Sovereign Wealth Funds

Jan 22, 2009 Editorial

Responding to criticisms about his extensive foreign travel, on his return from his latest trip last week — to Libya and Greece (a planned stopover in Qatar fell through) – President Jagdeo explained his rationale.
He pointed out that, in our quest for foreign investments, the traditional sources in the capitals of the West (not that we had been too successful recently) are threatened in the wake of their financial meltdown. After all, they are busy scrounging around for liquidity injections for themselves as they struggle to survive.
The President pointed out, however, that all was not lost. After the astounding rise in the price of petroleum in the last few years, the countries in the Middle East, which sit on top of the largest reserves of petroleum and petroleum products in the world, are also now sitting on top of some of the largest cash reserves in the world.
They have established investment vehicles – dubbed “Sovereign Wealth Funds” (SWF) – which, according to President Jagdeo, “are looking for investment opportunities around the world, since it is even more difficult for them to find these in the Western world because of the problems there.”
In that circumstance, he opined, lies an opportunity for our investment-starved economy: “We have to flow with the tide.” Most concretely, he informed the nation that a delegation from Libya, the proud owner of a multi-billion SWF, would be visiting Guyana “in a month, to look at investment opportunities”.
Since it would appear that maybe our economic salvation is nigh upon us, it may be of some value to look a bit closer at these “Sovereign Wealth Funds”.
While the name might be new (conferred in 2005 by one account) Sovereign Wealth Funds are nothing new, but they are growing larger. Countries that ran trade surpluses always held their excesses as “foreign reserves”, as a buffer in assets that were considered safe – usually gold and most recently US T-bills.
Deployed by their central banks, the returns were small, but safety was the watchword. With the first oil crisis in the seventies, the foreign reserves became overwhelming, and several oil-producing emirates, such as Kuwait and Abu Dhabi, established separate investment funds (SWFs) in an attempt to garner larger returns.
They were the governmental versions of the massive private hedge and investment funds that were sprouting in the West. Now, Abu Dhabi boasts the largest fund, sized at $600-$700 billion, and other countries have followed its lead.
Norway established a fund for its excess oil incomes in 1990. Singapore has accumulated two large funds that, unusually, are not based on oil income. And more recently, China and Russia have instituted large Sovereign Wealth Funds of their own.
These latter funds had their origins in the Asian financial crisis of 1997-98, in which several Far Eastern economies were caught with their pants down when they did not have enough foreign reserves to support their currencies when Western investors suddenly pulled out their assets.
They vowed not to replicate this debacle and began to accumulate foreign reserves from their trade surpluses. Following the lead of the Arab oil producers, they later established several Sovereign Wealth Funds in the last few years. Today, such funds hold as much as $3 trillion in assets, and some economists forecast they will grow to $12 trillion by 2015, an amount that roughly corresponds to the size of the entire U.S. economy.
Some of these funds were badly burnt from their strategy of investing in the financial institutions of the West. Morgan Stanley estimated that Sovereign Wealth Funds (SWFs) have seen their combined net worth fall 25 per cent — a whopping loss of US$750 billion — in 2008, and most of them have signalled a shift in their investment strategy.
However, we have to be realistic in our expectations of receiving any sudden deluge in investments from this quarter soon. Firstly, these funds have not been investing in even liquid assets of volatile Third World economies – much less the long term developmental projects that we may offer.
Secondly, with the precipitous drop in oil prices, the Arab League has already scheduled a meeting to exhort the funds to keep their investments closer home. Finally, with the economic downturn reducing the current account deficits of the trading economies, such as China’s and Singapore’s, we can also expect very conservative behaviour from those quarters.