Sovereign Wealth Funds

From Oil4All
Jump to: navigation, search

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 economical 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'. Countries increasingly want 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 882 1990 10
UAE Abu Dhabi Investment Authority 773 1976 6
Saudi Arabia SAMA Foreign Holdings 757 n/a 4
Kuwait Kuwait Investment Authority 548 1953 6
Qatar Qatar Investment Authority 256 2005 5
UAE - Dubai Abu Dhabi Investment Council 90 2007 n/a
Russia Reserve Fund 88.9 2008 5
Russia National Welfare Fund 79.9 2008 5
Kazakhstan Kazakhstan National Fund 77 2000 2
UAE - Abu Dhabi International Petroleum Investment Company 68.4 1984 9
UAE - Abu Dhabi Mubadala Development Company 66.3 2002 10
Libya Libyan Investment Authority 66 2006 1
Iran National Development Fund of Iran 62 2011 5
US - Alaska Alaska Permanent Fund 53,9 1976 10
Algeria Revenue Regulation Fund 50 2000 1
Malaysia Khazanah Nasional 41.6 1993 9
Brunei Brunei Investment Agency 40 1983 1
US - Texas Texas Permanent School Fund 37.7 1854 9
Azerbaijan State Oil Fund 37.3 1999 10
[10]

In detail

State Oil Fund of Azerbaijan

Main article: State Oil Fund of Azerbaijan (SOFAZ)

Libyan Investment Authority

Main article: Libyan Investment Authority (LIA)

Tanzania Natural Gas Revenue Fund

Main article: Tanzania Natural Gas Revenue Fund (NGRF)

References

  1. "What is a SWF?" Sovereign Wealth Fund Institute, retrieved 15 August 2012.
  2. "What is a SWF?" Sovereign Wealth Fund Institute, retrieved 15 August 2012.
  3. "SWF" Investopedia, retrieved 15 August 2012.
  4. "What is a SWF?" Sovereign Wealth Fund Institute, retrieved 15 August 2012.
  5. "Sovereign Wealth Study" Central Banking Journal, 16 May 2012.
  6. "Sovereign Wealth Study" Central Banking Journal, 16 May 2012.
  7. "London-based Experts Assess Sovereign Wealth Fund Activities" WikiLeaks, 25 June 2009.
  8. "Azerbaijan - Investment Climate Statement 2010" WikiLeaks, 25 January 2010.
  9. "Linaburg-Maduell Transparency Index", SWF Institute, retrieved 14 March 2013.
  10. "Fund Rankings", SWF Institute, retrieved 14 March 2013.