Two of Asia’s frontier markets have given new details of the sovereign wealth funds they hope will radically change their prosperity. Papua New Guinea plans to launch a new fund based on its reserves of liquefied natural gas, while Timor-Leste’s fledgling fund is set to make a major shift in its investment approach.

Timor-Leste’s Petroluem Fund was launched on the back of oil and gas field revenue that began accruing in 2006 and now brings in about $2 billion per year. The fund today has $7.7 billion under management, of which 90% is invested in US Treasuries or similar instruments, and the remaining 10% in equities managed by Schroder Investment Management.

Yesterday Timor-Leste’s Emilia Pires, Minister of Finance, told Emerging Markets that she has submitted a recommendation to change the allocation considerably to 50% global equities and 50% bonds. “The 50% bonds will not just be US Treasuries,” she added. “It is diversification we are after: increasing the risk, but also diversifying to counterbalance that risk.”

Andrew Oaeke from Papua New Guinea’s Department of the Treasury outlined plans to build a sovereign wealth fund to handle the revenues that will come from the country’s transformational PNG-LNG liquefied natural gas project, which he said was expected to start producing revenues from 2018 and should generate a total of around US$30 billion over the lifetime of the project.

The government and central bank have now set up a basic structure for a consolidated pool of three offshore funds: one for infrastructure, one for economic stabilization, and one future fund. The funds will be integrated with the budget and fiscal framework and will aim for international best practices of governance and transparency. Drawdown rules will be governed by legislation, which has yet to go to parliament, and an investment board will oversee allocation, including external fund managers.

Both countries are dealing with the challenges as well as the bounty that a discovery of commodity assets can bring to a small country. “It is likely that the scale of LNG as a new and major revenue resource will give rise to major macro pressures such as the appreciation of the exchange rate, potentially undermining the competitiveness of our export sector,” especially for agriculture in 80% rural PNG, said Mr Oaeke.

In Timor-Leste’s case, there has been an acute challenge to balance the need to improve the country today, and to save for future generations when the existing fields run out, expected in approximately 20 years time. “There was major civil unrest in 2006 [when] we were sitting on a growing bank account while many ordinary people were in desperate need to be lifted out of poverty,” Ms Pires said. “You do need a balance on this.” Since then the country has taken funds out to develop infrastructure, but must go to parliament for withdrawals over about 3% of the fund in any given year. The fund is considered among the most transparent in the world.

Mr Oaeke said communication would be vital. “It is important people understand how [assets] are going to be used and why they will be kept abroad and not onshore.”

The insistence on transparency is striking given that the largest sovereign funds in the world, such as those in Kuwait and Abu Dhabi, disclose very little about their holdings or performance. But SWF commentators said it was the right approach. “Transparency is a good thing for three reasons: it stops abuse; it is public money; and because it leads to better decisions,” said Professor Simon Chesterman of the National University of Singapore Law School.

It’s no surprise that sovereign wealth funds capture the attention of the world’s asset managers. Estimates of the total wealth these enterprises manage typically range from $3-4 billion, and in most cases they outsource generous amounts of that wealth to external managers.

Attention typically focuses on a handful of the biggest names such as the Abu Dhabi Investment Authority, Kuwait Investment Authority, Government of Singapore Investment Corporation, Norway’s Government Pension Fund Global, or newer arrival the China Investment Corporation. But one of the most interesting trends in this area is the emergence of a newer wave of secondary sovereign entities: far smaller than the more famous behemoth famous, but representing either the emergence of a new bloc of capital, a newfound sophistication in investment technique, or both.

In this article we take a look at three institutions that illustrate the trend: the Petroleum Fund of Timor-Leste in East Timor; the Abu Dhabi Investment Council; and the endowment fund of KAUST, a new science and technology university in Saudi Arabia.

PETROLEUM FUND OF TIMOR-LESTE

To find the next generation of sovereign funds one most go to some obscure parts of the world. A prime example is East Timor, whose sovereign fund is a fascinating story reflecting the emergence of the country itself.

