and investment tranches.

We are part of the World Bank’s Ramp [Reserve Advisory & Management Partnership] programme, and are in the process of implementing the tranching of our reserves.

We do three tranches. One focuses on working capital, another for liquidity purposes, and the last for investment.

We don’t think of them as tranches – we have mostly MTM [mark-to-market] portfolios, but also an HTM [held-to-maturity] portfolio as well as a ‘performance’ tranche.

We have a liquidity tranche and an investment tranche.

We have a liquidity tranche and an investment tranche, with the liquidity tranche being the most substantial.

We have an investment-based tranche (benchmarked) and rule-based tranche (total return-based).

We have foreign reserves (part of reserves in USD, which is not hedged back to euros) and then own funds in five different currencies, all hedged back to euros.

We have liquidity, liability and investment tranches.

We have two investment portfolios.

We have two tranches, namely: a working capital and liquidity tranche; and an investment tranche.

We maintain a liquidity and working capital tranche for short-term liquidity needs, and an investment tranche for return enhancement.

We separate our portfolios between trading and held-to-maturity, but we do not formally tranche our reserves.

We tranche our EUR reserves in a long-term HTM portfolio and classically managed AFS portfolio with a shorter duration. No tranching of FX reserves.

We tranche our FX reserves in three layers: working capital, liquidity and investment portfolio.

We use the tranching investment approach to better address the multiple objectives of the foreign reserves established in our investment policies.

Working capital, buffer tranche, investment tranche.

Working capital, liquidity and investment tranches.

Yes, in liquidity, money market and investment tranches.

How do you allocate your reserves across tranches?

As indicated above, we also have three tranches. However, the nomenclatures differs, in the case of the country’s external reserves, we have liquidity, investment and stable tranches.

Gold accounts for 13% of the reserves portfolio, and is managed separately from the three tranches as a strategic asset.

I have categorised MTMs as liquidity and HTM and equities as investment. Ultimately, they are all investment.

Liquidity and working capital tranche combined: 17%.

Liquidity refers to our working capital, the working capital tranche is our buffer tranche, while “Other” refers to gold.

Liquidity tranche is denominated 100% in USD. The currency exposure of the total portfolio is: 77% USD; 8% CNY; 5% EUR; 4% GBP; 3% KRW; and 3% AUD.

Money market deposits – 26%; gold tranche – 71%; others – 3%.

Most reserves are in the investment tranche, which include in-house and outsourced funds. Working capital tranche cannot be determined currently, as it is included in in-house investments.

No tranches. Everything is managed together.

“Other” includes gold tranche and intermediation tranche.

“Other” includes the liability tranche.

“Other” is SDR [special drawing rights] allocation.

“Other” refers to gold.

Our tranches are: ‘short-term’: 38%; US Treasuries and agencies 1–5 years: 34%; non-US sovereigns 1–5 years: 24%; and corporates 1–5 years: 3.5%.

Reserves are divided in different portfolios as per different benchmarks (asset classes) and different portfolio managers (internal/external). However, no tranching in a traditional sense of the word (ie, into liquidity/investment portions) is applied – essentially, we treat all sub-portfolio as investments.

That is the allocation of the euro reserves.

The allowable allocation for the liquidity and working capital tranche is 63%, with the investment tranche at 37%.

The investment tranche accounts for the largest share of reserves, followed by the liquidity and working capital tranche. The remaining tranches include gold, foreign banknotes and SDR.

The liquidity portfolio is a buffer portfolio.

The liquidity tranche must have sufficient funds to cover at a minimum, six months projected payments for the central bank, inclusive of government payments.

The objective of the liquidity tranche is to have sufficient availability to satisfy the potential uses of the reserves in a 12 month time horizon. We use the ARA metric to establish the size of this tranche. The objective of the working capital tranche is to provide liquidity for covering transactional needs, while the investment tranche receives the excess reserves from the former tranches with the objective of generating returns.

To facilitate the achievement of our objectives and implicitly with the purpose of adequate liquidity risk management, in the context of recent and expected economic and financial developments, the international foreign exchange reserves are structured in the aforementioned tranches. The liquidity tranche ensures the replenishment of working capital tranche and covers unforeseen foreign currency outflows from the reserves. Prudent interest rate risk management recommends the establishment of sufficiently large liquidity tranches in euros and US dollars with short durations, in the context of the very short duration of central bank liabilities and the direct relationship between the duration of a fixed income instrument portfolio and the volatility of its market value. Along with the working capital tranches, these constitute the prudential reserves.

We cannot specify this information due to our information security policy.

We do not have tranches.

We don’t tranche our portfolio because we believe that considering the portfolio as a whole enables us to achieve further diversification in our investments.

While we have divided our reserves broadly in liquidity, working capital and investment tranches – instead of using percentages, we work out absolute numbers. Any increase in reserves is managed under [the] liquidity tranche till revision of SAA.

Working capital tranche and liquidity tranche – about 10%; investment tranche – less than 40%; others – more than 50%.

8. Have balance sheet losses impacted how you manage your reserves?

Although profitability is one of the considerations in managing the reserves, it is not the main factor.

Any shortfall in the central bank’s balance sheet is to be considered by the portfolio managers when managing the in-house reserves.

Assets are generally held to maturity.

Balance sheet losses (from 2022) have not impacted the way we manage our reserves.

