Today’s edition of this SWF series presents an overview of the SWFs around the world, such as in Asia, Africa and the Middle East. In so doing, this article seeks to put into perspective the rationale for their development by these countries, their roles in the global financial markets, and to the countries’ economic development.
Overview of SWFs in Asia
SWF assets of Asian countries currently account for about 40 percent of total global SWF assets. The growth of Asian SWFs is a relatively new phenomenon, which emerged as a consequence of two economic factors. Firstly, as the large, export-driven East Asian countries accumulated enormous foreign currency reserves, policy makers started evaluating the desirable level of reserves. The second factor was that the U.S dollar (the main reserve currency), depreciated significantly in recent years, and the returns of these reserve investments came under scrutiny. Thus it was decided to establish SWFs as a tool to address these issues (World Bank, 2014).
On the contrary, other large SWFs in East Asia, such as Singapore and Malaysia, were originally established in order to enhance the efficiency of managing government’s holdings in domestic corporations, which were accumulated in the process of government-led economic development. These funds then started to invest internationally, and today these funds operate more like a commercial investment company. Additionally, a few countries, namely Brunei and Timor-Leste, had established their SWFs with commodity revenues as savings or stabilization funds. These types of funds have relatively less need for short-term income streams. Rather, they need high, long-term returns with prudent levels of risk, so as to support productive investment in growth-enhancing and poverty-reducing spending on needed infrastructure, such as agriculture, health, education and basic service delivery.
In history, however, it was evidenced that in some instances these funds have actually amplified, rather than mitigated, the adverse effects of oil and gas windfalls (World Bank, 2014).
China’s SWF
China’s SWF, the China Investment Corporation (CIC), was established in September, 2007 – and is one of the largest SWFs in the world. The CIC was created to improve the rate of return on China’s $1.5 trillion in foreign exchange reserves and to absorb some of the country’s excess financial liquidity. The CIC is a semi-independent, quasi-governmental investment firm mandated to invest a portion of China’s foreign exchange reserves. The CIC reports directly to China’s State Council, conferring it with the equivalent standing of a ministry, and the State Council’s leader.
A number of international finance experts had expressed some concerns about the recent growth in SWFs, and the CIC in particular. Some analysts had argued that major shifts in SWF investments could potentially disrupt global financial markets and the U.S economy. On the other hand, other analysts were less concerned about SWF and the CIC, and welcomed their participation in international investment markets (CRS Report for Congress, 2008).
Nonetheless, China responded by maintaining that the CIC will prove to be a source of market stability. But despite its reassurances in this regard, there were calls for greater oversight and regulation of SWFs. Some experts suggested elements to be included in such guidelines, such as standards for transparency, governance and reciprocity. It was also suggested that the United States review its laws and regulations governing foreign investments in the United States, with the possibility of implementing special procedures or restrictions on proposed investments by SWFs – inclusive of limits of SWF ownership of U.S companies, financial reporting requirement, and restrictions on types of equity investments SWFs can make in U.S firms (CRS Report for Congress, 2008).
Arab Sovereign Wealth Funds
Kuwait Investment Authority
The Kuwait Investment Authority (KIA) is mandated to achieve long-term returns on Kuwait’s surplus oil revenue and to provide an alternative source of government income for when the country’s oil resources are depleted. The KIA is set up as an autonomous government institution, and is responsible for the management and administration of the Future Generations Fund (FGF) and the General Reserve Fund (GRF), as well as any other fund entrusted to it by the Kuwait Minister of Finance (Behrendt, 2008).
The SWFs of Abu Dhabi
The Emirate of Abu Dhabi controls three relevant SWFs: the Abu Dhabi Investment Authority (ADIA), Mubadala Development Company and the International Petroleum Investment Company (IPIC). All three of these funds, over the course of several decades, were established to manage the emirate’s oil and gas income, strengthen its position in the regional and global oil markets, and eventually help diversify Abu Dhabi’s economy away from risks posed by volatile oil markets (Behrendt, 2008).
Dubai SWF
While Abu Dhabi and Kuwait have managed their foreign investments through SWFs for decades, Dubai’s portfolio of SWFs was developed only just over a decade or so, in an effort to benefit from global investment opportunities. As such, Dubai does not have an extensive track record of managing the government’s external assets. Dubai’s investment landscape was fairly fragmented, and private ownership appeared to be much more dominant there than other countries (Behrendt, 2008).