East Timor is one of, if not the, newest countries in the world (depending on how one views the status of Kosovo, and whether you’re reading this after South Sudan becomes a sovereign state). But when it came into being in 2002, it did so as a miserable new entrant into the world economy. Neglected by Indonesia when it was part of that country, and cruelly damaged on the road to independence, Timor had (and largely still has) an infant mortality rate of almost one in 10, a male life expectancy of 47, and 40% of the national population in poverty.

But it had a bounty: plentiful oil and natural gas reserves in the Timor Sea. Hammering out sharing agreements with Australia took several acrimonious years, but today East Timor gets 90% of the Bayu-Undan oil and gas field (being exploited by a ConocoPhillips-led conglomerate which expects the field to be good until 2023 and to provide 4 trillion cubic feet of natural gas and 500 million barrels of condensate); 50% from the Greater Sunrise field, with almost twice as much gas and 300 million barrels of condensate; and 90% from any further finds within the Joint Petroleum Development Area. One way or another East Timor is likely to get at least $20 billion from these fields, and possibly much more.

Many new countries have found themselves with the gift of hydrocarbon reserves and have then destroyed themselves as a consequence. But from the outset, Timor has stood out for the prudence of its approach to its assets. The Petroleum Fund was set up in 2005 in order to build up its assets for the future. It has certainly not been without controversy: in a country where there is not enough money to educate or heal people, it is highly contentious to put all the money from commodities away for the future, and today there is something of a compromise with some funds withdrawn for expenditure and the majority saved for the future. And since oil and gas account for 170 times more than the second-biggest national revenue provider (coffee), based on official 2008 numbers, it’s very clear that these commodities are the country’s only shot.

But, in this poor and unlikely location, the fund is among the world leaders for transparency, accountability and governance: when the Peterson Institute for International Economics tried to put together a scorecard for sovereign wealth funds based on those criteria, East Timor’s fund ranked 3^rd behind New Zealand and Norway, ahead of democratic and transparent beacons like Canada, Alaska and Australia, and an absolute mile ahead of anything in Asia or the Middle East (ADIA ranked 32^nd).

So, today, a visit to the fund’s website, hosted within the central bank, reveals precise assets under management, holdings, allocation and performance, all of it revealed on a quarterly basis. Absolutely everything is spelled out: what can be withdrawn and in what circumstances; what external mandates might be announced; how the benchmark is composed. It’s perhaps not surprising to hear that one of the Norway sovereign fund’s senior management serves on the Timor fund’s investment advisory board.

At this stage, the fund is deeply conservative: it got up and running just ahead of the financial crisis and was in no rush to diversify out of treasuries – a decision that may have made it the best performing sovereign fund in the world during the worst months of the crisis. Whether because of nervousness, lack of expertise or conscious decision, it still hasn’t. Its global benchmark today is 90.4% US government treasuries in a 0-5 year duration; a further 2% in 5-10 year treasuries; 2.6% AAA government or supranational dollar debt; 1.4% AA; and then a sprinkling of Australian, euro, UK and Japanese government bonds. Until recently BPA, the central bank, ran 80% of that portfolio (most of the short-dated Treasuries), while the Bank for International Settlements ran 20%, including the non-US holdings.

While that’s hardly the most exciting allocation, returning just 1.6% in the quarter to September 30 2010, it has served the fund well: given that modest performance but mostly because of new revenues from the oil fields, it has grown from US$3 billion in 2007 to $6.6 billion in September 2010, even after a quarterly withdrawal of $175 million for the quarter to the state budget (which doesn’t sound much but is substantial in a poverty-line country with a population of just a million).

That conservatism might suggest little reason for foreign asset managers to get excited, but there are gradual signs of that wealth being ready to be trusted to external managers. Back in 2009, the Ministry of Finance asked the BPA to consult a manager for an equity portfolio – and on September 7 2010, that finally happened, with Schroders getting a contract to put 4% of the fund into global equities. That chunk, about $260 million, was apparently deployed in October.

