Sovereign Wealth Funds
Contents
Overview
A Sovereign Wealth Fund (SWF) is a state-owned investment fund or entity that is commonly established using balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports. [1]
SWFs are made up of the revenues earned from commodities such as oil and gas, or non-commodities, usually through the transfer of assets from official foreign exchange reserves. Commodity revenues are created through the export of commodities either taxed or owned by the government. As oil and gas prices have risen, particularly since 2003, the number of SWFs that have been created has also risen. [2] In 2012, commodity financed funds totalled more than US$2.5 trillion. [3]
SWFs are created for a number of reasons. According to the Sovereign Wealth Fund Institute, the primary reasons are to:[4]
- Protect & stabilize the budget and economy from excess volatility in revenues/exports
- Diversify from non-renewable commodity exports
- Earn greater returns than on foreign exchange reserves
- Assist monetary authorities dissipate unwanted liquidity
- Increase savings for future generations
- Fund social and economic development
- Sustainable long term capital growth for target countries
- Political strategy
Commodity Based SWFs
Commodity based SWFs play a role in combatting the 'Resource-Curse'. As of August 2012, countries have increasingly wanted to create funds to better utilise revenues from non-renewable resources given oilfield depletion. According to the Central Banking Journal, Ghana, for example, discovered oil in commercial quantities in 2010 and has since tried to structure its SWF by taking into account the failures and successes of other African states. The Ghana Petroleum Fund was intended to adopt policies that utilize the potential of natural resources, while avoiding the resource-curse experienced by many African and other states. [5] The Ghanaian government has full ownership over the fund but an investment advisory board helps by providing published recommendations, increasing transparency. The Bank of Ghana is the manager of the funds. The main purpose of the SWF was to invest the oil and gas revenues into fixed-income instruments, and so the Bank of Ghana’s experience in managing exchange reserves by foreign investment in securities made it an appropriate choice for this role.[6] To ensure that Ghana will avoid the resource-curse, it 'has taken the important initial steps to ensure effective management of its oil revenues by ensuring transparent and stable legal and governance frameworks.'
Impact of Financial Crisis
According to a leaked US diplomatic cable from 2009, in the aftermath of the global financial crisis, SWFs were increasingly inclined to have liquid assets. This is because the crisis eroded the market value of many SWF holdings. [7] However, the funds of certain countries were less affected by the crisis. For example, in spite of the global financial crisis, Azerbaijan's strategic currency reserves, held by the State Oil Fund of Azerbaijan (SOFAZ) and the Central Bank, increased to US$19.1 billion during the year, exceeding the 1 January 2009 projection of US$18.55 billion.[8]
SWFs around the world
The following table shows the largest oil funds globally, by size of assets, according to the Sovereign Wealth Fund Institute. The table includes a rating for each fund according to the Linaburg-Maduell Index, a series of indicators, whereby the higher the number (maximum 10), the more transparent the fund is considered to be.[9]
| Country | Name of fund | Assets ($ billion) | Inception | Linaburg-Maduell Transparency Index |
|---|---|---|---|---|
| Norway | Government Pension Fund | 715.9 | 1990 | 10 |
| UAE | Abu Dhabi Investment Authority | 627 | 1976 | 5 |
| Saudi Arabia | SAMA Foreign Holdings | 532.8 | n/a | 4 |
| Kuwait | Kuwait Investment Authority | 296 | 1953 | 6 |
| Russia | National Welfare Fund | 175.5 | 2008 | 5 |
| Qatar | Qatar Investment Authority | 115 | 2005 | 5 |
| UAE - Dubai | Investment Corporation of Dubai | 70 | 2006 | 4 |
| UAE - Abu Dhabi | International Petroleum Investment Company | 65.3 | 1984 | 9 |
| Libya | Libyan Investment Authority | 65 | 2006 | 1 |
| Kazakhstan | Kazakhstan National Fund | 61.8 | 2000 | 8 |
| Algeria | Revenue Regulation Fund | 56.7 | 2000 | 1 |
| Malaysia | Khazanah Nasional | 39.1 | 1993 | 9 |
| UAE - Abu Dhabi | Mubadala Development Company | 53.1 | 2002 | 10 |
| US - Alaska | Alaska Permanent Fund | 45 | 1976 | 10 |
| Iran | National Development Fund of Iran | 42 | 2011 | 5 |
| Azerbaijan | Azerbaijan State Oil Fund (SOFAZ) | 32.7 | 1999 | 10 |
| Brunei | Brunei Investment Agency | 30 | 1983 | 1 |
| US - Texas | Texas Permanent School Fund | 25.5 | 2008 | 9 |
In detail
State Oil Fund of Azerbaijan
Main article: State Oil Fund of Azerbaijan (SOFAZ)
Libyan Investment Authority
Main article: Libyan Investment Authority (LIA)
References
- ↑ "What is a SWF?" Sovereign Wealth Fund Institute, retrieved 15 August 2012.
- ↑ "What is a SWF?" Sovereign Wealth Fund Institute, retrieved 15 August 2012.
- ↑ "SWF" Investopedia, retrieved 15 August 2012.
- ↑ "What is a SWF?" Sovereign Wealth Fund Institute, retrieved 15 August 2012.
- ↑ "Sovereign Wealth Study" Central Banking Journal, 16 May 2012.
- ↑ "Sovereign Wealth Study" Central Banking Journal, 16 May 2012.
- ↑ "London-based Experts Assess Sovereign Wealth Fund Activities" WikiLeaks, 25 June 2009.
- ↑ "Azerbaijan - Investment Climate Statement 2010" WikiLeaks, 25 January 2010.
- ↑ "Linaburg-Maduell Transparency Index", SWF Institute, retrieved 14 March 2013.
- ↑ "Fund Rankings", SWF Institute, retrieved 14 March 2013.
