Sovereign-Wealth Funds: Assuaging the Exaggerated Anguish about the New Global Financial Players

Abstract

The world of international finance is in the process of transformation. A new group of emerging market economies and members of GCC are emerging as major exporters of capital. Sovereign Wealth Funds (SWFs) are their instruments of interacting with the global capital markets. Although they are an instrument of enhancing liquidity and financial resource allocation in the international capital market, they have become a source of controversies and threaten an escalation in financial protectionism. SWFs are state-owned and managed and have started playing a decisive role in underpinning, sustaining, and expanding financial globalization. Popular and financial media did not begin copious discussions regarding the operations of the SWF until the last quarter of 2007, when they acquired considerable eminence due to their increasing operations. The sub-prime mortgage crisis in the US created severe credit crunch, which precipitously worsened to a crisis proportion in the third week of September 2008. This credit crunch became a window of opportunity for the SWFs. Total assets under management of the SWFs were on an increase. However, their state-ownership and lack of transparency has created considerable anxiety about their operations. The SWFs are being viewed as turning from creditors to owners. Large and diversified portfolio investments by SWFs entail few risks for the international financial market; anxiety about them is exaggerated. Restrictions from host economies on SWFs activities would deprive the international financial markets of a cash-rich market player. Rise of financial protectionism would work as a barricade against the expanding globalization. Participation of the SWF in the international financial system can be improved by policy initiatives at three levels, namely, the SWF level, the host economy level and by the international institutions like the IMF, which needs to devise a set of best practices for the operations of the SWFs.