"The
rise of "sovereign wealth funds" signals the end of the neo-liberal
model and challenges western states and financial institutions to develop a
coherent and long-term response"
Free market ideologues have a new obsession - ‘sovereign wealth funds,' those state-backed investment bodies whose accumulating assets are roaming the globe in search of businesses to invest in, partner and in some cases achieve political ends.
Such funds continue to accumulate huge wealth especially with the recent skyrocketing oil prices, but they hit the headlines with the collapse of the US housing market. In January 2008 the governments of Singapore, Kuwait and South Korea provided the $21 billion lifeline to Citigroup and Merrill Lynch, two banks that have lost fortunes in America's credit crisis. It was not the first time either was bailed out by them. Since the sub-prime-mortgage fiasco unfolded in the summer of 2007, such funds have gambled almost $69 billion on acquiring the rich world's biggest investment banks (far more than usually goes the other way in an emerging-markets crisis). With as much as $2.9 trillion to invest, the funds' horizons go beyond finance to telecoms and technology companies, casino operators, even aerospace. But it is in banking where they have arrived most spectacularly. They have deftly played the role of saviour just when Western banks have been exposed as the Achilles heel of the global financial system.
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The world's sovereign wealth funds (SWFs) are believed
already to command assets worth over $3 trillion, this is more than the British
economy, but the SWF phenomenon represents a major change in the world's
financial and investment markets in a way that goes beyond merely making money.
SWF's represent a direct challenge after three decades of policy, propaganda,
and hype about freeing up markets, reducing the role of the state and promoting
the private sector, the SWF's embody a massive and unstoppable shift of influence
back to what are in effect state-owned entities.
Although sovereign-wealth funds hold a
bare 2% of the assets traded throughout the world, they are growing fast, and
are at least as big as the global hedge-fund industry. But, unlike hedge funds,
sovereign-wealth funds are not necessarily driven by the pressures of profit
and loss. Most do not even bother to reveal what their goals are-let alone
their investments. The motives of the sovereign moneymen are considered to be
sinister, stifling competition; protecting national champions; engaging, even,
in geopolitical troublemaking. Despite their disruptive market power, their
managers have little accountability to regulators, shareholders or voters.
Western Fears
The rise of sovereign wealth funds has
panicked the world's free market ideologues into defensive responses. An
attempt was made at the January 2008
World Economic Forum conference in Davos to negotiate a code of
conduct, stricter disclosure requirements and a proposed code of practice. Such
proposals were shrugged aside with some SWF managers even commenting if the US
wants their banks bailed out from the brink of bankruptcy.
Western fears essentially lie in the
fact in the free market for the first time foreign institutes are king. SWF
pool large assets and are forecasted to expand in size and importance, so does
its potential impact on various asset markets. The Western world also worry
that foreign investment by sovereign wealth funds raises national security
concerns because the purpose of the investment might be to secure control of
strategically-important industries for political rather than financial gain.
These concerns have led the EU to reconsider whether to allow its members to
use ‘golden shares' to block certain foreign acquisitions. Sovereign wealth
funds are guaranteed to make profits as they were all created from foreign
exchange reserves and Oil receipts, this makes them a distinct and potentially
valuable tool for achieving certain public policy and macroeconomic goals.
Western Hypocrisy
The EU is trying to force SWFs annually
to declare the origin and disposal of their assets; to abstain from using
investments for political purposes; and to make their management structures
transparent. The EU and western governments in general, are in no position to
lecture the rest of the world on correct behaviour in such matters. The
European Union itself proclaims open markets yet practices protection in
agriculture and significant areas of European trade and industry including
airlines. France and Germany's gas and electricity giants are considered
national interests and given extensive protection.
The "good practice" now
recommended to the SWFs - of not using their economic power for political
purposes is something Western states have been doing from the very birth of
free markets - The East India company is the best example. The economy and
state interest have all, permeated the international market for as long as it
has existed; the policy of sanctions against Cuba by the United States or Iran
by the United Nations are current examples, while the history of oil companies
in Latin America or the Middle East prove the private sector and state are two
sides of the same coin.
The Gulf States remain - for all the
superhighways, skyscrapers, knowledge cities and glitzy conferences -
controlled by secretive ruling families whose members regard the state, and its
revenue, as theirs. The minister of finance is, in effect, the private
accountant of the ruler. No-one knows what the state's (or ruler's) income is.
