Santiago Principles Research Articles

Developing Asia’s Sovereign Wealth Funds and Outward Foreign Direct Investment

Sovereign wealth funds (SWFs) have emerged in developing Asia as a policy response to an unprecedented accumulation of foreign exchange (FX) reserves since 2000. At the same time, developing countries have become an increasingly important source of outward foreign direct investment (FDI). The central objective of this paper is to evaluate the prospects for SWFs to serve as a major conduit for the region’s outward FDI. In principle, FDI represents an attractive means of earning higher returns on FX reserves than traditional reserve assets. In practice, the limited institutional capacity and the political sensitivity of state-led FDI severely constrains the ability of developing Asia’s SWFs to undertake FDI on a significant scale. Therefore, the potential for developing Asia’s SWFs to become major sources of outward FDI is more apparent than real. This paper also explores the implications of the Santiago Principles and the global financial crisis on outward FDI by SWFs.

Sovereign Wealth Funds as a Public-Private Challenge for Institutional Governance

During the G20-meeting of April 2009 it was agreed that all systemically important financial institutions, markets, and instruments should be subject to an appropriate degree of regulation and oversight. SWFs are important financial market participants. Economic studies assert that SWFs will keep growing disproportionably for some time and attempt to diversify their holdings through cross-border investments.They have plaid a stabilizing role, helping distressed banks during the financial crisis. As a source of governmental capital they raise concerns and calls for protectionism against their influence are widespread. The challenge is to develop an institutional framework and a governance regime that help maintain an open and stable investment climate. The IWG-SWF has established the International Forum of SWFs, a voluntary initiative, which aims to support the G20 objectives to promote global investment and reject protectionism, as well as the implementation of the “Santiago Principles” it defined in October 2008. The paper focuses on an analysis of the governance structure of the regulatory regime, its potential as a self-regulatory regime, its ability to alleviate concerns of recipient countries, and to develop best practices. The paper also discusses existing barriers in recipient countries. It is argued that it is necessary to establish ongoing dialogue between donor and recipient countries.

Fondi sovrani: opportunitŕ, minacce, speranze e illusioni

- In this work we provide a critical summary of the debate about sovereign wealth funds (SWFs). We start by explaining what a SWF is and what it is not according to the various definitions that have been proposed. We then present the main concerns and hopes which SWFs have raised and explain why these threats and opportunities are often exaggerated, incorrect or, at the best, not yet supported by any serious empirical evidence. We devote particular attention to the issue of the transparency of SWFs and show that, while there still is ample room for improvement, SWFs are clearer now than what they used to be before the Santiago principles were signed. We also point out, however, that there are sound reasons to believe that transparency, if pushed too far, could be detrimental to both SWFs and recipient countries. Finally, we present the results of the first attempts made by academics and practitioners to provide systematic evidence on SWF investment behaviour. Keywords: sovereign wealth funds, transparency, global imbalances, foreign investments Parole chiave: fondi sovrani, trasparenza, squilibri globali, investimenti esteri Jel Classification: F21 - G15 - H27

Government of Singapore Investment Corporation (GIC): insurer of last resort and bulwark of nation-state legitimacy

The global financial crisis has shattered many illusions, one of which being that sovereign wealth funds (SWFs) are properly treated as arms-length investment institutions subject only to global standards of good governance. In fact, in a number of East Asian countries SWFs have acted as ‘insurers of last resort’ for their nation-states underwriting financial stability and social welfare. In this paper, we explain how and why this came to pass, arguing that this role serves to sustain the legitimacy of the nation-state as well as justify the separation of SWF assets from the public interest in current consumption and spending. Focusing upon the Government of Singapore Investment Corporation (GIC), we suggest that the prospect of recurrent financial crises was an important prompt for its establishment in 1981, reinforced by the experience of many East Asian countries in the 1997 Asian financial crisis. The formal constitution of the GIC, the mechanisms by which its reserves are returned to the government in crisis, and the role of different sections of the political elite in managing those assets are explained. Referencing the principles of best-practice fund governance and the Santiago Principles underwriting the legitimacy of SWFs, we also consider the governance of the GIC, especially as regards its investment processes. Implications are drawn for the experience of Western countries, particularly the UK and the USA, wherein the failure of their banking systems has put untold pressures on current and future living standards.