Balance sheet losses have impacted how we manage our reserves. These losses have prompted a comprehensive review of our strategic asset allocation, leading us to adapt strategies aimed at minimising such losses in the future. This proactive approach ensures a more resilient and adaptive investment framework, aligning with our commitment to preserving the value of our reserves over the long term.

Balance sheet events, due to recent years’ rise in interest rates, were thoroughly discussed and analysed within the board of governors and procedures related to the long-term investment process, however, were not severely impacted by short-/medium-term volatility.

In 2021 and 2022, we experienced losses due to market conditions. We recently modified the strategic asset allocation due to changes in market expectations, not due to losses in those years.

In order to reduce the impact of unrealised losses on [the] profit-and-loss account, we set up a held-to-maturity portfolio.

It is hard to admit it, but in the end, yes, the cost of monetary policy shapes the profit and loss in a negative direction, and therefore the aim is to compensate for this factor.

More precisely, expectations of balance sheet losses have impacted how we manage our assets.

Not in any major way, but we take our balance sheet into account when we look at our risk levels and risk sources.

Not yet, but it’s under discussion.

One of our investment targets is obtaining a return in local currency that will cover at least the cost of financing the reserves in the long run.

Our accounting rules do not allow balance sheet losses.

Our reserve management decisions do not respond to balance sheet losses. Our primary objectives are liquidity and capital preservation. The asset-liability impact of the SAA is considered in a latter stage of the evaluation process.

Reduced allocation of non-traditional assets.

The central bank reviewed its investment objective to that of income optimisation within the approved risk budget. The central bank also started managing both a hold to maturity book and a separate portfolio where trading (sale of securities) is allowed.

The investment approach and asset classes/sectors have remained the same.

The negative mark-to-market impact on the fixed income portfolios, generated by the increasing yielding environment, made us determined to seek additional means of optimising our results, and thus engaging more actively in FX trades.

They are coming into the debate more and more due to monetary policy decisions.

Unrealised losses have brought some unwanted volatility to the central bank’s capital. This has brought several discussions at the bank on the necessity to reduce the level of risk in the reserves portfolio.

We are experiencing, due to the euro negative rates from the last couple of years, a negative outlook in our euro position. With the positive rates of the last year, we’ve decided to look into more euro investments.

We do not have balance sheet losses due to the short duration of the securities.

When balance sheet losses were beginning to build up, we restrained our portfolio management to a certain degree.

9. Do you think artificial intelligence will help reserve managers to optimise their operations?

A careful integration of artificial intelligence has potential benefits for reserve managers to enhance accuracy and data analysis, as well as minimising errors and therefore optimising their operations.

AI could improve data management, but such processes are also connected with significant risks (cyber security risk, data mismanagement, operational risk, etc).

AI has only started, and its potential is large. It will become a normal tool for all reserve managers.

AI holds the potential to automate and optimise various critical functions, including trading and execution, portfolio management, risk assessment, strategic asset allocation, and reporting. By embracing AI in these areas, reserve managers can enhance operational efficiency, make data-driven decisions, manage risks more effectively, and provide more insightful and timely reports, ultimately contributing to the overall optimisation of reserve management.

AI tools can help reserve managers speed up a wide range of processes, and thus increase efficiency and enhance portfolio optimisation.

All aspects of portfolio management will benefit from technology ranging from quicker trade execution to risk management.

All of the above will likely be affected significantly at some point.

All of the areas could potentially benefit from tech development and AI.

All the areas mentioned above would benefit from AI to enhance reserve management operations.

Artificial intelligence can help and support the decision of the portfolio manager. We have an internal solution that is able to analyse a significant volume of news and research, and give us the most relevant topics, as well as the sentiment related to them and for various asset classes.

Artificial intelligence is progressing rapidly. Presently, algorithms capable of generating precise responses or executing complex processes exist. Undoubtedly, when employed effectively, this tool will enable international reserve managers to enhance their work across various areas.

I think macroeconomic projections and forecasting will also benefit from deploying AI in central banking.

In my opinion, the difference between a robot and AI is that AI is learning and adjusting itself (from wrong outcomes). And there are not that many areas in reserve management where we are allowed to make mistakes – therefore, it is very important to identify areas of use … and, in order to use AI, the … culture would have to change and become a bit more tolerant to mistakes because the AI is mostly learning from inaccurate performance.

Integrating AI systems with existing reserves management systems will enhance current processes – however, there is risk of system failure.

Likely strong use cases of AI for reserve managers are in trading and execution, such as using AI to determine optimal execution strategies and minimise transaction costs. It could also automate routine tasks such as data analysis, research and report generation.

Not so familiar with AI possibilities really, but think it can be helpful for us in reporting and probably also in other areas (SAA).

Only gradually.

Research and information processing is likely to benefit the most.

These are contingent [on] the infrastructure and mechanisms in place.

This technology is expected to help in automation, improving flexibility in the mentioned areas.

We believe AI/machine learning can be useful to support our reserve manager operations. However, it will not replace the need for decision-making by the experts in the foreseeable future.

We believe that operational tasks will be the first to benefit from AI.

We expect that AI will enhance FX reserves management.

We see a strong trend toward a pervasive use of AI in reserve management. Nonetheless, we believe this transition is still incipient.

With the advent of artificial intelligence, portfolio management can be enhanced with data-driven insights and automation. AI can identify optimal asset allocation, rebalancing strategies, risk-adjusted returns, and tax efficiency for each portfolio based on the data analysis. AI can also execute trades, monitor portfolios, adjust asset weights, and generate reports automatically and efficiently. AI can equally help to reduce portfolio risks, as it can help discover correlations between different assets, sectors or regions, and suggest optimal diversification strategies.

