FUTURE OF SOVEREIGN WEALTH FUNDS  IN THE GLOBAL FINANCIAL SYSTEM.

Abdelmadjid, Keddi; Yasmina, Khenniche

مجلة الإقتصاد الجديد
Volume 5, Numéro 1, Pages 5-26
2014-06-01

Future Of Sovereign Wealth Funds In The Global Financial System.

Authors : Abdelmadjid Keddi . Yasmina Khenniche .

Abstract

This paper analyses the effects of the recent global economic crisis upon sovereign wealth funds (SWFs). Since mid-2007, SWFs have experienced significant portfolio losses, a decline in fund inflows, and enhanced scrutiny from their own governments. SWFs have been utilised for sovereign stabilisation programs and have helped finance troubled Western banks. SWFs and the IMF have also created a set of best practices known as the Santiago Principles. From these developments, many SWFs have moved to relatively shorter investment time horizons and more liquid holdings, revamped their transparency and management, experienced a temporary improvement in their images, begun to hold controlling stakes in major Western corporations, and have improved their coordination with institutional investors and other SWFs. Going forward, these changes, alongside the relatively strong post-crisis asset position held by SWFs in comparison to other asset vehicles, make SWFs well-positioned to play an even more prominent role in global finance. Much like other asset classes and sectors of the global economy, the recent global financial crisis was a painful yet transformative time for sovereign wealth funds (SWFs). Alongside most pension, mutual and private equity funds, SWFs endured heavy losses between mid-2007 and early 2009, inviting a wave of criticism and scrutiny from their own governments not seen by most SWFs since their inception. Although the recent global turmoil has left most funds with less capital for investment and has put many SWFs under increased scrutiny from governments and the press, many of the lessons learned from the crisis have also strengthened SWFs. SWFs are now well-positioned to carry out their stated goals: growing a country’s wealth for future generations, stabilising a country during economic shocks, and helping enhance a country’s comparative advantages through strategic investments and acquisitions. On the other hand, some of the events associated with the global crisis may have taught SWFs and their sovereigns the wrong lessons.