Wednesday word: sovereign wealth funds. Your security at risk?January 23, 2013
Investment funds maintained by the governments of countries that run budget surpluses, usually because the nation exports more than it imports (e.g., oil-exporting countries). These funds act much like other institutional investors, except that their client is, directly or indirectly, a national government.*
In the 1950s, the big oil producing countries, mostly in the Persian Gulf, wanted some way of investing extra capital. They said this would help protect them from the volatility of the oil markets. Since then, they have acquired more and more assets around the world. Critics have pointed out several concerns about these sovereign wealth funds:
- SWFs can acquire important stakes in sensitive industries and sectors, ie “assets with strategic value,” as illustrated most famously by the Dubai Ports World fiasco in 2006.
- SWFs distort markets by investing capital in pursuit of foreign policy goals rather than financial goals.
- The funds lack transparency and accountability.
- SWFs can carry out corporate espionage and extract technology they previously could not access.
- Due to their massive size, SFWs have the potential to disrupt financial markets.
In addition to those concerns, Bryan Balin of John Hopkins points out:
- SFWs have been ineffective in carrying out the stated goal of currency stabilization and managing liquidity.
- Some, including German chancellor Angela Merkl, worry that SWFs can conceal their investment activities through third party proxies.
- Smaller countries are at risk from larger countries manipulating their economies, such as Russia’s efforts to choke off Georgia’s energy independence.
The U.A.E., Saudi Arabia, and Kuwait are three of the five top countries with the most sovereign wealth assets. Sovereign wealth funds from Arab states have attempted to buy stakes in Western ports, airlines, election equipment, and stock exchanges.
* Romero, Philip, Your Macroeconomic Edge: Investing Strategies for the Post-Recession World (New York: Business Expert Press, 2011).