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Sovereign Wealth FundsNabylah Abo dehmanGrowth Economics2015/2016

+Sovereign Wealth FundsDefinition

state-owned and government-run investment vehicles

term coined by Andrew Rozanov in 2005

almost 80 SWFs exist today

manage more than 7,200 billion dollars of assets

mostly originate in “emerging economies”

derive their assets from commodity exports revenue or trade surpluses

+Sovereign Wealth FundsHistory

First SWFs created in the 1950s: Kuwait Investment Board (1953) and Kiribati’s Revenue Equalization Reserve Fund (1956)

In the 1970s, American States (Alaska, Wyoming), Canadian Provinces (Alberta) and resource-rich countries such as the UAE (ADIA) created their own SWFs

In the 1970s, new type of SWF emerge with creation of Temasek (Singapore): funds whose financing source is derived from excess in foreign exchange reserves

1973 and 1979 oil crises lead to a few SWFs’ creation (Oman, Brunei, Norway)

Surge in commodity prices since 2000 led Russia, Qatar, Dubai, Libya, Iran and Kazakhstan to set up their own SWFs

In parallel, Southeast Asian countries saw their trade balance surplus grow thanks to cheap and abundant workforce and new SWFs were set up (China, Korea)

+Sovereign Wealth FundsNumber of new SWFs created by decade

Source: Harvard Kennedy School

+Sovereign Wealth FundsCriteria used to define SWFs

Source: ESADE

+Sovereign Wealth FundsFunding source and Regional distribution

Source: SWFI, Oct. 2014

+Sovereign Wealth FundsList of main SWFs Country Fund AUM

$bnDate of creation

Source

Norway Government Pension Fund - Global

873 1990 Oil

UAE – Abu Dhabi

Abu Dhabi Investment Authority

773 1976 Oil

China China Investment Corporation 746.7 2007 Non-commodity

Saudi Arabia SAMA Foreign Holdings 671.8 n/a Oil

Kuwait Kuwait Investment Authority 592 1953 Oil

China SAFE Investment Company 547 1997 Non-commodity

China – Hong Kong

Hong Kong Monetary Authority Investment Portfolio

417.9 1993 Non-commodity

Singapore Government of Singapore Investment Corporation

344 1981 Non-commodity

Qatar Qatar Investment Authority 256 2005 Oil & Gas

China National Social Security Fund 236 2000 Non-commodity

TOTAL ASSETS (of all SWFs) 7,253.8

Source: SWFI, Sept. 2015

+Types of SWFs (IMF classification)1. Stabilization fundsset up to insulate the budget and economy from commodity price volatility and external shocks (ex: Chile’s Economic and Social Stabilization Fund, Timor-Leste, Iran, and Russia’s Oil Stabilization Fund) 2. Savings/future generation fundsintend to share wealth across generations by transforming nonrenewable assets into diversified financial assets (Abu Dhabi Investment Authority, Libya, Russia’s National Wealth Fund) 3. Pension reserve fundsset up to meet identified outflows in the future with respect to pension-related contingent-type liabilities on the government’s balance sheet (Australia, Ireland, and New Zealand) 4. Reserve investment fundsintend to reduce the negative carry costs of holding reserves or to earn higher return on ample reserves, while the assets in the funds are still counted as reserves (China, South Korea, and Singapore) 5. Strategic development SWFs established to allocate resources to priority socio-economic projects, usually infrastructure (UAE’s Mubadala and Iran’s National Development Fund)

+Sovereign Wealth FundsInternational Standing

Most SWFs’ management is characterized by a lack of transparency which traditionally led Western political actors to

regard SWF with caution or even mistrust

However after the 2008 crisis, the SWFs having actively taken part to the bailout of Western financial institutions (Morgan

Stanley, Citigroup), their reputation has somehow improved

The 2008 crisis also changed:

The geographical distribution of SWFs’ investments:

With the crisis, many SWFs lost considerable amounts with their investments in the West. Besides the economic crisis that followed has made the West ever less attractive of a market to invest in and thus most SWFs have intensified their investment

in emerging and developing economies

+Sovereign Wealth FundsTransparency

The issue of transparency of SWFs is paramount

The level of transparency of a fund is often related to the type of regime/to the political culture of the country of origin of the fund

Along with transparency, the fear of foreign government acting through SWFs with purposes that are not purely commercial is diffuse

Apprehension with regards to industrial espionage or foreign entities taking over companies belonging to sensible industry segments has indeed been voiced

Increased transparency could improve legitimacy and reassure recipient countries

+Sovereign Wealth FundsTransparency (Linaburg-Maduell Index) 2Q2015

Source: SWFI

+Sovereign Wealth FundsTransparency, Legitimacy and International Framework

In order to avoid that recipient countries turn to protectionism with regards to SWFs’ investments, steps were taken at the international level

The IMF and the then International Working Group of SWF worked jointly to come up with a set of 24 voluntary guidelines also known as the Santiago Principles (2008)

The International Working Group has since been replaced by the "International Forum of Sovereign Wealth Funds" (IFSWF). So far 28 nations have signed onto the principles

Fiduciary responsibilities vis‐à‐vis the citizens of their home country should incite SWFs to put out a minimum of information regarding their activities and their performances

BUT there are excellent motivations for SWFs to conserve a certain degree of opacity. 1° being that SWFs engage in risky investment activities and that as every other actor involved in the international capital market, they have a priori no interest in revealing all of its assets under management, its strategy and its investment criteria along with the details of every transactions it gets into

+Sovereign Wealth FundsAggregate SWF Assets under Management ($TN) 2008-2015

Source: Preqin 2015

+Sovereign Wealth FundsValue of SWF Investments by Target Region, 2006 - 2014

Source: Preqin 2015

+Sovereign Wealth FundsPotential role in financing development

As most emerging and developing economies have not been hit as hard as the West by the economic crisis and have had sustained growth up to today, they have the potential to attract investments on the part of SWFs. Furthermore, there is still a lot to be invested in when it comes to these markets…. this is where the developmental needs of most emerging/developing countries could meet the investment strategies of SWFs the SWFs have the capacity to invest on the long-term: an essential feature in financing development projects

Up to today, some SWFs have indeed chosen to dedicate some of their assets to investing in development, be it in their own country or abroad.

+Sovereign Wealth FundsSWFs financing development at home

Discrepancy between amount of reserves accumulated and living conditions in

SWF’s sponsor country – be it with regards to infrastructures,

telecommunications, health conditions or the education sector– has brought

some countries to allow and even to encourage their SWFs to invest

domestically

As of 2012, thirteen SWFs had domestic investment mandates

These investments aim at supporting sustainable growth for their countries and

provide the population – and future generations – with sustained returns

HOWEVER

To be effective the SWFs’ quality of management is paramount

A fund must function aside from political play lest it performances may be

hindered by corruption, and malpractices of all kinds

+Sovereign Wealth FundsSWFs financing development abroad

some SWFs have chosen to dedicate part of their assets to financing development abroad:

• CAD Fund (China Africa Development Fund)

• Norfund (Norwegian Fund for Development)

• Dubai World Africa

these Development Finance Institutions contribute to financing development through investments, as would a traditional commercial investor with this difference that they accept higher risks and lower returns

they provide equity, risk capital and loans to companies in countries where they are typically lacking and their principal objectives are economic growth and poverty reduction