Inquiry and Analysis Series – No. 418
January 31, 2008 No. 418

From the MEMRI Economic Blog http://memrieconomicblog.org/ Sovereign Wealth Funds: From Obscurity to Front Page[1]
By: Dr. Nimrod Raphaeli *

Introduction

The World Economic Forum (WEF), which concluded its meetings over the weekend in Davos, Switzerland, appears to have devoted an inordinate amount of time and attention to a growing financial phenomenon few people had heard of until recently. Why the sudden interest? Money talks. From a rather low-key and modest beginning, sovereign wealth funds (SWFs) have burst onto the economic and financial scene as economic powerhouses in control of $2.5 trillion-assets undergoing rapid growth, driven by escalating energy prices and, in the case of China, benefiting from U.S. trade deficits.

MEMRI’s Economic Blog, http://memrieconomicblog.org/, is updated daily with news and analysis dealing with economic issues from the Middle East. Please visit daily.

The Subprime Debacle Heightens the Role of SWFs

The recent subprime debacle has exposed many international banks to severe risks of illiquidity, forcing them to look for assistance from what The Wall Street Journal termed “sovereign saviors.” With deep pockets, many SWFs came quickly to the rescue, striking deals that were generous in their magnitude and potentially even more rewarding when things return to normal, as they most likely will. Some of the most significant deals, valued in billions of dollars, were made with Citigroup, Merrill Lynch, and the Swiss bank UBS. The Qatar Investment Authority [SWF] is negotiating a $3 billion deal with Credit Suisse Bank. Some SWFs had earlier been on a shopping spree, buying into EADS (which manufactures Airbus aircrafts), Deutsche Bank, choice real estate in New York and elsewhere, Barneys department store, the Nordic Stock Exchange, and a big chunk of NASDAQ.

Voices of Concern

But precisely because some of these deals are big, voices are being raised against what is perceived as a threat to national interests, even a threat to national security. French President Nicholas Sarkozy criticized the funds, saying his government would defend “the primordial [ital. added] economic interests of the nation” against the SWFs – a very unusual way to characterize the economic interests of a modern nation. Larry Summers, a former U.S. secretary of the treasury, dubbed the activities of the SWFs “cross-border nationalization.”

Reasons for Concern

Why is there such concern? It is very simple. Critics argue, and rightly so, that the sovereign wealth funds lack transparency; they operate in the shadows of secrecy. Most of them are themselves owned by non-representative governments whose leaders are accountable to themselves or to a small coterie of supporters. Critics might also ask how one guarantees that at a time of a political conflagration or economic shocks, the SWFs would not act in a manner that poured more fuel on the fire. Who is to guarantee that investments that seem perfectly commercially viable and economically rational would not turn suddenly into a political tool that could harm national interests?

Soothing Voices

At the WEF, the head of the Kuwait Investment Fund (SWF) dismissed these worries as “assumptions.” But this assertion is hardly reassuring to the doubters. The worries are real and require a realistic response. Such a response was provided by Tony Tan, deputy chairman of Singapore’s Government Investment Corporation and a former Singaporean deputy prime minister. In an interview with The Financial Times that was published January 28, 2008, Mr. Tan stated emphatically, “We have already decided that the circumstances have changed. The right thing to do is to move to a path of more disclosures.” Fully aware of the consequences of non-disclosure, Mr. Tan added, “The greatest danger if this is not addressed directly then some form of financial protectionism will arise and barriers will be raised to hinder the flow of funds.”

The Need for Transparency

Now it is time to hear the same message from others as well. Transparency requires that each SWF issue a statement about governance, investment strategy, over-the-table details on individual deals, and periodic reports on assets and liabilities. Anything less than that would invite loud voices that clamor for protection of the “primordial” interests of host countries. If the owner governments of the SWFs wish to be part of the global economy, they should start to play according to the rules of the game.


[1] To view this editorial on the MEMRI Economic Blog, visit http://memrieconomicblog.org/bin/content.cgi?comment=29. See also Bianca Gersten, “Changing Patterns of Investment in the Gulf Region: The Case of Dubai,” MEMRI Inquiry & Analysis, No. 381, August 15, 2007, http://www.memri.org/bin/articles.cgi?Page=archives&Area=ia&ID=IA38107, and Nimrod Raphaeli and Bianca Gersten, “Sovereign Wealth Funds: Investment Vehicles for the Persian Gulf Countries,” the Middle East Quarterly (forthcoming).

 

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