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

According to investment guidelines, the central bank could invest up to 2% of [its] total portfolio in ESG bonds.

Environmental/climate-related criteria as a complementary element, for diversification purposes.

ESG bonds portfolio mandate and incorporation of ESG metrics in an internal ranking used to allocate liquidity among institutions.

Impact investing.

In addition, we have a best-in-class strategy. As a consequence, we orient our investments towards emitters with the best carbon footprint measurement.

In-house methodology.

Invested in ETFs that meet the EU’s minimum requirements for Paris-aligned Benchmarks (PABs).

Investments in green bonds.

Negative screening.

Our central bank actively incorporates socially responsible investing into our reserve management strategy. Our investment guidelines prioritise security, liquidity, yield and sustainability in that order. Sustainability is paramount, guiding us to favour investments of a responsible nature (ESG) when the first three principles are met.

Our existing management principles do not incorporate SRI per se. However, based on our current principles, the central bank has been purchasing foreign currency-denominated green bonds issued by governments and other foreign institutions.

Published SRI policy, including a net-zero road map and stewardship guidelines, and additional voluntary reporting.

Reporting.

Specifies a minimum percentage of ESG holdings in our portfolio.

SRI has been incorporated as a secondary objective for reserve management.

Sustainability reporting.

The central bank does not implement ESG internally, but its external managers can incorporate a small percentage on ESG.

The central bank is currently managing a portfolio with sustainability elements through green bonds, social bonds and sustainable bonds.

The central bank was one of the first central banks worldwide to set up a dedicated green bond portfolio. Last year, our top management decided to double the size of this portfolio. In the past years, we have published a TCFD [Task Force on Climate-related Financial Disclosures] report, as well.

The standard measurements of ESG risks [that] the foreign reserves are exposed to, recommended by the TCFD and NGFS [Network for Greening the Financial System], as well as the impact in terms of carbon emissions are reported internally. The first public reporting on these measures is planned to be within the central bank’s annual report for 2023.

We are incorporating two SRI strategies for our fixed income investments. Firstly, we invest roughly 10% of our financial assets in thematic bonds (eg, green, social and sustainable bonds). Secondly, we have considerably tightened the exclusion list for our investments in non-financial corporate bonds (by following PAB recommendations as much as possible). This year, we plan to switch more than half of our equity allocation to ETFs with a lower carbon footprint.

We are still in the process of formulating SRI elements.

We gained access to ESG scores, and monitor the portfolios. We included ESG considerations in the portfolio’s investment policy.

We include SRI in our investment goals, and we also use ESG metrics to classify our counterparties.

We internally measure our carbon footprint. Additionally, we invest in labelled bonds and incorporate a secondary objective related to ESG.

We monitor and report our ESG holdings to the board. Further, we apply an SRI filter on the corporate benchmarks and SRI policy (negative screening) on our external corporates mandate portfolios.

If “Yes”, how do you integrate SRI into your investment process?

100% in the sense that all our investments are affected by ESG considerations of some sort.

7.5% of SRI in the financial assets.

All of our FX reserves portfolios are covered by the SRI policy. In general, some asset classes offer more room to focus on SRI than others.

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.

Currently, investments in green, social and sustainable bonds represent around 10% of our portfolio.

Currently, we allocate approximately 7% of our FX reserves portfolios to SRI, with a focus on ESG bonds, with a medium-term objective of reaching 10% of our reserves.

Exposure to sustainable assets remains small.

Externally managed portfolio.

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

Our equity portfolio is invested in the ETFs compatible with the objectives of the Paris Agreement for decarbonisation.

Percentage of all SRI investments amount to around 25% of assets under management [AUM].

Still formulating.

The aforementioned percentage was already invested in green bonds (around 2.2%) and sustainable bonds (around 0.8%) by the end of 2023.

The board of governors adopted a strategy aimed at gradually increasing investment in green bonds and sustainable bonds – such securities account currently for over 1% of foreign reserves. However, SRI principles are taken into account in the entire process of foreign reserves management.

The central bank has gold holdings, and, in acquiring the gold, the ESG principles and SRI are considered.

The central bank is preparing to invest a small portion of its reserves in a dedicated green bond investment pool (outsourced) this year (2024).

The element of sustainable responsible investing is integrated in reserve management starting from the strategy of the central bank, where it is stipulated that one of [its] strategic objectives is increasing awareness of climate change and contribution to a green sustainable economy. Based on that, ESG bonds are introduced in the investment guidelines, allowing for longer maximum maturity for this type of instrument, in order to increase investment alternatives and to be aligned with the central bank’s strategy, but at the same time, the principles of safety and liquidity have priority over sustainability.

The fundamental objectives of reserve management are liquidity, capital preservation and return. However, we favour investment in issuers with the best environmental indicators.

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

This applies only to our FX reserves, which are only 10% of our total reserves. Euro reserves are currently >30% in ESG-compliant bonds.

This percentage includes green bonds and social and sustainability bonds.

We are building a thematic (green bond) multi-currency portfolio and studying ESG integration across the investment process.

We do not implement ESG, but are considering it.

We have not taken specific actions yet. However, we are learning about the metrics in order to explore future applications.

