Sovereign Development Funds and the Shifting Wealth of Nations Salzburg Global Seminar Javier Santiso Director and Chief Economist 27 September Salzburg, Austria
A fundamental shift Emerging economies are returning to their historical position in the global economy - a rebalancing of the wealth of nations. Decoupling is no longer an appropriate concept, since the Centre is no longer the Centre, and the Periphery no longer Periphery. Sovereign Wealth Funds are at the heart of this process. Joaquín Torres García América Invertida, 1943
1 2 3 Sovereign Wealth Funds in the global shifting of wealth New investment drivers in the emerging world Sovereign Development Funds?
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 01-09-2006 01-11-2006 01-01-2007 01-03-2007 01-05-2007 01-07-2007 01-09-2007 01-11-2007 01-01-2008 01-03-2008 01-05-2008 01-07-2008 01-09-2008 Emerging economies have enhanced growth over recent years 70% 60% Emerging and developing countries contribution to global GDP growth 400 350 300 U.S. Dollar and Commodity Price Commodity Index Broad index US Dollar 50% 250 200 150 40% 100 50 30% 0 Source:, 2008.
% GDP % GDP the trend is likely to continue in the short run World Growth Prospects 2008 10 9 8 7 6 5 4 3 2 1 0 Emerging Markets China Russia Indonesia Turkey Korea Chile South Africa 10 9 8 7 6 5 4 3 2 1 0 United States France OECD United Kingdom Spain Japan Italy Source:, based on IMF and Economist Intelligence Unit
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 USD billion USD billion Emerging markets continue to accumulate foreign reserves 2,000 International reserves emerging countries 2,000 International reserves Developed countries 1,800 1,800 1,600 1,600 1,400 1,200 1,000 800 600 400 Brazil China India Mexico Russia South Africa 1,400 1,200 1,000 800 600 400 Germany France Netherlands Switzerland UK US 200 200 0 0 Source:, based on Economist Intelligence Unit
.. creating significant surpluses 900 800 700 600 a. Absolute values, USD billion 140 120 100 b. Reserves relative to GDP, per cent 500 80 400 300 200 100 0 60 40 20 0 Source:, based on IMF and Central Banks
invested in Sovereign Funds Sovereign Wealth Funds (SWFs) by origin, 2008 Number Total assets (USD bn) Middle East 7 1533 Asia 9 867 OECD 10 489 Russia & Central Asia 4 177 Africa 7 109 Latin America 4 23 Pacific islands 6 1.2 Total 47 3,194 Source:, estimation based on Deutsche Bank
1 2 3 Sovereign wealth funds in the global shifting of wealth New investment drivers in the emerging world Sovereign Development Funds?
Emerging economies have become major actors in mobilising capital Note: Emerging countries refer to Latin American and Asian only. Source: 2007, based on Thomson Datastream (Economist Intelligence Unit).
Sovereign funds' assets in perspective: small in one respect. Bank assets World GDP Stock market capitalisation Private debt securities Public debt securities Investment funds Pension funds Insurance companies Reserves ex gold SWF Hedge Funds 1.4 4.2 3.1 23.4 21 17.9 16 36.3 42 45 63.5 0 10 20 30 40 50 60 70 USD, trillion, 2005 Source: OECD, Deutsche Bank, 2008.
yet fast becoming heavyweights as an asset class Financial institutions total assets, 2007 USD billion 0 500 1000 1500 2000 2500 3000 3500 SWFs total assets Barclay's Global Investors State Street Global Advisors Hedge Fund assets United Arab Emirates China Singapore Private equity assets Norway Saudi Arabia Kuwait Hong Kong Russia Source: OECD, Deutsche Bank, 2008.
