The Exchange Fund achieved a good investment return in 2003. But it will be difficult to match this performance in 2004.
It is time again to hand in the preliminary report on reserve management. We are still churning out the non-audited, preliminary numbers, but our management information system gives fairly accurate estimates of what the investment results of the Exchange Fund in 2003 look like. I would now like to share them, first hand, with the community. I will also, on my next appearance before the Finance Affairs Panel of the Legislative Council, scheduled for early February, give a detailed presentation of, among other things, the results on the basis of the more refined figures available then.
Marking all financial assets to market, which is the proper accounting approach for fund management, we achieved an investment return in 2003 of HK$89.6 billion. In terms of the actual amount, this is the third highest return in the history of the Exchange Fund, though it is understandably behind 1998 and 1999, when investment return was boosted by book profits from the stock market intervention. The rate of investment return in 2003 was 10.2%*: once again, we managed to beat the benchmark (the rate of return of the benchmark portfolio), this time by a substantial 70 basis points.
After deducting interest expenses, arising mainly from borrowings in the form of Exchange Fund paper, and other expenses, including fees for external managers and for the safe custody of financial assets totalling HK$6.4 billion, the profits made for the Exchange Fund in 2003 amounted to HK$83.4 billion. This is the second highest on record, next only to 1999, but surpassing 1998, because interest rates, and therefore interest expenses, were much lower in 2003 than in 1998.
In accordance with the agreed formula for calculating investment return for the fiscal reserves deposited with the Exchange Fund, the amount accruing to the general revenue is HK$25.7 billion, more than twice the amount of HK$12.1 billion budgeted for. Regardless of how this will eventually be booked in the general revenue account, it should go some way to reducing the budget deficit of the financial year 2003-04. The HKMA is happy once again to have been able to help in tackling the budget deficit for this financial year by producing a higher-than-expected investment return for the fiscal reserves. Given the depletion of fiscal reserves over the last few years, however, it should be noted that the investment return for the fiscal reserves in 2003 is, in absolute terms, less than in both 1998 and 1999, when the level of fiscal reserves was much higher.
Finally, the Exchange Fund's share of the profits in 2003 is HK$57.7 billion. This will be added to the Accumulated Surplus of the Exchange Fund, boosting it to HK$384.9 billion and boosting further Hong Kong's armoury for ensuring monetary and financial stability.
Let me turn now to the bad news by presenting to readers, particularly those with investment experience, three simple questions. First, where are interest rates, particularly those for the US dollar, heading in 2004? Secondly, where is the US dollar, in terms of its exchange value, heading in 2004? Thirdly, where are equity prices, particularly those in the US and in Hong Kong, heading in 2004?
It is not the business of monetary officials to make predictions about financial markets publicly. I will therefore refrain from doing so, despite having just posed those three questions. But it should be all right for me at least to tell readers that our internal answers to these questions point to the possibility of bad news: there is a strong likelihood that the investment return for the Exchange Fund next year, in money terms, may not be significant at all. I would like to prepare the community early to avoid too much disappointment this time next year. Indeed, I have a duty to do so, if only for the purpose of assisting in the estimate of the investment return for the fiscal reserves in the next financial year. The better-than-expected performance in the last two years may give readers the impression that I am crying wolf. But let us not forget the disappointment we had in 2001 over the absolute amount of investment return for the fiscal reserves in the financial year 2001-02, even though we still managed overall to beat the rate of return of the benchmark portfolio. Investment return for the fiscal reserves next year is likely to be significantly below trend, and allowance should be made in the next government budget for this possibility.
* The reported investment return of 10.2% is computed in US dollar terms in accordance with AIMR Global Investment Performance Standards. The difference between investment return as reported and simple return is attributable primarily to the difference between gross assets at year-end and average investible assets for the year and the translation differential arising from the strengthening of the Hong Kong dollar against the US dollar.
Joseph Yam
15 January 2004
Related Press Release:
Click here for previous articles in this column.
Document in Word format