And this is exactly the reason international managers ought to look off the beaten track. Timor’s fund will never be ADIA, but it’s very likely to hit $20 billion within the next decade or so; that’s not so far short of, for example, the Korea Investment Corporation. And, over time, as confidence and sophistication grow, it is likely to put more and more of its capital to work in a structure in line with other sovereign wealth funds around the world. Plus, it’s highly unlikely to feel it has that expertise available in the national capital, Dili, which suggests that most of the non-Treasury allocations will be outsourced.

ABU DHABI INVESTMENT COUNCIL

ADIA obviously gets the headlines, but there are a host of other sovereign wealth entities in the United Arab Emirates. In Abu Dhabi alone, for example, there is Invest AD (formerly the Abu Dhabi Investment Company), Mubadala Development Company and the Abu Dhabi Investment Council (known as The Council, or sometimes ADIC 2).

A look at the last of these illustrates the possibilities for international managers in sovereign vehicles beyond what you might call the mother ship. The Council is one of the newer ones, and was set up only in April 2007. Like ADIA, it is an investment arm of the government of Abu Dhabi, and again like ADIA it is responsible for investing government surpluses for the future good of the people, by achieving strong returns and diversifying the economy away from oil. It also has a direct investment mandate to broaden Abu Dhabi’s economic base and help local companies to develop internationally.

In some respects The Council looks a bit like a holding company or a Temasek, in that it holds major stakes in several of Abu Dhabi’s leading businesses: National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, Union National Bank, Al Hilal Bank, Abu Dhabi National Insurance Company, Abu Dhabi Aviation Company, and Invest AD (which is itself a sovereign investment vehicle).

In other ways, however, it looks like a more nimble version of ADIA. It has a dedicated special situations division, for example, which ADIA does not. And this gets to the heart of the big question about The Council: why is it there? Who needs another sovereign wealth fund in Abu Dhabi?

Many feel that ADIA simply became too big to be able to move quickly. It has never revealed its precise assets under management and estimates vary dramatically, but Cerulli believes the total to be between $400 and $500 billion. With such a large amount, one has to deploy a lot of capital into a position for there to be any point in doing so – and that can be difficult in, for example, small caps or special situations. There are political and personal reasons mooted too, but the idea of a quick-acting sovereign fund as an adjunct to ADIA has a lot to recommend it. Some even say that ADIA is beta and The Council is alpha, but in fact a large part of ADIA’s assets are actively managed.

It’s certainly a more opaque institution than ADIA, which itself used to set the benchmark for opacity. These days ADIA produces an annual report with detailed information on asset allocation ranges, governance and even long term performance; at the time of writing, The Council’s web site contained only a picture of some buildings and a brief mission statement: “To assist the Government of Abu Dhabi in achieving continual financial success and wealth protection while sustaining prosperity for the future”, and “to increasingly participate and support sustainable growth in the Abu Dhabi economy.”

We have not yet seen many more satellites come off established sovereign funds, but it’s not impossible that we could do in future. Many of the biggest institutions – Norway’s, Kuwait’s, Singapore’s, China’s – face these scale issues, and a free-reined lower-asset think tank could be a smart way for all of them to deal with it.

KAUST

On a 36 million square metre custom-built site on the Red Sea 80km north of Jeddah, a remarkable new educational institution is taking shape. The King Abdullah University of Science and Technology opened its doors in September 2009 and was by then already an exceptionally well-equipped research university, with specialisms distinct to Saudi Arabia such as water desalination. But that’s just the start, and by 2020 it aims to be among the top 10 universities of its type worldwide.

Ambition like that requires a lot of money to realise, particularly since one of the stated ambitions within the university’s mission and vision statements is to have “a diversified and sustainable revenue base that supports both its operating and capital requirements.”

For this purpose, and with the endowment funds of Yale and Harvard very much in mind, KAUST Investment Management Company was set up. In March 2009, it made a landmark hire as its chief executive and chief investment officer: Gumersindo Oliveros, who was previously the director of the pension plan and endowments at the World Bank.