La crise mondiale de la titrisation et la dynamique des fonds souverains

Global Securitization Crisis and Sovereign Wealth Funds The Generally Accepted Principles and Practices for sovereign wealth funds (SWFs) -the Santiago Principles -are designed to address contestation over the role played by government-controlled asset pools in global capital markets and reduce negative public perceptions about the impact on social cohesion in recipient countries by outlining minimum standards of accountability and transparency. The paper examines how the changing nature of the global financial crisis impacted on the dynamics of the regulatory debate. It maps the dimensions of the crisis and assesses the risks associated with the expansion of state-controlled capital. It argues that the continued failure to clarify the rules governing inward investment makes it much more difficult to build the foundations of a new financial order. JEL Classification : F30, GO1, G18

Global Securitization Crisis and Sovereign Wealth Funds

The Generally Accepted Principles and Practices for sovereign wealth funds (SWFs) - the Santiago Principles - are designed to address contestation over the role played by government-controlled asset pools in global capital markets and reduce negative public perceptions about the impact on social cohesion in recipient countries by outlining minimum standards of accountability and transparency. The paper examines how the changing nature of the global financial crisis impacted on the dynamics of the regulatory debate. It maps the dimensions of the crisis and assesses the risks associated with the expansion of state-controlled capital. It argues that the continued failure to clarify the rules governing inward investment makes it much more difficult to build the foundations of a new financial order. JEL Classification : F30, GO1, G18

Sovereign Wealth Funds : Long-Term Investors in Need of Effective Strategies

This article underscores the limited financial power of sovereign wealth funds (SWFs) and their growth potential, as well as their objectives and governance principles, With the Santiago Principles as a backdrop, It evokes efforts aimed at drafting a common charter of principles for investors and recipient countries. Then, it examines the funds' strategic asset allocations, while emphasising their diversity. Lastly, it considers how the funds' missteps amid the crisis will likely encourage them to improve their strategies. JEL Classification : F30, G29

A European Approach to Sovereign Investment

A growing share of inward investment inro me European Union, including but not limited to sovereign wealth funds (SWFs), will come from countries with diverse political regimes with which Europeans may not always see eye-to-eye. The current crisis may increase both Europe's need for such investment and its sensitivity to the non-economic implications. New investor countries have incentives to refrain from political use of their assets, as illustrated by the recently published « Santiago principles » for transparency and accountability of SWFs. But these incentives are nor powerful enough to spare Europe its own assessment of security risks linked to new trends in foreign investment. JEL Classification : F30, G28, G29, N24

Les fonds souverains : des investisseurs à long terme en mal de stratégies efficaces

Sovereign Wealth Funds : Long-Term Investors in Need of Effective Strategies This article underscores the limited financial power of sovereign wealth funds (SWFs) and their growth potential, as well as their objectives and governance principles, With the Santiago Principles as a backdrop, it evokes efforts aimed at drafting a common charter of principles for investors and recipient countries. Then, it examines the funds' strategic asset allocations, while emphasising their diversity. Lastly, it considers how the funds' missteps amid the crisis will likely encourage them to improve their strategies. JEL Classification : F30, G29

Évolution de la politique des fonds souverains

The Evolving Politics of Sovereign Wealth Funds Sovereign wealth funds (SWFs) can provide needed liquidity and stabilize equity markets. Countries that are open to investment by SWFs are likely to benefit from their participation. Countries, such as France, that adopt protectionist policies, may see a dramatic fall-off in foreign direct investment, which is likely to be harmful to their economy at the worst possible time. The adoption by SWFs of the Santiago Principles, a voluntary set of principles without the force of law, is unlikely ta forestall tougher regulation by recipient countries that conclude that increased regulation of such funds is in their best interest. In the United States, the Obama administration and a Democratic-controlled Congress are likely to subject financial institutions, including private equity and hedge funds, to increased regulation. In this environment, SWFs may be unable to escape tighter regulation. If SWFs do not actively engage policy makers, they could be left with stricter rules and fewer investment options. JEL Classification : F21, F30, G11

The Evolving Politics of Sovereign Wealth Funds

Sovereign wealth funds (SWFs) can provide needed liquidity and stabilize equity markets. Countries that are open ta investment by SWFs are likely to benefit from their participation. Countries, such as France, that adopt protectionist policies, may see a dramatic fall-off in foreign direct investment, which is likely to be harmful to their economy at the worst possible time. The adoption by SWFs of the Santiago Principles, a voluntary set of principles without the force of law, is unlikely to forestall tougher regulation by recipient countries that conclude that increased regulation of such funds is in their best interest. In the United States, the Obama administration and a Democratic-controlled Congress are likely to subject financial institutions, including private equity and hedge funds, to increased regulation. In this environment, SWFs may be unable to escape tighter regulation. If SWFs do not actively engage policy makers, they could be left with stricter rules and fewer investment options. JEL Classification : F21, F30, G11