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

Difficult to say, but the definition is definitely not 100% clear yet (changing over time), and there is a (growing) threat of greenwashing.

It was difficult to rank because they are all really relevant.

To the central bank of a small and poor country that is facing so many challenges (very high inflation, exchange rate volatility, political instability, etc), SRI is not on the list of priorities.

We are still working on the issues.

We still struggle with a missing mandate. The concentration of power in central banks generally is very high, and the line between a professional approach and moral hazard is very thin. This is the area where the reserve managers have to ask: “Would I do the same investment if it is my own money and not ‘public’ money?” On top of that, this is the area where by definition (because the reserves are usually in reserve currency), many central banks undermine the competitiveness of their own country – I buy another country’s green bonds, that government uses the proceeds in domestic subsidy schemes, which help domestic firms to outperform our companies because no foreign central bank invests in our own green bonds. And yet, more and more commentators say: “What? How come you still do not have dedicated people for climate?”

12. Which best describes your attitude to the following asset classes?

Above responses are inclusive of in-house and external investments.

According to our investment policies, we are currently investing in deposits (with official entities), government bonds, and SSA bonds above AA-.

Deposits (with commercial banks) as reverse repos.

EM bonds = China only.

Even if we don’t have a dedicated mandate to invest in green bonds/social and sustainable bonds, we are allowed to trade these instruments.

If China is considered [an] ‘emerging market’ in this question, it is the only exception for the “Emerging market bonds (above BBB)” item.

In 2024, as part of our strategic asset allocation process, we will assess the investable asset classes. Our SAA process occurs every three years.

Our deposit counterparties include [the] BIS, and our gold investment strategy is to buy and hold.

Our investment strategy is designed for a balanced and diversified portfolio, encompassing traditional asset classes like government bonds (above BBB), money markets instruments, SSA bonds, covered bonds, deposits and ESG bonds. This approach incorporates sustainability considerations, reflecting our commitment to ESG factors. We also embrace some non-traditional assets, such as US MBS, to add diversification.

Our reserves management is primarily focused on security and liquidity; thus, our investment scope tends to be conservative.

Real estate investment is not part of our reserves portfolio. However, we hold real estate investments in our pension fund. Gold is not actively managed.

Several of those [selections of] “Investing in” (covered bonds, deposits, corporate bonds) are not part of the benchmark portfolio, but are allowed for taking active positions.

The central bank invests in instruments that fit its conservative risk profile.

The reserves management policy also allows for investments in government bonds (above BBB), supranationals and US agency bonds.

We are in the final stage of the work to start investment in the equity market.

We have corporate and mortgage bonds as part of our QE [quantitative easing] portfolio, but not in the FX reserves.

We have recently divested from central Europe on the back of the Russia/Ukraine war. We are also working on infrastructure investing for 2024.

With the exception of equities and ABS [asset-backed securities]/MBS, all the above-mentioned asset classes are managed internally.

13. Which of the following best describes your attitude to exchange-traded funds (ETFs)?

Adjusting portfolio with a low transaction cost and high liquidity.

As soon as ETFs become eligible instruments, we can start investing in those ETFs that have underlying asset classes approved by our investment guidelines.

Efficient way to diversify your portfolio.

ETFs are used by external managers to replicate/gain exposure to certain asset classes.

ETFs come as a possible and 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.

Exchange-traded funds allow for broad, diversified exposure towards equity markets without operational challenges typical for direct investment (including: trading and settlement, accounting, corporate actions, taxation). Development of ETF market supports its liquidity, lowering of fees, emergence of tailored funds (eg, taking into account ESG criteria).

Flexibility, ease of use, low costs.

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.

For us, ETFs are a cost-efficient way to obtain broad exposure to equities and credit.

High liquidity, ‘speed’ of investment, relativity simple instrument to invest in, but could be expensive.

Legal constraints.

Other fixed income bonds (SSAs and govs).

“Other” = MBSs. It’s very easy to get exposure in those asset classes through ETFs, and it would be a lot of work to invest directly (in equities for example), and also it is relatively cheap(er) than using external managers, for example.

Some of our external managers with equity mandates use them for various reasons. They mostly buy SPY. We do not allow a lot of variety in ETFs in our guidelines for risk management purposes.

The allocation to equities is done via ETFs. We choose Paris-aligned ETFs in order to complement the strategy to decarbonise our portfolios.

The investment in the equity market will most likely be made using ETFs.

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

We are not allowed by law to invest in ETFs even if we would have [an] interest [in] invest[ing] in these instruments.

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 previously reviewed ETFs for inclusion as an approved asset class. However, because of our conservative approach towards investing in equities, this asset class has not been considered thus far.

14. Does your central bank engage in repo and/or agency securities lending?

Considering it, but still not investing.

Considering securities lending via an agent.

Engage in securities lending to generate incremental revenue.

Engaged in tri-party and bilateral cleared reverse repos.

Internally only with local institutions (commercial banks).

Looking into implementing a securities lending programme.

Repo/reverse repo is undertaken by the domestic money markets department.

Repos have just been approved and are set for operationalisation this year.

The central bank does not engage in a securities lending programme, but did in the past via a global custodian.

The central bank has engaged in: (1) third-party agency lending; (2) bilateral lending of its US Treasuries; (3) repo/reverse repo transactions. All collateral management is conducted internally.

The custodian runs our lending programme.

The policy and guidelines allow us to invest in repos/reverse repos.

