Sovereign Wealth Funds

1. SovereignWealth Funds Nabylah Abo dehman GrowthEconomics 2015/2016

2. Sovereign Wealth FundsDefinition • state-owned and government-runinvestmentvehicles • termcoined by Andrew Rozanov in 2005 • almost 80 SWFsexisttoday • managemore than7,200 billiondollars of assets • mostlyoriginate in “emergingeconomies” • derive theirassets from commodity exportsrevenue or tradesurpluses

3. Sovereign Wealth FundsHistory • First SWFscreated in the 1950s: Kuwait Investment Board (1953) and Kiribati’sRevenueEqualizationReserve Fund (1956) • In the 1970s, American States (Alaska, Wyoming), Canadian Provinces (Alberta) and resource-richcountriessuchas the UAE (ADIA) createdtheirownSWFs • In the 1970s, new type of SWF emerge with creation of Temasek (Singapore): funds whosefinancing source isderived from excess in foreignexchangereserves • 1973 and 1979 oilcriseslead to a fewSWFs’ creation (Oman, Brunei, Norway) • Surge in commodity pricessince 2000 led Russia, Qatar, Dubai, Libya, Iran and Kazakhstan to set up theirownSWFs • In parallel, Southeast Asian countriessawtheirtrade balance surplus growthanks to cheap and abundantworkforce and new SWFswere set up (China, Korea)

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

5. Sovereign Wealth FundsCriteria used to define SWFs Source: ESADE

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

7. Sovereign Wealth FundsList of main SWFs 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 Mubadalaand Iran’s National Development Fund)

9. Sovereign Wealth FundsInternational Standing MostSWFs’ management ischaracterized by a lack of transparencywhichtraditionally led Western politicalactors to regard SWF with cautionor evenmistrust Howeverafter the 2008 crisis, the SWFshavingactivelytaken part to the bailout of Western financialinstitutions(Morgan Stanley, Citigroup), theirreputationhassomehowimproved The 2008 crisisalsochanged: The geographicaldistribution of SWFs’ investments: With the crisis, manySWFslostconsiderableamounts with theirinvestmentsin the West. Besides the economiccrisisthatfollowedhas made the West everlessattractive of a market to invest in and thusmostSWFshaveintensifiedtheirinvestment in emerging and developingeconomies

10. Sovereign Wealth FundsTransparency The issue of transparency of SWFsisparamount • The level of transparency of a fund isoftenrelated to the type of regime/to the political culture of the country of origin of the fund • Along with transparency, the fear of foreigngovernmentactingthroughSWFs with purposesthat are notpurely commercial is diffuse • Apprehension with regards to industrial espionage or foreignentitiestaking over companies belonging to sensibleindustrysegmentshasindeedbeenvoiced • Increasedtransparencycouldimprovelegitimacy and reassurerecipientcountries

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

12. Sovereign Wealth FundsTransparency, Legitimacy and International Framework In order to avoidthatrecipientcountries turn to protectionism with regards to SWFs’ investments, stepsweretakenat the internationallevel • The IMF and the then International Working Group of SWF workedjointly to come up with a set of 24 voluntaryguidelinesalsoknownas the Santiago Principles(2008) • The International Working Group hassincebeenreplaced by the "International Forum of SovereignWealth Funds" (IFSWF). So far 28 nationshavesignedonto the principles • Fiduciaryresponsibilitiesvis‐à‐vis the citizens of their home country shouldinciteSWFs to put out a minimum of information regardingtheiractivities and their performances • BUT thereare excellentmotivations for SWFs to conserve a certaindegree of opacity. 1° beingthatSWFsengage in riskyinvestmentactivities and thataseveryotheractorinvolved in the international capital market, theyhave a priori no interest in revealingall of itsassets under management, itsstrategy and itsinvestmentcriteriaalong with the details of everytransactionsitgetsinto

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

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

15. Sovereign Wealth FundsPotential role in financing development Asmostemerging and developingeconomieshavenotbeen hit as hard as the West by the economiccrisis and havehadsustainedgrowth up to today, theyhave the potential to attractinvestments on the part of SWFs. Furthermore, thereisstill a lot to be invested in whenitcomes to these markets…. • thisiswhere the developmentalneeds of mostemerging/developing countriescouldmeet the investmentstrategies of SWFs • the SWFshave the capacity to invest on the long-term: an essential feature in financingdevelopmentprojects Up to today, some SWFshaveindeedchosen to dedicate some of their assets to investing in development, be it in theirown country or abroad.

16. 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

17. Sovereign Wealth FundsSWFs financing development abroad • some SWFshavechosen to dedicate part of theirassets to financingdevelopmentabroad: • CAD Fund (China Africa Development Fund) • Norfund (Norwegian Fund for Development) • Dubai World Africa • these Development Finance Institutionscontribute to financingdevelopmentthroughinvestments, aswould a traditional commercial investor with thisdifferencethattheyaccepthigherrisks and lowerreturns • theyprovideequity, risk capital and loans to companies in countrieswherethey are typicallylacking and theirprincipalobjectives are economicgrowth and povertyreduction