1. Sovereign Wealth Funds
Nabylah Abo dehman
Political Economy of Growth
2016

2. 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

3. 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)

4. Sovereign Wealth Funds Number of new SWFs created by decade
Source: Harvard Kennedy School

5. Sovereign Wealth Funds Criteria used to define SWFs
Source: ESADE

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

7. 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

8. 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)

9. 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

10. 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

11. Sovereign Wealth Funds Transparency (Linaburg-Maduell Index) 2Q2015
Source: SWFI

12. 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

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

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

15. 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.

16. 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

17. 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