Sovereign Wealth Funds Nabylah Abo dehman Political Economy of Growth 2016

Sovereign Wealth Funds Definition 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 Funds History 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 Funds Number of new SWFs created by decade Source: Harvard Kennedy School

Sovereign Wealth Funds Criteria used to define SWFs Source: ESADE

Sovereign Wealth Funds Funding source and Regional distribution Source: SWFI, Oct. 2014

Sovereign Wealth Funds List of main SWFs Country Fund AUM $bn Date of creation Source Norway Government Pension Fund - Global 873 1990 Oil UAE – Abu Dhabi Abu Dhabi Investment Authority 773 1976 China China Investment Corporation 746.7 2007 Non-commodity Saudi Arabia SAMA Foreign Holdings 671.8 n/a Kuwait Kuwait Investment Authority 592 1953 SAFE Investment Company 547 1997 China – Hong Kong Hong Kong Monetary Authority Investment Portfolio 417.9 1993 Singapore Government of Singapore Investment Corporation 344 1981 Qatar Qatar Investment Authority 256 2005 Oil & Gas National Social Security Fund 236 2000 TOTAL ASSETS (of all SWFs) 7,253.8 Source: SWFI, Sept. 2015

Types of SWFs (IMF classification) 1. Stabilization funds set 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 funds intend 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 funds set 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 funds intend 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 Funds International 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 Funds Transparency 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 Funds Transparency (Linaburg-Maduell Index) 2Q2015 Source: SWFI

Sovereign Wealth Funds Transparency, 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 Funds Aggregate SWF Assets under Management ($TN) 2008-2015 Source: Preqin 2015

Sovereign Wealth Funds Value of SWF Investments by Target Region, 2006 - 2014 Source: Preqin 2015

Sovereign Wealth Funds Potential 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 Funds SWFs 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 Funds SWFs 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