Global sovereign wealth funds (SWFs), which grew by 24 per cent over the past five years to $3.5 trillion (Dh12.8trn) by the end of 2007, could grow to $30trn on current underlying growth trends in the next 10 years, a latest report on sovereign wealth revealed.
Global Insight, the US-based company specialised in economic and financial analysis and forecasting, Sovereign Wealth Fund Tracker report, said the current global gross domestic product (GDP) stands at $45trn, stock market capitalisation at $42trn and commercial bank assets at $64 trn.
The report forecast that sovereign wealth will also surpass the entire current economic output of the United States by 2015 and European Union by 2016.
Sovereign wealth funds now represent the most powerful group of global investors, more than enough to match the total annual economic output of the United Kingdom, Germany or France, it said.
Jan Randolph, head of Sovereign Risk at Global Insight, said: "Armed with such large amounts of debt-free cash, sovereign wealth funds are the new financial power brokers, replacing the combined financial muscle of hedge funds and private equity, and usurping central banks as the international capital providers of last resort."
According to Global Insight's Sovereign Wealth Fund Tracker, sovereign wealth funds injected up to $80 billion into bank shares or bank equity stakes in the US alone and expected to provide even more capital in 2008 and 2009.
"There has since been a shift of financial weight from West to East, particularly to China, Asia, the Middle East and other energy countries," Randolph said.
"Riding the energy and commodities boom, together with the wilting dollar, sovereign wealth funds will continue to be the key players in the changing financial landscape of the global economy thrown into flux by the credit crunch," he said.
With some $3.5trn currently under their active asset management, sovereign wealth funds are now larger than the combined assets of hedge funds ($1.5trn) and private equity ($1.5trn); but this excludes central bank reserves of an additional $4.5trn.
Nigeria has grown its sovereign wealth the most rapidly over the past five years by 291 per cent, followed by Oman (256 per cent) and Kazakhstan (162 per cent), while China remains the largest player, with approximately $1.2trn, followed by Russia and Kuwait.
The report found that record inflation in sovereign wealth fund countries is the new "push factor" behind their expansion into foreign markets. Inflation has intensified in China, the UAE, Saudi Arabia, Russia and Kuwait, creating pressure to invest money abroad.
The vast majority, around 93 per cent, of sovereign wealth fund equity investment has so far targeted the Western financial sector. But there is new interest in energy and mining companies.
In January 2008 alone, worldwide acquisitions by sovereign wealth funds totalled $20.6bn or nearly one-third of the total $60bn that the funds made in mergers and acquisitions (M&A) for the whole of 2007. The funds, however, also accounted for 35 per cent of world M&A activity in 2007, and 28 per cent of all M&A in the US during January 2008, exceeding M&A activity from private equity buyouts, which fell in the last quarter of 2007, as the credit crunch unwound debt leveraging, Global Insight said. The funds have fostered new alliances with private equity to avoid scrutiny. The report said that trade imbalances, which remain at elevated levels, are the principal sources of and immediate reasons for the existence of sovereign wealth generation.
"The surge in energy and commodity prices in recent years has in part been responsible for swelling these imbalances and with energy and an ever broader range of commodity prices continuing to push new records, it suggests that imbalances will remain elevated," it said.
Global Insight forecast that the US current account deficit, the largest trade global imbalance, is showing signs of stablilisation. "With the US economy now forecast by Global Insight to contract in the first half of 2008, US domestic demand is expected to ease under recessionary influences, thereby restraining US import demand. In addition, the weakening dollar has already provided a useful export fillip to the US and has combined with import restraint to ease the long expansion in the US current-account deficit."
Global Insight is forecasting that the US current-account deficit, of which two-thirds is generated vis-à-vis surplus exporters in Asia and among energy exporters, will have peaked at $811.5bn in 2006, or 6.2 per cent of GDP, and begin to narrow gently.
Double-digit growth in region
The sovereign wealth in the Middle East has shown steady double-digit annual growth since 2002, with 16 per cent annual increases on a crude foreign-exchange-generation basis to $403 billion (Dh1.4 trillion), and 17 per cent for an investment and commercial banks assets basis to $487bn, Global Insight said.
The region's sovereign wealth has nearly doubled between 2002 and 2007. The rate of increase has accelerated further in recent years, with the sovereign wealth growing by a staggering 81 per cent since 2004 on a commercial banks assets basis. On a country-level basis, Algeria, Libya, and Egypt have recorded the largest relative gains, with these countries' SWFs nearly tripling since 2004. The report said Gulf countries' foreign acquisitions are estimated to have doubled in the year 2007 to $64bn.
Despite criticism against the sovereign wealth funds, the Middle Eastern funds have been extremely active, and successfully so, in recent months, closing deals worth tens of billions of dollars and acquired interests not only in battered global financial institutions, such as Citigroup, but in a variety of other sectors and regions of the world ranging from Spanish real estate to Austria's OMV, to Italy's Ferrari, and to Pakistan's Telecom. The report found that Middle Eastern sovereign investors are increasingly expanding into Asia, China, the Subcontinent, and the Arab region itself, as a means of diversifying away from the traditional investment destinations of developed economies.
The region's sovereign wealth is expected to continue to expand at a rapid pace for a few more years, as the near-term outlook for oil prices remains very favourable to exporters. It forecast that a boom-bust scenario is unavoidable in the longer term.
"Another factor to consider is the fact that the compounding of earnings from existing overseas investments suggest that the foreign assets of the oil-exporting countries in the Middle East and North Africa will continue to grow even in the event of a sharp oil-price decline. As such, the region will gain a growing influence in global investment flows and financial markets for the foreseeable future," Global Insight said.
$30trn SWFs could reach $30trn in 10 years on current growth
$3.5trn SWFs, which grew by 24 per cent over the past five years, have $3.5trn in the kitty
$80bn Was invested in US banks alone is 2007
93% Of SWF equity investment targeted the financial sector of the Western world
$45trn Is the global gross domestic product
$42trn Is the current global stock market capitalisation