Financial reserve reports record annual earnings rate in 2020

The Macau SAR financial reserves reported a record profit rate in 2020 despite local authorities having to dip into the local savings to balance a budget depleted by the Covid-19 pandemic.

Investments made by the financial reserve recorded some MOP31 billion (US$3.8 billion) in returns, a 5.3 per cent annual earnings rate, finishing the year with MOP623 billion.

Back in January the Monetary Authority of Macao (AMCM) Chairman, Chan Sau San, had predicted that local financial reserves were expected to report returns of more than 4 per cent in 2020, thanks to “prudent fund allocation and risk hedging”.

According to the AMCM, the average annual profit rate of the financial reserve stood at 3.1 per cent, with the MOP31 billion in net profits reported last year the highest ever.

As the pandemic progressed the Macao SAR Government used, for the first time, MOP46.6 billion from financial reserve funds to cover the budget deficit, as well as transferring a part of the balance of the execution of the central budget referring to 2018, some MOP52.26 billion, to the reserve.

An extraordinary injection of MOP26.6 billion from the financial reserve to balance the 2021 budget was also already approved.

The AMCM underlined that the pandemic led to severe market fluctuations and to circuit breakers – trading curbs to prevent stock market crashes from occurring – occurring several times.

“However, in an extremely unfavourable situation, the Financial Reserve has successfully managed to preserve and enhance its capital, through prudent allocation and risk coverage, as well as the application of funds in markets with potential growth,” the AMCM added.

The financial reserve was said to have implemented a conservative defensive approach and reduced its position in high-risk assets in the first half of the year.

“Subsequently, in some of the main equity markets, there was a deviation from the downward trend recorded in the first half of the year, as a result of the quantitative policies of economic stimulus announced in those markets, together with a relatively high proportion of assets equity has been allocated in high-growth markets, which is a factor that contributed to the increase in annual returns resulting from investments in equity,” the AMCM noted.

The financial reserve also extended, in an orderly manner, the average duration of assets allocated to securities portfolios, and reinforced the percentage of securities in RMB, in order to guarantee higher yields.

During the year a global bond portfolio was also introduced through the award of a new company, in order to ensure the investment opportunities that arise in the global bond markets.

“The exchange rate revaluation also recorded net income, after the reduction in hedge expenses resulting from the control of exchange rate risks,” the monetary authority added.

By the end of 2020, the value of the assets held by the local financial reserve increased by 6.3 per cent year-on-year reaching MOP616.12 billion; of which the basic reserve represented MOP146.6 billion and the extraordinary reserve MOP469.5 billion.

Looking to this year, the AMCM outlooked that the price of high-risk assets is already at a high level and many variables in the global economic recovery still exist as the pandemic progresses.

“Cash markets have also registered very low or even negative interest rates, all factors that pose great challenges for the management of reserve investments,” it added.