This multi-faceted approach enables us to leverage internal capabilities for repo transactions and benefit from external agents in securities lending. Importantly, securities lending serves as a valuable tool, allowing us to generate additional revenue while contributing to the efficient functioning of financial markets.

We engage in repo and reverse repo transactions generally as a possibility to create an additional income due to market conditions (demand for high-quality securities) as well as for providing liquidity, if needed.

We often repo out our Treasuries which are trading special vs GC [general collateral]. We can also do reverse repo – however, rates are not yet attractive enough to do so.

We have been using repos since 2011, but only via a CCP.

What are your main considerations for agency securities lending?

Apart from the difficulty of finding a fair split, liquidity is a big issue. During peace, it is a good product which delivers extra return without hard work. But nobody knows how long the chain of loans is, and therefore it is hard to evaluate the liquidity risk. It is for sure that the borrowing banks use securities lending for covering certain regulatory requirements, but the bank regulation is so complicated that we do not have any chance to even create all scenarios under which securities lending can turn into a trap.

Credit quality of collateral is key for us.

Enhancing the central bank’s income by obtaining an additional interest rate income.

It is also important for us to assess the agent’s ability to reinvest the cash collateral, as this is also a key part of our securities lending programme.

It is crucial to have a very safe programme (when implemented).

The central bank has a double indemnity on its agency lending programme on: (1) borrower default; (2) collateral default.

The main considerations for agency securities lending prioritise the credit quality of collateral to safeguard our assets. Additionally, borrower eligibility and rating are paramount, enabling us to engage with reputable and creditworthy counterparties, aligning with our commitment to responsible and risk-mitigated lending practices.

We are active on repo/reverse repo market (internally traded) – such transactions provide an additional source of income at relatively low risk. And quite recently, we have started an agency securities lending programme in order to broaden lending opportunities (wider spectrum of borrowers, additional eligible collateral) and reduce operational burden (collateral management for internal repo has become more time-consuming).

We are engaged in automatic lending programmes with our global custodians. We do not engage in agency securities lending.

We are part of a securities lending programme managed by our custodians, which repo out bonds purchased in our internally managed funds in line with our risk parameters, taking into consideration the bonds repo-ed by the ECB and ECB EXTended basket, etc.

We do not engage in securities lending.

We do securities lending ourselves for the larger part. We allow our custodian to lend out bonds.

We have guidelines concerning all these points that have to be met in order to participate in securities lending.

We used to have a securities lending programme, but had to stop it several years ago.

Who do you utilise as your agency securities lending agent?

A third-party agency lender was chosen for the following reasons: double indemnity and more attractive revenue-sharing arrangement than a global custodian.

All our security lending programmes are done through the global custodian.

By utilising our global custodian as our agency securities lending agent, we streamline operational processes and benefit from a consolidated and integrated approach. This enhances efficiency and risk management, and ensures seamless co-ordination between custody services and securities lending activities.

Considering using a third-party agency lender.

It’s easier and less costly to use our custodians directly.

The central bank has several custodians.

To be determined.

We are currently reviewing the third-party model. Previously, the central bank used its custodian for securities lending. This might change again following the outcome of the review.

We have two agents.

We use our global custodian for automatic securities lending (intraday). A third-party agency lender is used for traditional securities lending activities.

We utilise automatic lending through our global custodian, but besides that, we also have a third-party service provider.

15. With respect to liquidity management, which products do you use?

According to our investment guidelines, for the working capital tranche, we invest mainly in deposits up to one month. For the liquidity tranche, we have minimum exposure constraints to short-term government securities of 40% of [the] total size of the tranche.

Most deposits are conducted with central banks, supranationals and G-Sib [global systemically important bank] US and EU banks.

Our liquidity management needs are not from the portfolios, but from our function as a service provider for foreign central banks.

Our reserves management is primarily focused on security and liquidity – thus, our investment scope tends to be conservative.

These are considered liquid for both in-house and outsourced funds.

This comprehensive approach allows us to optimise liquidity across various instruments, ensuring flexibility, safety, and efficient cashflow management. Excluding money market funds aligns with our specific liquidity management preferences and risk considerations.

Under the free-floating FX regime, our liquidity needs are limited.

We predominantly have deposits with commercial banks.

We use those products, but not so much for liquidity management – for risk management (FX risk in case of swaps) or to add a bit of extra return (with repos).

16. Do you use derivatives in your reserve management? Do you use central clearing for OTC derivatives?

Derivatives are mostly used by external managers actively with a view to hedge the portfolio in line with the ‘security’ aspect mandated by our regulations for the management of the reserves. Some vanilla derivatives have been used by the internal team such as gold swaps, etc.

Derivatives are used for hedging and efficient portfolio management.

For FX swaps, these are done bilaterally, and we do not use central clearing. Meanwhile, futures are traded on exchange.

FX hedging and bond futures are undertaken by the fund managers only.

Gold derivatives may be used in the future for active management of the gold position.

Hedging is employed to mitigate market risks and enhance portfolio resilience. Duration management involves using derivatives to align interest rate sensitivity with our broader investment strategy. Additionally, we utilise derivatives for yield enhancement, optimising returns while maintaining a prudent risk profile. These choices collectively reflect a comprehensive and strategic approach to derivatives usage, aligning with our overarching investment and risk management goals.

I have all portfolios – euros and FX – as reserves portfolio. Others may treat them differently.

Most FX swaps are settled through CLS [continuous linked settlement].

