1. PRESENTATION FOR September 2017
Bank of Botswana
6/21/2019
PRESENTATION FOR
MEFMI SERMINAR ON MARKET RISK
September 2017

2. RISK MANAGEMENT FRAMEWORK
Board
Investment Committee (Chaired by Governor)
Financial Markets Department (I.C Sub)
Risk Management Unit (within FMD)

3. INVESTMENT POLICY AND OBJECTIVES
SAFETY
Maintenance of purchasing power of foreign exchange reserves
LIQUIDITY
Timely availability of funds that can be accessed to meet payment obligations
RETURN
Subject to liquidity and risk constraints, reasonable earnings are generated.

4. INVESTMENT POLICY AND OBJECTIVES
LIQUIDITY PORTFOLIO
100 percent short maturity bonds and bank deposits
Lower but stable expected return
PULA FUND
35 percent equities
65 percent long maturity bonds
Higher expected return over the long term

5. INVESTMENT POLICY AND OBJECTIVES (Cont’d)
PULA FUND
Fund for future generations (quasi SWF)
LIQUIDITY PORTFOLIO
Short-term portfolio to cover six months of import cover
Safety
Liquidity
Return
Safety
Return
Liquidity

6. RESERVES STRUCTURE AGGREGATE PORTFOLIO IMF ( (6-months import cover)
LIQUIDITY PORTFOLIO
TRANSACTION BALANCE TRANCHE
LIQUIDITY INVESTMENT TRANCHE
PULA FUND
GLOBAL FIXED INCOME
EQUITIES
GLOBAL MANDATE
REGIONAL MANDATES
(USA, Europe, Japan, UK)
The portfolio structure is shown in more detail in this this slide, with values for the main components as at December 2016:
LP, cash, money market and short fixed income
PF: both fi an equities with the latter broken down
….and equities (i.e., shares traded on major stock markets, with a global mandate supplemented by regional mandates focussed on those markets

7. PORTFOLIO MANAGERS Pula Fund (65 percent ) (35 percent)
Bonds
(65 percent )
Bank of Botswana
External Mangers
Equities
(35 percent)
External managers

8. Market Risk/Systematic risk
Negative returns due to market factors.
Accept risk is inherent in portfolio
Identify and manage the risk

9. Managing Currency Risk
Invest in well developed financial markets
Currency must be convertible
Minimum rating Aa/AA
Currency Exposure Limits (+/- 5 or 10% vs Benchmark)
Non benchmark currencies max 5 percent
Hedging- forwards and derivatives.
Derivatives allowed only for hedging or portfolio rebalancing

10. Managing Interest Risk
Adverse movements in interest rates
Duration- most widely used measure
BoB uses modified duration
Duration buckets
Duration decision taken by I.C
Local market duration
Total portfolio duration limit +/-1.5 years
Internal portfolio managers +/- 0.2 years
Correct deviation within two business days

11. Tracking Risk
Difference between portfolio return and benchmark return
TE = Return (p) – Return (BM)
But model uses standard deviation of differences in portfolio and benchmark returns
3-year rolling tracking error target.
Weekly Tracking error for Sub-I.C
Quarterly Tracking Error – Custodian Reports

12. Value at Risk
An estimate of what the portfolio could lose
Set time period – normally 3-months
Certain level of confidence (95%)

13. Bank Risk
Deposit Takers
Based on credit ratings
Monthly setting of exposure limits
Daily monitoring of exposures

14. Fund Manager Monitoring
Daily compliance monitoring
Compliance Radar
alerts
Weekly fund manager reports
Monthly reports.

15. RISK ASSOCIATED WITH QUASI SWF
Reserves are in the balance sheet of BoB
Not independent
Unplanned withdrawal for fiscal expenditure

16. CONCLUSION
A robust risk management framework is important
Manage risk, do not avoid it
Have a risk budget
KNOW YOUR PORTFOLIO CHARATERITICS !!!!!