Sovereign funds 'can have stabilising influence as key player on global stage'

Dubai: Foreign exchange reserves are at unprecedented levels across the globe, with estimates of foreign assets held by sovereigns standing at around $7 trillion in international reserves (including gold) making them key players in the international financial markets, a top official said.

"$2-3 trillion of these assets are estimated by the markets to be in Sovereign Wealth Funds [SWFs] which exceed the size of hedge funds [estimated to be around $1.7 trillion], but comparison may somewhat be misleading because of leverage," said Krishna Srinivasan, Advisor and Head of the Multilateral Surveillance Unit of the International Monetary Fund (IMF), in his special address to the GCC Institutional Investment Summit at the Dubai International Finance centre yesterday.

He said the size of SWFs is small compared to the total global financial assets which are estimated to be around $190 trillion, but large relative to mature market stock capitalisation debt and capital markets in emerging market countries.

Recent capital injections into systematically important banks show how SWFs can have a "stabilising" influence as a key player in the global economy.

In November 2007, Abu Dhabi Investment Authority injected $7.5 billion into Citibank; In December 2007 Singapore GIC injected $9.7 billion into UBS; China Investment Corporation injected $5 billion into Morgan Stanley; Temasek Singapore injected $4.4 billion to Merrill Lynch; and in Jan. 2008 Singapore CIG and Kuwait Investment Authority (KIA) injected $6.8 billion and $3 billion respectively into Citigroup, just to mention a few, said Srinivasan.

The objectives of these SWFs determine the investment horizon and the risk and return trade-offs they are willing to take.

For example, stabilisation fund emphasises on liquidity and a short-term horizon while savings funds' liquidity needs are low and emphasises on long-term horizon, said Srinivasan.

He said Asian manufacturers and oil-exporting countries have accumulated large current account balances, reflecting high commodity prices and favourable balance of trade that has translated into a large accumulation of foreign exchange reserves.

This shows that SWFs have become a key player in the international financial landscape and that they are heterogeneous both in terms of their source of funding and the objectives, which influences their investment behaviour.

There is no evidence to suggest that SWFs undermine financial stability -indeed, evidence from the recent crisis suggests to the contrary.

As countries increasingly diversify their foreign assets, including through SWFs, the pattern of global capital flows will change -and this will have implications for asset prices, macro outcomes and financial stability, more generally, Srinivasan said.