Under IBRD’s liquidity management guidelines, aggregate liquid asset holdings are kept at or above a specified prudential minimum in order to safeguard against cash flow interruptions. This minimum is equal to the highest consecutive six months of projected debt service obligations plus one-half of projected net loan disbursements on approved loans (if positive) for the relevant fiscal year. The FY 2013 prudential minimum liquidity level has been set at $22 billion, reflecting an increase of $1 billion from FY 2012. In general, the size of the liquid asset portfolio should not exceed 150% of the prudential minimum liquidity level. From time to time, IBRD may, however, hold liquid assets over the specified maximum level to provide flexibility in timing its borrowing transactions and to meet working capital needs. At June 30, 2012, the liquid asset portfolio was 163% of the prudential minimum liquidity level. As of June 30, 2012, the liquid assets were held in three sub-portfolios: stable, operational and discretionary, each with different risk profiles and performance guidelines. The discretionary portfolio was re-activated on November 30, 2011. Stable Portfolio is principally an investment portfolio holding the prudential minimum level of liquidity, which is set at the beginning of each fiscal year. Operational Portfolio provides working capital for IBRD’s day-to-day cash flow requirements. Discretionary Portfolio provides flexibility for the execution of IBRD’s borrowing program and can be used to take advantage of attractive market opportunities. Figure 6 represents IBRD’s liquid asset portfolio size and structure at the end of FY 2012 and FY
2011, excluding investment assets associated with PEBP and AMC. At June 30, 2012, the aggregate size of IBRD’s liquid asset portfolio was $34,189 million, reflecting an increase of $6,035 million from June 30, 2011. This increase reflects management’s decision to increase IBRD’s liquidity levels. IBRD’s liquid asset portfolio is largely composed of assets denominated in or hedged into U.S. dollars, with net exposure to short-term interest rates. The debt funding these liquid assets has similar currency and duration profiles. This is a direct result of IBRD’s exchange rate and interest rate risk management policies, discussed further in Section V-Financial Risk Management, combined with appropriate investment guidelines. In addition to monitoring gross investment returns compared to their benchmarks, IBRD also monitors overall investment earnings net of funding costs, discussed further in Section VI-Reported Basis Analysis. Long-Term Income Portfolio (LTIP) The LTIP program was adopted prior to the global financial crisis in November 2008 with the objective of seeking enhanced returns by investing part of IBRD’s equity that was not needed to support its lending activities, in a portfolio of fixed income instruments and listed equities. While the original program was approved for an investment of up to $3 billion, the program was capped at $1 billion at the end-FY 2009, following the onset of the global financial crisis, which resulted in a surge in IBRD’s lending volumes. In order to maximize IBRD’s lending capacity to borrowing member countries, on April 24, 2012, the Board of Executive Directors approved the liquidation of LTIP.
Figure 6: Liquid Asset Portfolio Composition at June 30, 2012 and 2011 In millions of U.S. dollars June 30, 2012
June 30, 2011
Stable Portf olio 61%
Stable Portf olio 75% Operational Portfolio 25%
Discretionary 22% Operational Portf olio 17%
Total: $34,189
Total: $28,154
IBRD MANAGEMENT’S DISCUSSION AND ANALYSIS: JUNE 30, 2012
17