Other derivatives used: FX forwards, inflation swaps.

We are planning to introduce euro OIS [overnight indexed swap] in 2024. Since we are already a direct clearing member at Eurex, we will extend our repo licence to IRS [interest rate swap] clearing.

We can use FX swaps in our reserve management, but they are not active.

We don’t have OTC derivatives.

We have a project in the pipeline to move to centrally cleared OTC derivatives.

We have considered adding IRS and CDX [credit default swap index] to our investment tools, and these instruments require central clearing.

17. What percentage of your FX reserves is in equities? How do you invest in equities?

All equities are externally managed.

Despite pretty high standalone volatility, equities act as diversifiers, reducing overall investment portfolio risk. Over the long-term horizon they considerably enhance investment return.

Due to charter constraints.

If approved, we would either use ETFs or futures.

Not in our mandate yet, but possible in [the] coming months/years.

Our reserves management is primarily focused on security and liquidity – thus, our investment scope tends to be conservative.

The equity sleeve of our reserves portfolio is managed externally mostly due to capacity. Also, this is done to benefit from the expertise and specialised knowledge of managers in the field. Having said that, our external managers are obliged to adhere to strict investment guidelines and regularly report on their performance.

We always consider changing allocation if need be.

We are looking to progressively move away from investing in funds to giving Paris-aligned mandates to managers.

We have a residual position in equity, mainly for strategic reasons.

We have no equities in our FX portfolios, but in our internally managed pension fund. In addition, we can buy an equity quota in our EUR own funds portfolio, which is currently not used, but might be if equities become cheaper during the year.

We used external managers, but then found that, for a passive strategy, internal management is capable, as well. Therefore, after more than a decade, all equity portfolios are under internal management.

18. Do you manage your gold reserves actively?

According to the central bank act, we must have a gold reserve.

Gold allocation is defined by our SAA.

Gold has been managed passively since 2000.

Gold is mostly held as a strategic asset, and, as such, is not traded actively. However, to generate income on our gold holdings, we make gold deposits with counterparties with strict eligibility. For more investment flexibility, we also swap part of our gold (against USD) with the view of reinvesting the USD in higher-yielding albeit safe assets (eg, UST).

Gold reserves [are] held overseas.

Gold reserves are not included within the central bank’s SAA.

In the past [few] years, we have tried to maintain our physical allocation to gold constant, while adjusting our exposure through options and futures.

Not investing in gold, but considering it now.

Our gold is held locally, but we are considering active investment in gold through swaps and deposits.

The central bank holds tonnes of gold. This amount is not actively managed.

We (almost) do not have any gold.

We do not hold gold reserves.

We don’t manage gold actively recently because of the rates, but when we do, we invest in gold deposits.

We might consider actively managing in the future through swaps, deposits, ETFs, options or futures.

We trade gold deposits via BoE [Bank of England] with our counterparts as well as gold swaps (Isda in place) against the major currencies in both ways, depending on market conditions.

We use gold/FX swaps to enhance return from time to time, depending on [the] market situation. The underlying gold allocation, however, remains static.

We would enter into gold lending.

We would use deposits if we decide[d] to manage our gold actively. In the future, we plan to implement gold swaps.

19. Over the last year, have you changed your view on the euro as a reserve currency? Do you plan to increase euro investments in 2024?

A significant modification in the global reserves weights is not on the radar for 2024 – though adjustments can be performed tactically, depending on developments in market conditions.

Although the attractiveness of the euro as a reserve currency has increased in the recent past (since Europe exited from the negative interest territory), in our view, it is relatively less attractive versus the USD due to various factors, including economic challenges within the eurozone, the changing global economic landscape, and the interest rate differential. Also, there are more opportunities to diversify reserve currency preferences with the rise of emerging economies, such as India.

EUR is our domestic currency.

For 2024, the approved currency basket for the euro is 2.5%.

Given [that] we are part of the Eurosystem, the decision to invest in euro-denominated assets is primarily a decision based on expected return. We currently expect this return to be negative once funding costs have been considered.

Higher rates in Europe have made it more attractive. However, it’s still relatively lower than other interest rates, and has a more negative forecast.

Investments are currency hedged to euros.

It is a question of [the] starting point: once we have over 50% euros, there is less need to increase euros. While someone starting at zero might go up to 40%, and would still be less invested in euros than us.

No change in view.

No plan for now.

Operating under [our] currency board arrangement, with [our] domestic currency pegged to [the] euro.

Our currency allocation in the reserve 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 main currency is the euro.

Our SAA model is suggesting that a higher allocation to euros is beneficial.

Our view on the euro has not changed.

Political instability, high public debt, very low share of our obligations are in EUR. Maintaining EUR exposure in line with SDR basket weight in the SDR tranche of the portfolio.

Regarding the question, as the yields on euro assets have increased over the last year, the euro has become a more attractive currency than it was previously. However, our currency allocation is determined by the SAA that is based on the asset-liability matching principle. Thereby the share of euro in our reserves portfolios depends on the currency structure of our FX liabilities and the course it will follow, as well as the expected trajectory of the euro-dollar parity.

Since the euro area has positive rates again, the euro has become more interesting. We have increased our euro investments from cash into bonds, and will continue in 2024. We have also seen an increased use from our reserve management clients.

[The] euro is our local currency and numeraire – it is not part of our FX reserves.

[The] euro is our numeraire, and we did not experience any change of our view on it last year.

