What are Sovereign Wealth Funds?
Sovereign Wealth Funds (SWF) are investment funds set up by governments to manage money through direct investment in the global market. Essentially, these are government funds invested for profit.
How are they funded?
SWF use two different sources of funds: commodity and non-commodity. Commodity SWF are funded by exports such as oil, which the country either owns or levies taxes upon. Non-commodity SWF are funded by excess foreign currency reserves; China has accumulated significant amounts of U.S. dollars in this manner through its trade surplus advantage.
Past, present and future of SWF
The amount and size of SWF has grown since they started in the 1950s. Currently there are as many as 40 SWF worldwide; estimates put current total wealth at $2.5 trillion. The International Monetary Fund calculates that they have the potential to grow to between $6 and $10 trillion by 2013.
What are uses and benefits of SWF?
Protection and growth of state’s economies
1. Stabilize state economies: A state could increase commodity investments in an SWF to offset a large increase in money from entering its economy all at once.
2. Ensure long-term sustainable growth: SWF profits can be used to prevent a downfall in global markets from drastically affecting the economy of an export-dependent country.
3. Diversify investments: Resource-rich states concluded in 2007 that they were over-invested in the weakening U.S. dollar and used SWF investments to diversify their holdings.
Increased investment in private domestic business and government programs
For the countries making these foreign investments, a successful strategy could result in lower taxes, better financed public works, as well as stronger internal businesses.
Support of Foreign Companies
SWF can provide much needed assistance to foreign businesses during financially difficult times. In January 2008, the Kuwait Investment Authority (KIA) invested $5 billion in Citgroup and Merrill Lynch, and in November 2007, the Abu Dhabi Investment Authority (ADIA) invested $7.5 billion into Citigroup. In both cases the banks sought out foreign investment due to the recent downturn in the U.S. economy.
Why do SWF cause concern?
Concerns arise over the potential use of SWF as tools of foreign political intervention. Through direct investment, governments could overthrow chief executive officers with the purchase of the majority share in a company. The U.S. government is also wary of financial power being in the hands of governments instead of private entities. With such large influence, analysts see SWF as having the potential to help or hurt market turmoil, by either selling abruptly and causing a crisis, or bailing out troubled companies.
Routes to address concerns
Given SWF ties to the global financial system and focus on long-term investments, many have called for greater transparency of their intentions and actions. On March 20, the Bush administration reached an agreement with two SWF, ensuring that they would not seek “geopolitical goals” with their investments. The agreements with Singapore and Abu Dhabi SWF ensure compliance with host-country rules, fair competition with the private sector, the presence of internal and governmental controls, more information disclosure and that the motivations for investment will be solely commercial.
10 Largest Global SWF
(*) Denotes government in the Middle East
(figures in US$ billions)
*1. UAE - Abu Dhabi: Abu Dhabi Investment Council ($875) – Oil
2. Norway: Government Pension Fund ($380) – Oil
3. Singapore: Government of Singapore Investment Corporation ($330) – Non-Commodity
*4. Saudi Arabia: various holdings ($300) – Oil
*5. Kuwait: Kuwait Investment Authority ($250) – Oil
6. China: China Investment Corporation ($200) – Non-Commodity
7. China – Hong Kong: Hong Kong Monetary Authority Investment Portfolio ($163) – Non-Commodity
8. Singapore: Temasek Holdings ($159) – Non-Commodity
9. Australia: Australia Future Fund ($61) – Non-Commodity
*10. Qatar: Qatar Investment Authority ($61) – Non-Commodity
*Also notable is the Palestine Investment Fund which was founded in 2000 and has $850 million in assets. Half of its assets are invested abroad and the other half support domestic economic development initiatives, many of which are joint ventures with foreign entities.
Primarily sourced from a Council on Foreign Relations report with additional information from The Economist, Business Week, The Christian Science Monitor, Foreign Affairs and other news outlets.