Wealth Funds to dominate New World Financial Order – By Gilbert Muponda
OPINION – Sovereign wealth funds are set to dominate Global financial markets in the wake of the credit crunch induced by the sub-prime mortgage crisis. Sovereign Wealth Fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals and other financial instruments. Sovereign Wealth Funds are typically controlled by hydrocarbon-rich countries like Russia or Gulf nations with huge petro-dollar surpluses from record high oil prices.
Other nations such as China and Botswana which have huge foreign reserves have set up similar funds. Sovereign wealth funds have gained world-wide exposure by investing in several Wall Street financial firms who were in desperate need of cash injection due to massive losses induced by mortgage crisis.
The current financial crisis has exposed capitalism to the limitations of market efficiencies in efficient allocation of financial resources.
The massive bailout and stimulus packages by the USA, UK, EU and other Western nations have given rise to fears that capitalism is now under threat from too much government involvement in the markets and as such alternative sources of funds have to be found. IMF and World Bank seem not to be up to the challenge either. This opens the way for Sovereign Wealth Fund who have the cash and are ready to invest it.
Most of the savings of Sovereign Wealth Funds originate in accumulated foreign currency reserves. They have been around since the early 1950s but they have grown dramatically in recent years. The expanded activities of the Sovereign Wealth Funds over the past several years as well as the increased amounts available to the funds have created concern that the Sovereign Wealth Funds can destabilize financial markets and the global economy if their investments are motivated by political rather than economic considerations. However it seems the fears are giving way due to desperation as Western markets warm up to the cash rich Sovereign Wealth Funds
Sovereign Wealth Funds are typically created when governments have budgetary surpluses and have little or no international debt. This excess liquidity is not always possible or desirable to hold as money or to channel it into consumption immediately as a result a nation creates a Sovereign Wealth Fund for the rainy day or as a war chest .For example, the Kuwait Investment Authority during the Gulf war managed excess reserves above the level needed for currency reserves.
The Government of Singapore Investment Corporation and Temasek Holdings are partially the expression of a desire to bolster Singapore’s standing as an international financial centre. The Korea Investment Corporation has since been similarly managed.
Global Sovereign Wealth Fund club of countries taking a more active approach to investing foreign reserves has broadened to at least 25 members, to include nations as diverse as Botswana, China ,Australia, Iran, Singapore, Brunei and Kazakhstan .These nations are not traditionally providers of capital or liquidity which now indicates a shift of financial power .The current credit crunch will further open up opportunities for these Sovereign Wealthy Funds to become new suppliers of choice for liquidity and stable capital.
The largest Sovereign Wealth Funds with assets over $100 billion are designated the Super Seven funds: Abu Dhabi Investment Authority
(ADIA) ($875 billion); The Government Pension Fund of Norway ($350 billion); Government of Singapore Investment Corporation ($330 billion); Kuwait Investment Authority ($250 billion); China Investment Corporation ($200 billion); Singapore’s Temasek Holdings ($159.2 billion); and the Stabilization Fund of the Russian Federation ($158 billion).
The growing role of the Sovereign Wealth Funds in markets is beginning to attract criticism, particularly over a lack of transparency. Few Sovereign Wealth Funds give details of their operations, with exceptions such as Norway?s GPF. The IMF also warned recently of the risks arising from the fact that public sector institutions such as Sovereign Wealth Funds are now large players in world financial markets and need to be more transparent in their activities and operations .
This raises issues about potential systemic problems if Sovereign Wealth Funds assume a greater role in markets. The principal reasons are their size, lack of transparency, potential to disrupt financial markets, and the risk that political objectives might influence their management .Many newer Sovereign Wealth Funds, lack management experience and systems of the established funds. Their rise has been accompanied by fears in the European Union and in the U.S. that the governments which control sovereign wealth funds could use them to advance their political and strategic aims.
The US has been pushing sovereign wealth funds to adopt new disclosure rules because of concern that a lack of transparency could spark a rise in protectionism. Given how critical new sources of capital will be a compromise has to be found because capitalism needs this cash .The European Commission has called for an international accord to limit the political influence of state- owned capital pools, which have grown in number to about 40, managing between US$2 trillion and
US$3 trillion. Japan wants global Sovereign Wealth Fund ?rule book?
for protection from China which it feels is trying to dominate resources and areas which Japan previously dominated.
The International Working Group of Sovereign Wealth Funds had to bridge significant differences between funds with a variety of histories, domestic political environments and mandates .Sovereign wealth funds) see themselves as passive, long-term investors, driven solely by the need to make a good return on their country?s surplus cash .
Britain called for a new Bretton Woods conference to reshape the world financial system. Sovereign funds proved their value to the world economy by helping to recapitalize the US banking system during the past year. Europe is now looking at the idea of bringing India and China together with G-8 nations in a "Bretton Woods II" framework of economic rules.
There is a general call for the revision of the architecture of the global financial system fit for purpose in the 21st century. Italy has said it will propose broadening the Group of Seven nations and give new tasks to the IMF and World Bank, when it assumes the rotating presidency of the G7 in January. This is general acknowledgement that the Bretton Woods system is in need of restructuring and Sovereign Wealth Fund present a possible model of replacement. France has called for the creation of its own Sovereign Wealth Fund to try and prop up key and strategic sectors of the economy.
Assets under management of Sovereign Wealth Funds increased 18% in
2007 to reach $3.3 trillion. Already around half the gross official reserves of all countries .Most of this growth stemmed from an increase in official foreign exchange reserves in some Asian countries and rising revenue from oil exports .Sovereign Wealth Funds are already larger than the global hedge fund industry are projected to keep growing.
Gilbert Muponda is a Zimbabwe-born entrepreneur. He can be contacted at firstname.lastname@example.org. This article appears courtesy of GMRI Capital. More articles at www.gmricapital.com