14 July 2023 05:32 am Views - 613
With the government issuing less debt than before under the domestic debt optimisation (DDO) proposed recently, as part of a broader debt sustainability framework, the Employees’ Provident Fund (EPF) will have to revisit its investment strategy as it may not be able to invest almost all of its moneys in government securities as before.
Approximately 96 percent of assets of EPF, the largest superannuation fund in the country, are invested in government-issued bills and bonds, which were deemed to be zero-risk. But, the proposed domestic debt restructure could upend this strategy going forward, according to the country’s Central Bank.
As the domestic debt restructuring announced a fortnight ago involves maturity extensions, the government may not have to raise debt at the same intensity and size as before. According to Central Bank Governor Dr. Nandalal Weeraisnghe, it could bring down the demand for rupee debt.
This could pose a fresh challenge to the investment committee of the EPF to find new and diversified investment opportunities outside of their more straightforward and conservative investment strategy of putting almost all their moneys in bills and bonds.
What could further upend the investment strategy of the EPF would be the more conservative fiscal and debt targets announced by the government as part of its economic stabilisation package with the International Monetary Fund (IMF).
In line with that, the government is expected to bring down the fiscal deficit to less than 5 percent of the Gross Domestic Product (GDP) in the medium-term. Debt-to-GDP is also expected to be brought down to around 90 percent from its current 120 percent.
If the government follows through with these targets, it will pose additional challenges to the EPF to find alternatives as there will be less government debt issued in time to come.
“In future, if that’s going to happen, EPF will also have to seriously think about where they are going to invest going forward,” said Dr. Weerasinghe.
While investing in equities has come to the fore as a form of potential diversification, Dr. Weerasinghe asked if the members are willing to take higher risks and if so if the country has adequate instruments to mitigate such risks associated with equities.
Over the years, government securities offered the lowest risk for EPF members with a reasonable return. They are not subject to market volatility as they are recognised in the books as held-to-maturity investments, and thus do not require to be marked-to-market.
That preserved the value and the returns for the members before accounting for inflation.
While EPF’s equity investments earned a dividend income of Rs.7.5 billion in 2022, up 12.6 percent from a year ago, it reported an unrealised marked-to-market loss of Rs.40.9 billion.
Currently the EPF has invested slightly above 2 percent of its assets in shares and it will continue to look for opportunities and will take its investment decisions within the investment guidelines and the parameters set by the Monetary Board, according to Yvette Fernando, the Senior Deputy Governor of the Central Bank.
Senior Deputy Governor Yvette Fernando said the EPF currently holds slightly over 2 percent of its assets in shares. She emphasised that EPF will actively seek out potential investment opportunities while adhering to the investment guidelines and parameters established by the Monetary Board.
“We have in fact looked at the options and about a year ago we invested in certain stocks. So, we continue to study,” she added in response to a query whether the EPF could buy more shares if the availability of government debt becomes less.