The West have no problem in dealing with Saudi Arabia or placing troops in
South Korea, but have concerns when foreign funds cross borders which for once
are not from Western companies.
Treachery of Muslim rulers
The UAE, Kuwait, Qatar and Saudi Arabia
are the largest funds in the world; there accumulation of oil wealth for the
last 100 years has resulted in immense wealth flowing into such countries.
Whilst the Gulf States have developed their economies into glitzy shopping
islands, Saudi Arabia remains an underdeveloped poverty stricken nation. Rather
then develop their own economy and industrialise the rulers in these countries
continue to bail out Western companies and buy US treasury bonds. In essence
such nations take the money of the West and then give it back to them.
China's investment corporation is an
extension of Chinese foreign policy, established with the intent of utilising
China's $1.2 trillion reserves for the benefit of the state. It has engaged in
building influence for the government by buying up significant stakes in
companies that have influence in western governments, airline companies and has
targeted firms that have heavily invested in China. The investments would help
the government to influence the policies of multinational companies and to
protect China's interests in the international arena. It ensures China has a
secure supply chain of energy resources and strategic resources.
Whilst China utilises such funds for
the development of its nation the Muslim ruler's waste money in US government
bonds instead of developing an independent industrial economy. They could even
develop the Muslim world and link the Muslim ummah by development projects
which will build the infrastructure necessary for future unification. Although
discussion has centered on the amount of wealth such funds have, it also
exposes the short sightedness of the rulers and their inability to look beyond
Western financial markets. It exposes the fact that although Allah (swt) has
bestowed the Muslim world with immense natural wealth, the rulers continue to
plunder such wealth, whilst the Muslim ummah drowns in poverty.
Major
Sovereign wealth funds
Abu Dhabi Investment Authority
Size: $875 billion
Major investment:
Citigroup $7.5 billion
History:
The Abu Dhabi Investment Authority (ADIA) is the investment arm of Abu Dhabi,
the largest oil producer of the seven city-states that constitute the United
Arab Emirates.
It was established in 1976, employs
about 1,400 people and has investments in banking and industrial businesses
throughout the Middle East. It was modeled on Singapore's national investment
fund and is the largest sovereign wealth fund in the world.
Dubai International Capital
Size: €6 billion
(estimate)
Major investments:
"Substantial stake" in HSBC
History: Dubai
International Capital, formed in 2004, is owned by Dubai's ruler, Sheikh
Mohammed bin Rashid Al Maktoum. As well as its stake in HSBC, the fund has
several significant holdings in household names such as Travelodge, Sony and
Daimier Chrysler. In 2005 it bought Tussauds Group for £800 million but later
sold 80 per cent of the group. It is also famous for its failed bid for Liverpool
Football Club in 2006. The club opted for American investors.
DIC's Global Strategic Equities Fund
took a stake in HSBC in May, but the size of the purchase was not disclosed,
because it did not exceed 3 per cent.
GIC
Size: $330
billion
Major investments:
£4.8 billion stake in UBS
History:
GIC, the Singaporean government investment arm that has come to UBS's aid, was
founded in 1982 to manage the city-state's swelling foreign reserves. With a
reputation for maintaining a low profile, it only goes as far to say it manages
assets of "more than $100 billion" (£50.4 billion).
Analysts say that dramatically
undershoots its real value and estimate its true size as as much as $330
billion. It has delivered an average annual return of 9.5 per cent in dollar
terms over the past quarter of a century.
China Investment Corporation
Size: $200 billion in
Assets
Major investments:
Blackstone $3 billion
History: One
of the youngest of the major sovereign wealth funds. It was set up in October
after the acquisition of an investment arm of the People's Bank of China, the
central bank. CIC is in charge of investing China's vast foreign exchange
reserves and is thought to have about $2 trillion at its disposal.
Kuwait Investment Authority
(KIA)
Size: $250
in Assets
Major Investments: Citigroup
History: Kuwait's
sovereign wealth fund specializes in local and foreign investment. It was
founded to manage the funds of the Kuwaiti Government in light of financial
surpluses after the discovery of oil. Today, KIA manages the Kuwait General
Reserve Fund, the Kuwait Future Generations Fund, as well as any other moneys
committed by the Ministry of Finance. The Kuwait Future Generations Fund has
10% of annual oil revenues added to it.
Currently this fund is worth over $3
trillion.
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