The eurozone economy will lag the US.

The implementation of the SAA will take place in 2025/26, and changes to currency allocation will only then be considered.

There has been no change in our view of the euro as a reserve currency.

We are in the process of updating our investment policy. As a consequence, our universe of eligible assets, currencies, sectors and requirements for counterparties’ qualification is now broader.

We are thinking about re-establishing our euro portfolio, which we had closed [at] the beginning of 2021.

We do not have investments in euro[s].

We do not invest in euro-denominated assets.

We had invested in euros in the past, but stopped doing so when rates were negative. Now that rates are back to positive levels, we are reconsidering.

We haven’t changed our view.

We haven’t changed our views for the euro as a reserve currency.

We invest 8.5% of our reserves (approximately) in assets denominated in euros. However, we hedge the currency exposure to the dollar.

We think that [the] diversification benefits of investing in euro[s] are offset by exchange rate volatility.

We will continue to monitor its performance in 2024 for future consideration.

We will increase the euro as a share of our reserves taking into account its increased weight in our country’s trade balance and the euro-integration our country is going through.

When taking into consideration our total AUM – ie, both those investments denominated in FCY [foreign currency] and those in EUR – 65% of our AUM is denominated in EUR.

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

Already investing in euro-denominated assets.

Currency of intervention and trading with the [euro]zone is mostly USD.

Currency structure is defined by foreign debt currency structure.

EUR is our domestic currency.

Eurosystem has so many EU bonds (through different asset purchase programmes) that there is not much room to add, everything is close to limits.

Expected return net of funding cost is the main hurdle.

Foreign exchange fluctuation could result in significant losses.

Interest rate differential vs USD and FX volatility.

Lack of liquidity.

Less liquidity compared to the US.

Low level of our reserves.

Low returns and risk of FX volatility.

Low yields and inverted yield curves in the very creditworthy countries.

Mandate is 50/50 EUR USD, no other hurdle.

Negative interest rate – now improving.

Our main trading partners deal in the dollar.

Our numeraire is the dollar, and we have a slightly negative perspective on the euro, given its weaker growth prospects.

Relative lower rates.

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

The identified hurdles, lack of supply of AAA assets and concerns about weak growth prospects in the eurozone, underscore the importance of both risk and growth considerations in our investment strategy. Striking a balance between quality assets and favourable economic conditions is crucial for optimising returns and managing risk effectively.

The implementation of the SAA will take place in 2025/26, and changes to currency allocation will only then be considered. The central bank does not have a tactical asset allocation.

The increasing of our current allocation to euro-denominated assets depends on market conditions and our view for this market.

The main reason is related to operating issues that affect our capacity to effectively invest in euro-denominated assets.

The yield differential between the UST and its European counterparts as well as the persistent dollar strength rendered the US sovereigns as more attractive.

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

We already invest in euro-denominated assets, and the amount that is held is the product of our SAA process. Negative rates presented a challenge in the past, but nowadays, we have no hurdles.

We consider as appropriate our current allocation to euro-denominated assets. At a strategic level, our allocation to this currency is evaluated with our internal models for the currency composition of different tranches.

We consider we hold a comfortable level of euro-denominated assets (around 60% of our currency reserves), but adjustments can be performed tactically, depending on the developments in market conditions.

We currently allow no non-USD exposure.

We don’t see any hurdle to invest or increase the share of euro-denominated assets.

We foresee a weaker risk-return profile of the currency.

21. What percentage of global reserves do you think will be invested in the renminbi by end-2024, 2030 and 2035?

A moderate increase of renminbi is projected as it becomes more used in global trade and implied larger weight in the SDR basket:

a. By the end of 2024, it is projected that the allocation of global reserves in the renminbi may increase to around 2.6%. This projection is based on the current average actual allocation of 2.4%, with the expectation of slight changes in reserve managers’ strategies by the end of 2024.

b. Looking ahead to 2030, there is an anticipation that the allocation of global reserves in the renminbi could rise to approximately 3%. This estimate considers the gradual increase in renminbi allocations over the next decade, building upon the current average actual allocation of 2.4%.

c. By the end of 2035, it is expected that the allocation of global reserves in the renminbi may experience further growth, reaching around 3.5%. This projection takes into account the evolving dynamics of global currency reserves, influenced by the ongoing integration of the renminbi into reserve managers’ portfolios. These estimations are subject to changes in market conditions and the strategic decisions of reserve managers.

Allocation in CNY should increase, as central bankers will continue to look for greater diversification.

Although, recently, investors have been decreasing their RMB holdings due to the fear of sanctions for these holdings as China supports Russia in the war, the financial market risks and declining growth prospects in China, we believe that, in the long run, the share of RMB will continue to increase. However, based on the recent outlook, we downsized our estimates.

Expect allocations to increase slightly. However, given capital controls and operational considerations, expect allocations to remain a small proportion of reserves going forward.

Expect the percentage of global reserves invested in the renminbi to steadily increase, but largely depends on the liquidity of the currency, the diversification benefit, operational difficulty and the availability of its assets.

Global reserves’ exposure to renminbi would likely increase, given its inclusion in global indices.

Have not followed, really – probably will increase in the coming years, but the access to renminbi markets has to become much more relaxed.

In 2023, the RMB accounted for 2.3% of official forex reserves. We expect the percentage to double every five years.

