Getting Know About Sovereign Wealth Funds

Sovereign Wealth Funds: A Review of Their Governance and Role Date: September 18, 2023 Introduction  Brief Overview of SWFS  The Governance Evolution of SWFS  SWFs in Times of Crisis Brief Overview of SWFS  Wealth of Nations: central banks or ministries of finance (liquidity and low-yielding assets).  Sovereign Wealth Funds ('SWF'): term coined by A. Rozanov in 2005. Flexible and innovative institutions.  SWFs as government owned investment funds date back to 1990's. IFSWF estimates that there was a total of 70 SWFs in operation as of June 2019.  Sources: Commodity-based SWFs (resource-rich nations, e.g.: Norway's GPFG, Abu Dhabi's ADIA) and non-commodity-based SWFs (Singapore's GIC, Korea's KIC, China's CIC).  SWFs have evolved and have become relevant players in the global financial markets, managing an estimated total of US$ 11.859 billon assets as of April 2023.  Definition: 'SWFs are defined as special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets. (Appendix I, Santiago Principles 2008)  Conventional Wisdom: long-term investors, mostly on foreign assets, with limited or non- existent liabilities.  . Criteria: ownership, purposes and objectives, investments.  Taxonomy (IMF, 2008): (i) stabilization funds, (ii) savings funds for future generations, (iii) reserve investment corporations, (iv) development funds, and (v) contingent pension reserve funds.  Governments have been innovative when establishing the mandates of their SWFs. While in some cases the same SWF is mandated to achieve multiple objectives, in other cases the same government may establish different SWFs to fulfil the different objectives. The Governance Evolution of SWFS - Rule of Law: (i) international level: limited and (ii) domestic level: mix of domestic private and public law - SWFs are a heterogeneous group of institutions that differ greatly on their legal framework, mandate, governance, accountability and investment policies. - Governance structure: 1. Transparency and accountability vary greatly. 2. Early 2000's concerns: foreign ownership issues (national security), lack of transparency issues and the potential use of SWFs' capital for non-commercial purposes. 3. Policy debate: regulation for SWFs vs. protectionism. - Responses: 1. Private sector: rank systems and classifications aimed to reflect the perceived transparency and governance of the SWF (LMTI of the SWFI, Truman's scoreboard, GSR by Global SWF). 2. Recipient Countries: domestic regulation that applies to foreign investment in strategic areas (protectionist barriers, increased by Covid-19). - International Organizations: Soft Law approach. - OECD - 'best practices for recipient countries': released the 'OECD Declaration on Sovereign Wealth Funds and Recipient Country Policies' (June 2008) and the 'Guidelines for Receipt Countries Investment Policies Relating to National Security' (May 2009). - IMF - 'best practices for SWF's': sponsored the IWG (IFSWF) and released th 'Sovereign Wealth Funds Generally Accepted Principles and Practices "Santiago Principles" (October 2008). IFSWF has become the key standard setting body for SWFs (37 members and 9 associate members). IFSWF members' commitment to undertake a triennial self-assessment review of their implementation of the principles as a means towards increased transparency. The Santiago Principles have marked a significant improvement in promoting transparency and good governance in SWFs. SWFs in Times of Crisis  SWFs are uniquely placed in crisis scenarios  SWF's operations linked to: 1. Public finances (funding and withdrawal rules), 2. Monetary policy (liquidity conditions) and 3. External accounts (exchange rate variations).  Key role in macroeconomic management and financial stability.  Crises challenge 'conventional wisdom': liabilities (implicit/explicit), long-term investors (liquid vs illiquid assets), foreign assets (shift to domestic assets).  Institutional design and governance policies: institutional independence, rules on funding and withdrawals, extent of mandate - Flexible frameworks and close coordination of policies with home country