Although the figure has never been confirmed, it is believed that the new fund was seeded with $10 billion of assets. The board at the time of Oliveros’s appointment makes for interesting reading and shows the scale of the ambition: alongside the Saudi royal family (Prince Khalid bin Adbullah bin Abdulaziz) and government (Ali Ibrahim Al-Naimi, who is the minister of petroleum and natural resources as well as the chairman of KAUST’s board of trustees) are local private sector leaders (Lubna Olayan, the CEO of Olayan financing group, and senior representatives of Saudi Aramco and the Abdullatif Jameel Group) and a couple of striking foreign names: John Brennan, chairman of Vanguard; and Charles Ellis, chairman of the investment committee at Yale University.

Yale is clearly a role model, and those asset managers who have had discussions with the new endowment fund say that it appears to be every bit as sophisticated – at least in what it is talking about doing – as its American cousin. Managers going in for pitch meetings talk about discussions in which typical asset allocation models are discarded in order to talk in detail about thematic investment styles, which might include themes distinct to the Gulf such as water or food scarcity.

The Gulf is not short of well-funded trophy projects, and while we tend to associate these with tall or grand buildings, a commitment to world class education is a logical and laudable way of deploying oil wealth. KAUST could be mirrored by similar institutions in the region.

For the moment, all eyes are on two other Saudi institutions that have been announced but don’t yet appear to be doing a great deal. One is Sanabil al-Saudia, formally launched in 2008 under the supervision of the Public Investment Fund, another state entity. The other is Hassana Investment Co, approved in 2009, to manage the assets of the General Organization for Social Insurance (GOSI), a key Saudi pension fund.

It’s not yet clear whether these new funds will be closer to KAUST’s thinking, or to that of the Saudi Arabian Monetary Agency, the country’s central bank which fulfils some sovereign wealth roles with its considerable assets but is by its nature conservative (and does not at all like being described as a sovereign wealth fund). Either way, these new pools of capital being created around pension funds, academic endowments and other sovereign wealth all suggest opportunity for foreign fund managers.

Picture two countries. One has an infant mortality rate of almost one in 10, a male life expectancy of 47, and 40% of the population in poverty. The other has $3 billion in a burgeoning sovereign wealth fund fuelled by oil and natural gas reserves, a figure that will reach $20 billion before long even in the worst case scenario. The curiosity of East Timor is that it is both of these places at the same time.

There is surely no country in the world where the sovereign wealth fund is so utterly key to the future of the country, the very sustainability of its people’s existence. The world’s newest nation, a sovereign state since just 2002, its oil and gas fields in the Timor Sea really are its only shot. Consider this: the government estimates $1.39 billion in revenues for 2008 – all but $27 million of it from oil and gas. Coffee, the second-ranked contributor, accounts for $8 million, 170 times less.

All of which makes the story of the Petroleum Fund, founded in 2005, so remarkable. The Peterson  Institute for International Economics, a Washington DC-based independent research group, ranks it the third best run sovereign wealth fund in the world based on structure, governance, transparency and accountability, behind only New Zealand and Norway. (The Abu Dhabi Investment Authority ranks 32^nd on the same list.)

It gets this accolade for its peerless transparency and its commitment to build for the future rather than to spend today: a bid to make sure there’s something left for the country when the oil runs out. On its website one can find up to date reports detailing everything it holds, how much it manages, even thoughtful responses to public queries about things like bond valuations – a far cry from some of its Middle East contemporaries. Its mandate states that in any one year it can only withdraw what it calls estimated sustainable income, which in practice means 3% of the likely near-term assets of the fund, on the grounds that a 3% reduction should be easily replenished by prudent investment. This display of discipline tends to win it applause from overseas commentators, but is a source of considerable friction from people on the ground wondering why they don’t have enough roads and hospitals while oil revenues sit in long-term investments.

