Sunday, June 1, 2008

Sovereign Wealth Funds: The guide to economic prosperity or financial dictatorship??

Sovereign Wealth Funds or popularly known as SWFs have all their coffers filled with money, currency and cash and their pockets heavy in coins. Just how do they accumulate so much capital and gain world-wide exposure?? Its simple: take the concept of a mutual fund. A mutual fund accumulates funds of a hundred thousand investors and gives an annual return to them. Likewise, sovereign funds are mostly held by central banks, accumulating money during the fiscal management of the nation's banking system. Due to this, these funds may hold money in currency, dollars, SDRs or IMF positions.

With high oil prices, financial globalization and large global imbalances and dwindling positions on assets, several oil exporters and Asian countries like Singapore, UAE, Kuwait, China, South Korea, Malaysia and Saudi Arabia have expanded their SWFs fast and rich -thereby making their presence felt globally Only recently did the SWFs like Abu Dhabi Investment Authority bale out Citigroup during the credit crunch, and so did others pump money into Merrill Lynch and Morgan Stanley because of the credit crisis. This reiterates my suggestion that SWFs will invade everything - right from pension funds to the Wall Street stalwarts.

China - Russia vs USA and European countries

With growing alliances between China and Russia, a greater co-operation between the two states, trade links both commercial and military , China and Russia would look forward to a dream run in the 21st century with their multi-multibillion dollar fund proving their financial prowess against the likes of US and UK. Europe will gets its first jolt when China becomes a natural customer of Russia's energy reserves even as Russia continues the restructuring of its economy.

Stabilizing force

SWFs are large enough to weather market downturns or even go against market trends. Many Sovereign Wealth Funds may also move a lot of money and allocate them properly thus reducing the risk of price effects on assets they own, thereby making it stable and reducing volatility. They could come quite handy in the present food crisis(if they opt to help) SWFs increase market liquidity and provide depth to the stock market.

Although SWFs are supposed to have a stabilizing effect on the world economy, they may also have unhedged, unclear, large, volatile positions in financial markets and have potential to cause market disturbance. SWFs, essentially held by central banks, can also come in its own way in the functioning of the central banking by mounting huge losses which may not be easily accounted for.

Facts on SWFs

UAE's fund Abu Dhabi Investment Authority (ADIA) leads the pack of all sovereign wealth funds with an undisputed estimate of more than $875 billion., beating second-place Norway fund by a whopping $525 billion.

It accounts for almost a third of all SWF's with the total estimate value to be $2.5 trillion.

According to, Temasek Holdings, the Singapore based fund, does not consider itself as a Sovereign Wealth Fund, although valued at $159 billion.

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