USD Billion Number of deals Sovereign fund investment is shooting up 80 70 60 300 250 Currently, global equity funds invest 7-10% of their equity investments in Emerging Markets. 50 40 30 20 10 200 150 100 50 If SWFs invested along a similar allocation, they would already account for a large part of the inflows to emerging economies. SWFs, themselves based in emerging countries, might be more willing to invest in other emerging countries 0 0 Value of Deals Number of Deals (RHS)
with the potential to reach USD 1.4 trillion to emerging markets over the coming decade SWFs total assets Potential 2018 SWF flows to EM Emerging market investment potential by SWFs USD billion 0 500 1000 1500 2000 2500 3000 3500 United Arab Emirates: ADIA Norway: Pension Fund Global Potential current SWF flows to EM Singapore: GIC Kuwait: KIA China: CIC Russia: Stabilisation Fund Singapore: Temasek Allocations from Sovereign Development Funds to emerging and developing countries could generate inflows of over $100 billion/year over the next 10 years With such huge potential flows, it is critical to address SWF impact on developing world early on. SWFs sheer size has the potential to dwarf ODA flows to developing world Development Aid DAC donors Source: OECD, JP Morgan, Deutsche Bank, 2008.
1 2 3 Sovereign wealth funds in the global shifting of wealth New investment drivers in the emerging world Sovereign Development Funds?
Output Prices Emerging markets have proven resilient to shocks more than ever before Three key differences: Response to an oil price shock Before 1983 After 1983 1. Real wage rigidities have decreased 2. Monetary policy: Stronger commitment of central banks to control inflation (i.e. inflation targeting) 3. Share of oil in the economy has decreased substantially Source: Blanchard, O. Gali, J. The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s?. NBER Working Paper. August 2007.
SWFs are well adapted to investing in emerging regions Sovereign funds seeking higher returns will find fast growing emerging markets attractive Emerging market SWFS seem like ideal investors for developing countries: long-term (not short-term speculators), Geographical, language and familiarity effects could mean lower information asymmetries for emerging market investors. If Developed country protectionist urges solidify, this may drive EM SWFs further into developing regions. Timing is felicitous: many African / Emerging Market countries have considerably improved governance & investment climate over recent years (16 functioning stock markets in Africa today 5 in 1980 s)
SWFs investments are becoming increasingly present Major FDI location of Sovereign Wealth funds Source: World Investment Report, 2008. Estimates of domestic investment by fund in green.
their investments start to diversify by industry and location FDI location of Sovereign Wealth funds An Estimation Geographical estimation of M&A by SWFs 2007 Industry Investments of SWFs Transport, communications United Kingdom United States Germany Taiwan Tunisia Other Developing Other Developed Finance Hotels and restaurants Business activities Vehicles and transport eq Chemical Primary Others Source: World Investment Report, 2008. Note: Data based on cumulative investments (M&A) only. See UNCTAD (WIR), 2008.
An emerging market home bias? Information Asymmetries What information? Accounting practices, corporate culture, political events, the structure of asset markets and their institutions. Market participants do not share the same information. Emerging SWFs have experience, firsthand knowledge of emerging countries institutional and infrastructure shortcomings. they are themselves from an emerging investor universe and have historical informational/network advantages (Gulf states in North Africa, Indians in East Africa, Chinese in South-East Asia, Russian in Central Asia)
Sovereign Development Funds: What next? Sovereign Wealth Funds signal a major reshaping of the world s economy. They may grow to become key actors of development finance: Sovereign Development Funds. If SWFs were to allocate 10% of their portfolio to other emerging and developing economies over the next decade, this could generate inflows of USD 1 400 billion. The international investment of sovereign funds is already increasing. Domestically, they are development finance institutions. Abroad, they seek performance and returns. Collaboration and peer-learning between different actors can be promoted.
Sovereign Development Funds and the Shifting Wealth of Nations Salzburg Global Seminar Javier Santiso Director and Chief Economist 27 September Salzburg, Austria
ANNEX
Case Studies: what s going on in Asia and the Middle East? Increasing regional exposure for Asian and Middle Eastern funds Temasek (Singapore) Asia represents 40% of its portfolio, including ICICI Bank, Tata Sky, Tata Teleservices, Mahindra & Mahindra. Gulf SWFs are increasing their exposure to Asia: targeting 10-30% of total portfolio towards Asia Kuwait Investment Authority $750 billion stake in Industrial and Commercial Bank of China. Qatar Investment Authority Stake in Industrial and Commercial Bank of China Dubai International Capital 30% of portfolio to allocated to Emerging Asia. Early 2008 announced that will invest $ 5 billion in China, India and Japan. Also MENA Infrastructure Fund ( MENA IF ), a US$500 million sector-specific fund targeting investment opportunities in infrastructure projects in the MENA region