It’s a discipline that comes from having watched others fail. “Where poor countries like Timor-Leste have quickly attained vast amounts of money very quickly, while their human resources and infrastructure still needs to be developed, the outcome is usually a failure,” says Alfredo Pires, Secretary of State for Natural Resources. “I don’t think I could name a single good example in the world. The challenge is for us to be the first ones to avoid the oil curse.”

As of June, the fund had $3 billion under management, a product of revenues from the Bayu-Undan oil and gas field being exploited by a team led by ConocoPhillips. East Timor gets 90% of the taxes and royalties from this field, with Australia taking the other 10.

This field ought to be good until 2023, and has proven reserves of around 4 trillion cubic feet of natural gas and about 500 million barrels of condensate. Pires estimates it ought to bring about $10 billion to East Timor over its life.

Then there’s the Greater Sunrise field, with almost twice as much natural gas and about 300 million barrels of condensate besides. It would take a book to describe the painstaking negotiations between Australia and Timor over the development of this field and the maritime boundaries affecting other, still-to-be-found fields (indeed, one has been written: Shakedown by Paul Cleary, who advised the Timorese on the deal) but the outcome was a 50/50 split with the Aussies on royalties and taxes. Still to be decided, and an increasingly fractious issue, is how it will be developed: although the field is closer to Timor than to Australia, there is a trench more than 2000 metres deep on the Timorese side, a geological curiosity that has been at the heart of decades of dispute about maritime law. One side wants the pipeline to go to Darwin, the other to Timor, while the site operator, Woodside Petroleum, is believed to be leaning increasingly to another option altogether, with a floating LNG plant. Development won’t start until they decide. But whatever the outcome, Timor’s revenues from this ought to generate at least $10 billion.

That’s before anything else is considered. For any funds within an area called the Joint Petroleum Development Area, Timor will take 90%. There are proven fields, albeit small, within Timorese waters. And nobody has really started looking onshore yet. So, although unpredictable oil and gas prices don’t help with projections, the worst case is really that this fund is going to enjoy $20 billion of revenues, and it is common to hear people talking about $50 billion, and sometimes even twice that.

That creates all sorts of whacky statistics: since the national population is barely a million, Timor could end up with a theoretically higher per capita GDP than Australia (although since it has the world’s highest fertility rate of more than seven children per woman, that imbalance is unlikely to stay in place for long). But suffice to say the management of the fund is of vast responsibility and importance. It is, as David Edwards, vice president in worldwide securities services at the fund’s custodian JP Morgan says, “basically all they’ve got.”

So far, the methods used to invest this wealth have been deliberately passive. The Petroleum Fund law insists that 90% of funds must go into US treasuries, bank bills, term deposits or other similar securities; the law dictates a minimum rating of AA-, or that the securities be guaranteed by a sovereign of that rating or higher. The law allows 10% to go into other assets, provided they are issued abroad, are liquid and transparent and are traded in a financial market of a high regulatory standard; in practice, though, the whole lot has stayed in the safe treasuries, and indeed no investment has yet been made in anything rated less than AAA.

The fund’s mandate requires it to track the Merrill Lynch 0-5 year government bond index; its duration must be within 0.2 years of the index, and it is only allowed to drift within 25 basis points of the index’s return, which so far it has managed, lagging it modestly. “The idea was to start with something simple and safe,” says Venancio Alves Maria, executive director of the Petroleum Fund. “At the time we Timorese didn’t have any expertise at all in the fund management area.”

It’s an approach that has served them rather well in a year when sovereign funds from Abu Dhabi to Singapore have found themselves billions of dollars out of the money on investments in American investment banks. But there are signs that the relentless caution may be about to give way to a slightly more daring approach.

The first signs of this change in approach have come with the fund’s first appointments of external western experts. Last August, Mercer was engaged as asset consultant. Then, in June this year, JP Morgan was appointed as the custodian for the fund. JP Morgan is also an advisor to Norway’s sovereign wealth fund, which is a clear model for Timor’s (Torres Trovik from Norges Bank is a member of Timor’s five-person Investment Advisory Board). JP Morgan’s role will cover settlement, administration, accounting, and in future will include performance measurement, mandate compliance monitoring and fund performance services. It’s the clearest sign yet that external managers will be appointed in due course. “This is an early step to accommodate the government’s intention to diversify the fund,” Maria says.

