sovereign wealth fund modern global economy

sovereign wealth fund modern global

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Its importance for World Economy Defining SWF: 

Pools of money derived from a country’s reserves, which are set aside for investment purposes that will benefit the country’s economy and citizens. The funding for a sovereign wealth fund (SWF) comes from central bank reserves that accumulate as a result of budget and trade surpluses, and even from revenue generated from the exports of natural resources. The types of acceptable investments included in each SWF vary from country to country; countries with liquidity concerns limit investments to only very liquid public debt instruments.

What role do sovereign wealth funds (SWFs) play in the modern global economy: 

To begin with, SWFs are a modern iteration of economic power projection by states on the international scene. In one form or another, vehicles resembling SWFs have been around for a long time. Similar entities investing state funds, generated from reserves or trade surpluses (such as from natural resources), or utilizing substantial state support or privilege, could very well include conglomerates such as VOC (the Dutch East India Company) or the British East India Company. Another thing they appear to have in common with modern SWFs is that they were the pioneers in frontier markets, often creating regional trade beyond what the local governments and businesses were able to create. It should not be forgotten, however, that SWFs are of ten perceived to be driven by political, rather than economic, considerations.

What current challenges do SWFs face: 

One of the biggest challenges for SWFs is likely to be the uncertainty surrounding the intended policies of the developed economies towards SWFs. There is little doubt that SWFs are going to face attempts to impose certain curbs on their operations, imposed by the current and prospective market regulators, putting them under increased regulatory scrutiny, in line with the tightening global financial regulations. Even though host governments would welcome long-term investments from SWFs, there is a growing popular feeling and political pressure to codify and regulate the global financial system, enhance its surveillance and the interventionist powers of governments. This will inevitably affect how SWFs operate in the developed economies – would their governments be happy to have their activities regulated and maybe virtually controlled by foreign states? An additional factor that remains, despite the changing market conditions, is the overall distrust towards SWFs among the governments of the developed economies, and in particular the fact that any major SWF investment can be viewed through the prism of national security.

What are the advantages SWFs can bring to the development of the Third World: SWFs are just like any other investor and are interested in returns, reduction of risk and capital growth. Sometimes, however, the long-term or broader view on returns and risks that they take is creating the impression of an agenda, different from that of other investment vehicles and organizations. Yet, at the end of the day, the investment decisions and abilities of SWFs depend on the specifics, nature and size of their holdings in particular regions. Some assets are deemed strategic, others – temporary, or a building block in a long-term approach. In addition, SWFs have a broader take on investment risks, due to their more long term vision and approach, and are gradually becoming more focused on realizing new opportunities in asset-backed or more traditional sectors in less developed markets.

Do We Have the Appetite for the Risk? 

One of the major concerns is the level of risk a government-controlled fund would be able to take. Investments in oil are often high-risk-and-high-return bets. Many of the deep water bets taken by the smartest oil companies in the world have proved to be wrong, sinking millions of dollars. Will an Indian sovereign fund, where every decision has to be cleared by an empowered committee, be able to take these risks? The other problem is the speed of decision making. Government- owned oil companies like ONGC and BPCL already face red-tape and delays in getting clearance, often resulting in the opportunity being lost. Will it be any different for the sovereign fund? The fund will have to be answerable for its returns.