Transcript Slide 1

The Emergence of Sovereign Wealth Funds
and U.S. Investment
ITRN 603
Dr. Stuart Malawer
December 2nd, 2009
Catrina Ciobanu
Mark DeMicoli
Ericka Floyd
What are they?
The U.S. Department of the Treasury defines a sovereign wealth fund as a
“government investment vehicle which is funded by foreign exchange
assets, and which manages those assets separately from the official
reserves of the monetary authorities.”
• Two categories:
– Commodity SWF - financed by surplus foreign exchange earnings from
commodity exports owned or taxed by the government.
• Assets of SWFs originating from commodities exports reached
over $2.5 trillion at the end of 2008.
– Non-commodity SWF - financed through excess foreign exchange
assets accumulated as a consequence of running persistent current
account surpluses.
• $1.4 trillion foreign exchange reserves were held in SWFs in 2008.
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SWF Overview
• When a nation has excess money, it uses a sovereign wealth fund
as a way to funnel it into investments rather than simply keeping it
in the central bank or channeling it back into the economy.
• Estimated value of all SWFs is estimated at $3 trillion.
• Emergence of SWF represent a growing stock of governmentcontrolled assets.
• SWFs are important players in global financial markets.
– Attract substantial attention by policy makers, market
participants and the international community.
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Largest SWFs
Why do countries establish sovereign
wealth funds?
• Protect domestic currencies and
banks from crisis.
• Promote intergenerational savings.
• Diversify revenue streams.
• Increase the return on assets held
in central bank reserves.
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U.S. Legislation
U.S. Committee on Foreign Investments in the United States
(CFIUS) 1975 - an inter-agency committee authorized to
review transactions that could result in control of a U.S.
business by a foreign person in order to determine the effect
of such transactions on the national security of the United
States.
 Exon-Florio Amendment (1988)
 Byrd Amendment (Continued Dumping and Subsidy Offset Act of
2000)
 Foreign Investment and National Security Act of 2007 (FINSA)
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International Legislation
Best Practices Initiatives:
•
International Working Group of Sovereign Wealth Funds
– "Santiago principles“
 Generally Accepted Principles and Practices (GAPP) - framework of generally
accepted principles and practices that properly reflect appropriate governance
and accountability arrangements as well as the conduct of investment
practices by SWFs on a prudent and sound basis.
•
Organization for Economic Co-operation and Development
– Freedom of Investment - launched at the OECD in 2006, helps governments to
reconcile the need to preserve and expand an open international investment
environment with their duty to safeguard the essential security interests of their
people.
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Main Issues
• Sovereign funds control about $3 trillion in assets up from $500 million in
1990, and they are expected to grow to $10 trillion by 2012. (IMF)
• Most of them are based in the Middle East and Asia.
• Because of their growing size SWFs have become a major focus of national
and international economic and financial policy with issues such as:
 their lack of transparency
 their potential to disrupt financial markets and to compete unfairly
with private investors
 the risk that political objectives might influence their management.
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Transparency and Accountability
• The lack of transparency of most of the SWFs has led to several
distinct policy concerns about the effects of SWF investment.
• The concern is that SWFs may pursue political objectives or policy
goals that are not strictly financial when making their investments.
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Disrupting of Financial Markets and
Protectionism
• The concern is that they could cause volatility in markets and
disruptions in economies.
• There could be a possible protectionist reaction by the investee
country government: local government might consider adopting
broad protectionist financial market policies that could harm the
country’s economy and its foreign relations.
• SWFs may be able to use their status as government instruments to
compete unfairly with private investors.
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Exercising Influence as a Shareholder
• Given the nature of public markets, shareholders with even
seemingly small ownership percentages can exercise influence
disproportionate to their shareholding.
• The risk is having a SWF exercise influence on decisions in a
company as a shareholder.
• SWFs may want to use their influence in a company to:
 extract technology
 protecting their national industries from US competition
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Financial Tools or Political Power?
• Unlike central banks, which usually invest reserves in assets like U.S.
Treasury bonds, the SWFs often invest in corporations.