Edwards at JP Morgan in Sydney has high hopes for the fund. “When we initially received the [tender request], the first concern was going to be the stability of the country, how they were looking to structure themselves and invest. We did a lot of due diligence on the individuals, the structure of the fund, the Acts that they passed and made sure we had absolute comfort in what they were trying to do. We do.”

It was, he recalls, quite a moment to step out of a car in Dili for the signing ceremony and face a phalanx of photographers: “my first experience of such overwhelming interest in a contract signing for a custody deal.”

 JP Morgan is believed to have offered a low fee for the work in order to secure this potentially lucrative client. “The value of the reserves, the price of oil and the value they will add through their investment means this is going to be a significant client for us in Asia, perhaps one of the largest,” he says. “On the fee side, for every client that we want to have a relationship with, we will price that very aggressively.”

He too expects a change in investment approach. “They’re at US$3 billion and growing at $180 million a month, and they understand that diversity of assets is going to be very important to them,” he says.

Then there’s the new finance minister. The Petroleum Fund is run by the Banking and Payments Authority of Timor-Leste, which is in every practical sense the country’s central bank and is intended to become it, although it doesn’t have that formal title yet (and doesn’t issue banknotes, since Timor uses the US dollar as its currency). But it conducts the fund’s management on behalf of the Minister of Planning and Finance, and last year, with a change in government, the person in that portfolio changed.

Euromoney’s interview with Emíilia Pires takes place in the Palácio de Governo, the Portuguese-era government palace facing Dili’s harbour, at 9.30pm on a hot evening in July. She looks tired, and a little wild of hair, after spending part of the day dealing with petitioners (earlier in the day a protest has been quelled with tear gas just around the corner) and the rest of it lobbying parliament, but presses on with an interview despite the lateness of the hour. She is certainly not lacking in energy or spirit: the first ever East Timorese graduate of an Australian university (La Trobe), and someone who fought her way from refugee status following Indonesia’s invasion of Timor in 1975 to being a public servant in the Victorian state government, she is one of a number of Timorese who have studied in Australia (Alfredo Pires, a cousin, is another example and the president, José Ramos-Horta, has held Australian permanent residency) and come back after liberation to help rebuild the country.

An hour in her presence leaves little doubt of her conviction to get things done, and the Petroleum Fund is on her agenda for change. She appointed a working group to look at the structure and approach of the fund. “When we took over government there were some studies being done on whether we had an optimal investment strategy,” she says. “From those studies it was clear we do not have.” With today’s cautious investment approach, she says the 3% that the fund’s founders believe to be a sustainable withdrawal would not be sustainable at all. “That immediately tells us we need to do something.”

She hasn’t yet decided what – her advisers still have to come back to her with a better strategy -  but she confirms it will involve “more active investment. I hope before the year is over we should have a new strategy, and know what are the areas where we should revise the law, and I should be able to submit it to parliament.” As a first step the fund has initiated contract negotiations with the World Bank and Bank for International Settlements as non-commercial external investment managers.

Pires is also under scrutiny because of another measure her government has taken: it’s started pulling more money out of the fund than it is generally allowed to do.

On May 23, the Council of Ministers approved the final draft of the Mid Year Budget for 2008, allowing for spending of US$773.3 million, the vast majority of it to be taken from the fund. Based on the sustainability calculations, only about $396 million should be taken out of the fund this year; the government is taking an additional $290 million above that level, a figure Emíilia Pires confirms to Euromoney. The Petroleum Law does allow these occasional larger withdrawals provided they are approved by parliament, but some are alarmed that this starts a bad trend.