Share of renminbi has been growing rather slowly in recent years. We expect this slow trend to continue due to geopolitical risks. Other currencies might see an increase in their shares, such as EUR, GBP, JPY, SEK and NOK.

The allocation will increase gradually.

The increasing geopolitical tensions in China and the prospects for the Chinese economy may negatively impact the renminbi as a global reserve currency.

The progress in the liberalisation of the Chinese financial markets and the inclusion of the Chinese bonds in major global bond benchmarks as well as diversification from traditional investments might support the renminbi, although the process might be long due to several factors such as: geopolitical tensions with [the] US and Taiwan, capital controls and the lack of full exchange rate flexibility.

This will depend on the review of long-term prospects in RMB-denominated assets, considering the developments in the Chinese economy and its financial markets, as well as the IMF’s review of the SDR basket, concluding in 2027.

Unable to predict.

We expect the dollar to remain the dominant currency in years to come. The renminbi might gain traction as reserve currency, but not significantly. As such, we expect a gradual doubling of its percentage in global reserves, from around 3% currently to around 6% in the next decade.

We think that the renminbi in global reserves will decrease because of geopolitical tensions.

We think that the share of renminbi will have a slight increase, thanks to de-dollarisation, and we also believe that lack of transparency and geopolitical conflicts are the main hurdles to seeing a greater shift in the future.

We think that the share of total reserves investing in renminbi will remain relatively stable in the following 10 years.

Weight of renminbi in global reserves has been increasing for quite a long time now. 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, including the Chinese economy.

While renminbi is a good diversifier against traditional reserve assets, the weaker perspective for the country and the reconfiguring of global supply chains could make investors cautious about increasing their exposure.

While there have been some breakthroughs in making yuan a potential global reserves currency (eg, through its inclusion in the SDR basket in 2016), the share of Chinese renminbi in global reserves portfolios is relatively much lower in comparison with the USD and the euro. Despite China’s efforts to internationalise its currency, there have been several challenges that have hindered its progress in becoming a widely accepted reserve currency. Some remaining concerns are the lack of convertibility and liquidity of the yuan in global markets. Also, the utilisation of the yuan in cross-border transactions has been mostly limited to countries viewed as being ‘antagonistic’ to the western financial ecosystem (the likes of Russia, Iran, etc). The negative interest rate differential, [as well as] monetary policy divergences between China and the US, have also rendered CNY assets as less attractive.

What percentage of your reserves do you plan to invest in renminbi by end-2024, 2030 and 2035?

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

Currently, we do not have plans to invest in renminbi.

Expectation is to increase investments due to trade with China.

Given our mandate, it makes sense to increase allocation to CNY.

Given the negative prospects of the Chinese economy, we expect the renminbi to underperform this year, and hence we do not plan additional investments.

It’s probably likely to be [a] lower percentage, for either we reduce the size of the CNY portfolio (so, in other words, not increase) or increase our discretionary investment assets, but not increase CNY.

Looking ahead to 2030 and 2035, considering current trends and potential shifts in the global economic landscape, it is estimated that around 3% of reserves could be invested in the renminbi. However, this projection is subject to changes in rates offered compared to the euro and other major currencies, taking into account similar credit quality. The attractiveness of the renminbi will also be influenced by any significant rate decreases in euro- and USD-denominated assets.

Lower rates in China as well as a negative perspective have made it less attractive.

No exact decision or plan to increase the share of renminbi in the future.

No plans to go there as of now.

No plans to increase our renminbi exposure.

Our reserves management is primarily focused on security and liquidity – thus, our investment scope tends to be conservative. 95% of our foreign reserves are invested in USD.

The central bank does not disclose its currency allocation, but should certain economic risks in China persist at the time of the SAA review, the allocation will likely be reduced somewhat.

The central bank is considering maintaining the current allocation.

The central bank’s exposure to RMB-denominated assets remains small. This will depend on the review of long-term prospects in RMB-denominated assets considering developments in the Chinese economy and its financial markets, as well as the IMF’s review of the SDR basket, concluding in 2027.

The fund managers have requested to invest in Chinese government bonds. This will be reviewed by the central bank’s investment committee, and a decision will be made later in the year.

There is growing interest by the central bank to invest more in RMB.

We could consider investing a small portion of the foreign reserves in renminbi in the following five to 10 years.

We currently do not hold a position in RMB for tactical reasons – however, RMB is in our investment universe for the strategic asset allocation.

We have no plans to increase our investment in renminbi at this stage. This may change if the SAA is reviewed.

We have trimmed down our allocation to renminbi due to the yield differential between UST and its Chinese counterparts, as well as persistent dollar strength. We are also wary of China’s credit outlook, especially with the ongoing downsizing of the property sector and continued impact on growth, which has remained persistently lower in the medium term. Over the long term, as global interest rates and global growth normalise, we may consider increasing our exposure to Chinese government bonds.

We hold CNY for diversification purposes as well as a consequence of the swap lines with China. However, our currency allocation is mainly determined during the SAA process that depends on the asset-liability matching principle. Therefore, we think that the share of CNY in our reserves will stay limited unless there is a significant increase in our swap lines with China.

We invested a small part of our portfolio in renminbi, and we don’t have any plans to change that allocation.

We only have (small) renminbi exposure via our SDR position with the IMF.

While there is scope for significant diversification from exposure to renminbi, geopolitical risks related to China have gained considerable traction over the past four years, and will continue for the foreseeable future and thus discourage investment for the moment.