The cost of holding high levels of foreign exchange reserves can be estimated as the difference between the interest rate paid by the central bank on domestic securities and the interest earned on foreign exchange reserves, adjusted for any exchange rate change.
I am of the view that during the coronacrisis this spread is likely to change very fast. The close relationship between SWFs and country central banks will come under pressure, especially for the petrodollar SWFs as oil prices have tanked to less than $30. Of course not all SWFs are created equal: they lie along a spectrum of risk appetite. Those that in the past demonstrated a strong willingness to lever up and make strategic purchases, serve dual objectives of wealth creation and support of their country’s policies will now need to rethink their mandates. In order to do that, I recommend that they need to think in terms of the larger eco-system and not silo mandate, as we showcase in this visual.