Tomas Freitas, director of a Timorese NGO called Luta Hamutuk, says “the fund is under threat” because of this approach. The protests on the morning of Euromoney’s visit are partly to do with this budget, and in particular the fact that $1.4 million of it is allocated to the purchase of luxury cars for members of the national parliament. Some external observers, while acknowledging the need for investment now (and especially the impact of food price hikes), privately say they wish the extra money had been taken from World Bank or Asian Development Bank loans, freely available and at favourable rates, rather than from the fund itself, because of the precedent it sets.

Emíilia Pires is characteristically passionate in her defence of the government’s position when asked about commentators who think the funds should not be withdrawn. “I don’t understand how they think that, because right now if you don’t invest in the people, what future have we got? There’s not enough schooling, or quality of schooling. We are suffering from dengue, malaria, you name it.  Should we take more? Of course, logically we have to, otherwise where is the future generation? For me it’s just irrational to think otherwise.”

The approach would probably have attracted less criticism but for the fact that Timor has not previously managed to spend its more modest budgets. In the 2006-7 fiscal year, the budget was set at $328.6 million, of which only $160.4 million was paid – a cash-based execution rate of just 49%. An inability to spend the money it has begs the question whether a greater sum can usefully be employed now. Perhaps the biggest problem is human resources, and there are no end of programs geared towards giving specialist education to a generation of Timorese, notably in petroleum and geology, but it will take time to come through.

East Timor is still a volatile place – Ramos-Horta was shot three times in a failed assassination attempt in February, and it is still rare to go a minute on Dili’s streets without seeing a vehicle marked with UN insignia. But it has a great chance. It is not short of advice: Minister of Economy and Development João Mendes Gonçalves recently set about collating the various macro and economic research and development studies that have been conducted for Timor since 1999, and has so far collected 1700 of them.

But it will eventually go its own way. As Alfredo Pires says: “We seem to have a lot of experts, but sometimes we have experts who have never lived in a poor country. They may have the mathematics and economics right but it’s about individual cases. It comes back to people and the leadership.”

BOX: Banking in Timor

Timor’s banking system is a reflection of its history. There are three banks with a presence, all foreign, one each from the country that colonised it (Portugal), occupied it (Indonesia) and helped liberate it (Australia): Caixa Geral de Depósitos, Bank Mandiri and ANZ respectively.

These banks are arguably seen as a method for capital to leave Timor rather than to come into it. “Apart from the Portuguese bank, the others are not giving any loans to people,” says João Mendes Gonçalves, Minister of Economy and Development. “They claim this is mainly geared to the risks associated with the loan, and we understand all that, our legal framework is not complete yet.” Instead, “they are in deposits from people, transferring money overseas, and getting commission from that.”

ANZ itself, which set up in January 2001 even before Timor’s formal independence, says it supports “both international firms and a fast-growing Timorese client base”, offering savings, transactional banking products, and international services, for personal customers, commercial clients, government and non-government organisations. A spokesman says ANZ “sees a number of opportunities… to play a strong role in the development of Timor-Leste as a nation,” including facilitating foreign investment, lending, and providing banking services to the public sector.

Timor is, though, witnessing the birth of its own banking sector. The Institute of Microfinance Timor-Leste was established under the UN-led transitional administration, with a mandate for poverty reduction. It has grown but been impeded by law, unable to take more than $1 million in total deposits, or to give loans higher than $5000. In July, it changed hands. “We reached an agreement that for the better future of the institution, it would be better if it came to the government,”  Gonçalves  says. “We would strengthen it and ensure they expand into other districts, transforming it into the first national bank of East Timor.”

The country does need a banking sector, because it barely has a private sector to speak of and has no hope of developing one without access to credit. Plenty needs doing before western banks are likely to commit further, though, starting with a bankruptcy law; Gonçalves says he is about to send a draft law to the Ministry of Justice.

For the future, there is also talk of a national development bank to support Timorese entrepreneurs. Gonçalves says he has lobbied the World Bank, ADB, IFC and another group to come in with the government in putting in $3 million apiece to a development fund.

 To see this article in its published form, click here:  http://www.euromoney.com/Article/2017101/East-Timor-The-worlds-most-important-sovereign-wealth-fund.html