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26 February 2024

Fewer shackles for sovereign funds

By Nitin Nambiar



The code of conduct for sovereign wealth funds being drafted by multilateral institutions in the US and Europe is unlikely to directly address the political issue surrounding such funds – that of its strategic implications.

The code is being created to monitor investment by mainly Asian and Middle Eastern sovereign funds in the Western finance sector amid increasing suspicion in Washington and European capitals as the sector soaks up much-needed capital. The latest example of this was on Wednesday when the China Investment Corporation pumped $5 billion (Dh18.3bn) into Morgan Stanley, which has been reeling from the global credit crunch.

This month also saw investments from the governments of Singapore and Saudi Arabia in UBS of Switzerland; Abu Dhabi in Citigroup; and China in American private equity firm Blackstone Group’s initial public offering. In all of the above cases, the foreign investment firms took minority stakes and said they would not become involved in management.

Government-controlled investment firms have been a “huge stabilising force” in the wake of the global credit crisis, according to Nasser Saidi (pictured above), Chief Economist at the Dubai International Financial Centre. “You can only imagine what the financial landscape would have looked like if it wasn’t for these funds that plugged capital into the market at the right time,” Saidi told Business 24|7. The biggest suspicion, though, in Western political capitals seems to stem from the burgeoning wealth surplus that can be used to steer investments for political purposes. The funds, governments in the West seem to believe, release little information about their investment aims or holdings.

“There are very clear advantages in sovereign funds as an investment source,” Saidi said. “Firstly, it is long-term capital controlled and managed by a professional set of fund managers and equity strategists. Secondly, they are unlikely to be leveraged, given the nature of such investment funds.

“I don’t think there’s any political agenda in it from the side of these funds. We are at a stage when the US is running a current account deficit that is six per cent of its GDP. In contrast, some of these wealth funds are coming from countries with a huge surplus.

“Currently, firms and investors outside the United States are holding $14 trillion (Dh51trn) worth of US securities. The best thing for the US to even out this global imbalance is to allow acquisition of assets by holders of US securities. China and Singapore, and to a lesser extent Korea and Taiwan are all benefiting from a growing current account surplus. It is only natural for the capital to flow outward from these regions,” said Saidi.

In October, after a meeting of the Group of Seven nations – the US, Britain, Japan, Canada, Germany, France and Italy – and leaders of eight sovereign wealth funds, the two sides agreed to put together voluntary codes of best practice.

The International Monetary Fund is working on such a code. The Organization for Economic Co-operation and Development is writing a code for the recipients of investment. The two institutions are expected to produce a preliminary set of guidelines in April.

“The benefits of sovereign fund investments to the recipient countries depend on the extent to which the behaviour is economically driven ... rather than politically driven,” US Treasury Deputy Secretary Robert Kimmitt writes in a coming issue of the magazine Foreign Affairs, as reported by The Wall Street Journal.

But a senior IMF official said in an interview earlier this month that “political issues and national-security issues are not in the purview” of the IMF and that those issues will not be part of the codes.

“Whether or not the financials are going to adopt a code of conduct or use guidelines for sovereign fund investment is something that they [financials] must decide for themselves,” according to Saidi. “I don’t think there is any requirement for government legislation or central bank interference in this.”

The IMF, for its part, seems to be focusing on guidelines that would help sovereign funds operate more professionally, like a private investment fund. There would be rules on setting up investment strategies and making sure investment decisions fit those strategies. Other guidelines would look at the structure of sovereign funds, including oversight boards and committees to manage purchases. The IMF would also make suggestions on what kind of financial information to disclose, how often and to what authority.
None of the proposals seem to be aimed to directly constrain sovereign funds.

“On the other hand, it makes sense for sovereign wealth funds to be transparent in their structure. What their financial reporting guidelines are to be is something that that the internal governments of these funds have to decide,” Saidi said. “If you intend to have special guidelines for such funds, you need to make guidelines for private-equity and hedge funds as well.”