• The concern is whether the governments will use the SWFs simply as
financial tools or to actually implement political power.
•
The risk is that political objectives
might influence their management
•
Use funds to create artificial monopolies.
•
Transfer of strategic US assets:
 Key industries and technologies
 Trade & state secrets
 Natural resources
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The Issue: National Security
Disruption of
Financial
Markets
Disguised
Political
Objectives
Poor
Accountability
& Governance
Lack of
Transparency
Transfer of key
US
technologies
National
Security
Risk
Protectionism
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National Security Risk
• Lack of transparency
• Disguised political objectives
• Transfer of strategic U.S. assets
– Strategic Industries
– Key Technologies
– Trade and State Secrets
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Source: Washington Post March 27,2008
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Measuring Transparency & Political
Objectives
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Transfer of US Strategic Assets
• Dubai Ports World Deal
• Unocal and China National Offshore
Oil Corporation (CNOOC)
• AES and China Investment
Corporation (CIC)
• Citigroup and Abu Dhabi
• Wal-Mart and Norwegian SWF
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Policy Proposals
International
• U.S. Support Code of Conduct Best Practices
• Santiago Principles
Domestic
• Current Policy Reform
– U.S. Committee on Foreign Investments in the
United States (CFIUS)
– Foreign Investment and National Security Act of
2007 (FINSA)
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Policy Proposal
• Fair and non-discriminatory review of foreign
investments, specifically SWFs
• Encourage transparency, disclosure, governance and
accountability
• Limit protectionist barriers against foreign investment
• Restrictions on voting rights of SWFs and other
government-owned investments in U.S. public
companies.
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Questions?
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Sources
Guha, Krishna. Sovereign funds sign up to code of conduct. Financial Times, UK. September 4 2009. http://www.ft.com/cms/s/0/fda301e0-7a19-11ddbb93-000077b07658.html?nclick_check=1
Department of Treasury. CFIUS Reform: The Foreign Investment & National Security Act of 2007 (FINSA) http://www.treas.gov/offices/internationalaffairs/cfius/docs/Summary-FINSA.pdf
“IMF Executive Board Discusses a Work Agenda on Sovereign Wealth Funds,” Public Information Notice (PIN) No. 08/41 . 2008 (Washington).
www.imf.org/external/np/sec/pn/2008/pn0841.htm
International Working Group of Sovereign Wealth Funds. Santiago Principles - Generally Accepted Principles and Practices. October 2008.
http://www.iwg-swf.org/pubs/eng/santiagoprinciples.pdf
Investopedia. Sovereign Wealth Fund – SWF. 2009. http://www.investopedia.com/terms/s/sovereign_wealth_fund.asp
OECD. SOVEREIGN WEALTH FUNDS AND RECIPIENT COUNTRIES. 2008. http://www.oecd.org/dataoecd/0/23/41456730.pdf
Teslik, Lee Hudson. Sovereign Wealth Funds. Council on Foreign Relations. January 2009. http://www.cfr.org/publication/15251/
The Washington Post, Chinese Company to buy a Stake in AES; Arlington firm seeks money for new projects, ties to Asia, November 7, 2009
Peterson Institute for International Economics
http://www.iie.com/publications/pb/pb07-6.pdf
International Monetary Fund
https://www.imf.org/external/pubs/ft/fandd/2007/09/straight.htm
Wikipedia
http://en.wikipedia.org/wiki/Committee_on_Foreign_Investment_in_the_United_States
http://en.wikipedia.org/wiki/Dubai_World_Ports
http://en.wikipedia.org/wiki/CNOOC
http://en.wikipedia.org/wiki/Abu_Dhabi_Investment_Authority
Sovereign Wealth Fund Institute
http://www.swfinstitute.org/
Testimony before the U.S.-China Economic and Security Review Commission: Implications of Sovereign Wealth Fund Investment for U.S. National
Security, Daniella Markheim; February 7, 2008
Norwegian Government Pension Fund Dumps Wal-Mart and Freeport on Ethical Exclusions, June 16, 2006
http://www.socialfunds.com/news/article.cgi/2034.html
The World Next Week; Oxford Analytica, October 2007
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