Sovereign Wealth Funds: Their Growth, Influence, Economic And Political Concerns
Over the past year, attention has shifted to the increasing role of sovereign wealth funds in the globalized economy. Whilst these funds have been around for many years, their activities have become more pronounced resulting in greater media attention and government scrutiny. The prevailing argument is that, left unchecked, it could result in funds pursuing strategic assets for political reasons. Whilst this is a valid argument, sovereign wealth funds have other motivations for making their investments. This article will briefly examine some of them.
The accumulated funds for sovereign wealth funds have their root origin in many sources including: gold, SDR’s, financial holdings, oil revenues, state savings and foreign currency reserves. The global growth experienced in recent years has contributed to these pools of capital. In the past, foreign governments with large US foreign reserves were content to hold these funds in US Treasury bonds. The desire to mobilize this capital has arisen in response to the decline taking place in the value of the US dollar, inflation and the desire to realize a greater return on idle funds. The US currency was, for a long period of time, considered to be relatively stable. In recent times this has changed due to the current monetary policy being implemented by the US Federal Reserve bank.
Currency debasement, through the decrease in general interest rates, causes the attractiveness of US dollar to decline. With the current adjustments taking place in interest rates, the US dollar is being heavily sold to the point where it is causing alarm for foreign holders of US reserves. A country such as China which has over one trillion of US dollar reserves is finding the value of its holdings deteriorating rapidly. The movements of sovereign wealth funds have resulted from the natural need to find ways to protect the value of existing capital and to potentially realize a higher return. With inflation on the increase on a worldwide basis, coupled with the declining dollar value, States risk further deterioration in capital pools if they remain idle. Sovereign wealth funds are merely looking to find a better alternative than allowing their reserves to remain at the mercy of the current US dollar plight.
Some of the larger sovereign wealth funds include the Abu Dhabi Investment Authority, The Government Pension Fund of Norway (GPF), the Government of Singapore Investment Corporation (GIC), China Investment Corporation (CIC) and the Kuwait Investment Authority (KIA). The recent crisis in the capital markets has seen some of these vehicles step in to make strategic investment in some of Wall Streets troubled investment banks. The investment of funds has provided an injection of much needed capital to firms ravaged by the sub prime fallout. The funds hope to realize a return on their investment by taking a passive stake in these corporations.
There has also been much discussed amongst foreign nations about the future role of the US dollar. The topic has been one of concern among Gulf States. Both the United Arab Emirates and Saudi Arabia have both discussed the possibility of dropping the dollar peg. China has also been actively diversifying its reserve holdings into Gold and the Euro.
Sovereign wealth funds are likely to play a greater role in the years to come. Simon Johnson, the IMF research director has suggested that SWF assets could grow from the current estimated $3 trillion to over $10 trillion by the year 2012.
