Sovereign Wealth Funds: Signaling shift in economic gravity

by Peter Harper
(Chicago)

In recent years, sovereign wealth funds (SWF), amassed by different national governments, have hogged the limelight. Though there is no unanimously accepted definition of sovereign wealth fund, but in common parlance, sovereign wealth fund is defined as the large chunk of assets, directly or indirectly owned by a national or state government. These funds may be generated by humongous foreign exchange reserves, fiscal surplus and from the revenues accrued from the exports of natural resources.

In most of the cases, sovereign wealth funds have been created by different countries to diversify their revenue streams and to provide much needed cushion to the domestic economies from external shocks. Currently, the gigantic sized sovereign wealth funds are playing vital role in global economic matters.

Sovereign wealth fund set up by a particular country is not only permitting that national government to purchase large stakes in companies but this is also providing exposure to that country to hitherto uncharted sectors. As per the research conducted by SWF institute, a whopping $4 trillion is managed by these funds. Given the sheer volume of these funds, it is quite understandable that these funds may make huge impact in the global economy. Some of the biggest sovereign wealth funds operating in the world today are the Qatar Investment Authority owned by the government of Qatar, National Welfare Fund possessed by the Russian Federation, Temasek Holdings managed by the government of Singapore, Kuwait Investment Authority governed by the government of Kuwait, China Investment Company regulated by the Chinese government and many more.

If we dig deep into the biggest 20 sovereign wealth funds of the world, we find that majority of these funds have been built up out of the revenues generated from oil and gas exports. In some cases, these funds have been generated out of the revenues earned from metals and minerals. Examples of commodity driven sovereign wealth funds could be the Social and Economic Stabilization Fund of Chile and Reserve Fund of Russia. Besides these, sovereign wealth fund revenues can be accumulated from the proceeds from the sale of government enterprises or from direct transfers from the budgetary resource of the state.

According to a research conducted by JP Morgan, the sovereign wealth funds center around the Asian continent. Middle East countries account for nearly 39% of the total sovereign wealth funds, thanks to the adequate supply of oil. The share of East Asia is 38%. On the other hand, the share of Africa and Americas are paltry 3% and 4% respectively.

Though, SWFs are mainly set up by the rich countries, but many financially less powerful countries such as Timor, Botsldjcapital.comwana have recently launched SWFs. The main reason for doing so is that the SWFs are widely viewed as excellent tools for economic development. But anyways, concentration of this large pool of money into some specific part of the world, may lead to shift in the economic power.

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Feb 29, 2012
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Feb 29, 2012
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Appreciation
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