Govt looking to invest billions outside for better returns

The Ministry of Finance (MoF) and the Druk Holdings and Investment (DHI) are working together to invest Bhutanese funds in financial markets and instruments abroad to generate better returns for the government.

The aim is to also take advantage of this COVID-19 period where global stock markets have experienced a slump and so the other hope is to pick up investments at a cheaper rate, before they accelerate in value.

Another purpose would also be to earn returns in convertible currency, which the country needs.

The main force behind this is the MoF and particularly the Finance Minister Namgay Tshering who said he has taken a personal initiative on this front. Lyonpo said that a concept note had been prepared by the ministry after seeking advice from various experts

Lyonpo said, “We are moving forward and the MoF and DHI are working collectively in identifying better opportunities to invest abroad. We want to explore potential markets and secure returns for Bhutan which will diversify revenue generation and the economy.”

However, in a tight financial year with a tight budget that has cut back on many things, the last thing that Bhutan has, is surplus funds to invest.

Here, the Finance Minister, admitting the tough financial position, said that it is an awkward time to talk of revenue surplus given that even in normal years it is difficult to talk of surplus revenue which is used to finance current expenditure, and the leftover is used for capital with the bulk of the capital budget still coming in from donors.

He said that if one took the above approach and one is too conservative then Bhutan would never be able to invest abroad, and especially at a time of opportunity when there is a global fall in stock market prices and markets globally are not doing well.

He admitted that the only problem is of money and there the government does not have to rely on just revenue, but sources like the National Pension and Provident Fund (NPPF) and various funds with major ones being Bhutan Health Trust Fund and Bhutan Trust Fund for Environmental Conservation.

Bhutan has four trust funds, the stabilization fund and four endowment funds, however the government’s main eye is on NPPF as of now.

The minister said that NPPF has around Nu 40 bn under its management of which they keep 14.28 bn or 38% in the banks as term deposits.

He said their investment policy allows 10% of the total assets under management for investment overseas.

He said there is no “idle” money as such as NPPF does not keep funds lying idle and invests them in the domestic market in treasury bills, bonds etc. The returns from these domestic investments are distributed to the NPPF members.

Lyonpo said if the government is to utilize NPPF funds then it will need to be withdrawn from the banks or from the investments made by NPPF in other areas.

“However, we are in the process of seeking consolidated fund status with different trust funds to ensure that capitalization of funds is done in proper manner.MoF, DHI and RMA will be working jointly on innovative investment opportunities both within and outside Bhutan,” said Lyonpo.

He said that since the NPPF money belongs to civil servants the government will have to ensure that it is invested well and not in any volatile instruments. He said in the case of NPPF Index Funds is an option.

According to Investopedia an index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500).

An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets.

Index funds are generally considered ideal core portfolio holdings for retirement accounts. Well known investor Warren Buffett has recommended index funds as a haven for savings for the later years of life.

Lyonpo said the ministry is also collecting actual figure from different trust funds but it is certain that those trust funds who have achieved their fund target are investing in some way or the other. For instance, Bhutan Health Trust Fund is investing 12% of its approximately Nu 3 bn fund abroad through RMA and rest are invested in the domestic market.

The Bhutan Trust Fund for Environmental Conservation has USD 12 mn invested inside Bhutan while another USD 55 mn is invested abroad in various financial instruments.

So it appears that the trust funds at least are well invested outside unless the government wants to increase their external investments or diversify them to financial instruments it considers more lucrative.

The minister said that idea is to pool the money and create an Investment Board and then use DHI to invest that money abroad for better returns.

He said that currently a lot of money just lies in fixed deposits when there are more returns to be had from investing outside.

The minister said that the MoF will work with DHI as a Special Purpose Vehicle for the external investments.

DHI in 2017 launched the Bhutan Future Fund for external investments with an initial capital of Nu 300 mn in the same year which is a portion of the profits from natural resources like hydropower and mining. This has grown to around Nu 1.5 bn today of which Nu 1.4 bn or around USD 19.5 mn is already invested outside in various financial instruments like equity shares, real estate instruments, tech stocks, start ups and others across the world.

From all accounts, it looks like the government wants to use the experience gained by this unit of DHI, which is also also the sole body authorized to make such investments, by putting in more money.

The MoF also has its own ideas. Lyonpo said various investment avenues that could be explored are the long term bond markets, index funds, blue chip companies, online gaming companies and others. The minister said one aspect of the investment could be in India where the regulations are tough, but an exception could be made for Bhutan in sectors like automobiles among others for investment.

However, while the investment plans are ambitious there are also certain natural limitations.

Lyonpo said that the biggest limitation is the foreign currency reserves, as any external investments will require the use of the reserves. He said that a major source of that reserve in the form of tourism revenue is not available.

Lyonpo said that MoF and DHI will be meeting with the RMA soon to discuss about this.

Reserves in March 2020 was around USD 1.2 bn.

The minister said that the Constitutional provision is to ensure 12 months of essential imports and the RMA 2010 Act had also come up with some provisions on reserves.

Another limitation is that though the stock markets since 23rd March 2020 saw the biggest drops it is now largely back to their old position and in the case of tech stocks the stock prices are increasing.

The minister said that MoF and DHI have developed a proposal that will be soon presented in the Lhengye Dhensa meeting.