Sovereign wealth funds
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- 1. BY PUNEET ANAND RISHIKA SINGHALANNU DANGIABHISHEK SOLANKIVASU
- 2. A sovereign wealth fund (SWF) is a state-owned investment fundcomposed of financial assets such as stocks, bonds,property, precious metals or other financial instruments. Pools of money derived from a countrys reserves, which are setaside for investment purposes that will benefit the countryseconomy and citizens. Sovereign wealth funds are invested globally. Most SWFs are funded by foreign exchange assets.
- 3. SWFs are state-owned funds SWFs are managed separately from official foreign exchangereserves SWFs have high foreign currency exposure Unlike pension funds, SWFs have no explicit liabilities SWFs have high-risk tolerance SWFs have long-term investment horizons
- 4. Kuwait RevenueEqualization Abu Dhabi Investment InvestmentAuthority-1953 Reserve Fund ofKiribati- 1956 Authority-1976SingaporesNorwaysCoined By Government GovernmentAndrew RozanovInvestmentPension Fund-in 2005 Corporation-1990 1981
- 5. Sovereign wealth funds are essentially set up to manage surplusforeign exchange reserves and revenues. Some funds also invest indirectly in domestic industries. In addition, they tend to prefer returns over liquidity, thus they havea higher risk tolerance than traditional foreign exchange reserves. In 2012, there are more than 50 sovereign wealth funds, andaccording to the SWF Institute, has exceeding north of $5 trillion.
- 6. SWFs are typically created when governments have budgetarysurpluses and have little or no international debt. The main reason for creating a SWF is because of the properties ofresource revenue: high volatility of resource prices, unpredictabilityof extraction, and exhaustibility of resources. Other reasons for creating SWFs may be economical, or strategiclike when a nation has excess money, it uses SWF as a way tofunnel it into investments rather than simply keeping it in the centralbank or channeling it back into the economy.
- 7. Generate high return on investment Ensure domestic economic stability Reduce the volatility in tax revenues and export income Diversify from natural resource exports Strengthen the regional development Accumulate savings for future generations
- 8. Current account surpluses Profits from sale of natural resources National assets
- 9. COMMODITY SWFNON-COMMODITY SWF Commodity SWFs are Non-commodity funds arefinanced by exportingtypically financed by an excesscommodities. An SWF acts asof foreign currencya stabilizer to diversify thereserves from currentcountrys money by investing account surpluses.in other areas. Non-commodity SWFs They have seen huge growth totaled $2 trillion in 2012,as oil and gas prices increasedwhich is three times the totalbetween 2000 and 2012. Inthree years earlier.2012, commodity SWFstotaled more than $2.5 trillion.
- 10. DECEMBER 2009
- 11. NOVEMBER 2010
- 12. Transparency- Lack of transparency is a major concern fornations. SWFs are being criticized for inadequate disclosuresregarding size and source of funds, investment objectives Several countries are keeping their economies away from SWFs dueto the concern that some investments are being diverted for politicalobjective to acquire control of strategically important assets. Ithas been observed that OPECs have been diverting large pool offunds in acquiring strategic assets and investing in important sectorslike infrastructure, telecom, energy and media across developedcountries.
- 13. POSITIVE Reduce volatilityand Support function NEGATIVE Currencymovement and announcementeffect Role similar to those of Hedgefunds and Financial Institutions.
- 14. Our Reserves: What Do They Really Represent? India currently faces the highest fiscal deficit it has recorded in the past decade and a half - a staggering 6.8%.Our reserves stands at over US $270 billion.Indias reserves do not represent its actual net savings. These reserves are either debts which need to be paid back, or funds which may flow out of India at a moments notice. Even if the current reserves could be put aside for SWF investment, there is little confidence that the current growth rate of our surpluses can be maintained. We do not have surpluses in our reserves which we can invest. A move to divert these funds from these reserves to form a SWF would be fraught with danger since it could prove to be disastrous in the event of a need to liquefy the reserves.
- 15. Risky Investments v/s Safe Bets: Assessing Indias RiskAppetite The RBI is entrusted with the responsibility of handling Indiasreserves. These reserves are invested in the US treasury bills,which result in relatively low yields but are safe investments. SWFs are generally considered to have an affinity for risky andpotentially high yielding investments. Withdrawing vast sums of Indian investments from the UStreasury paves the way for further volatility in the globaleconomy. This would also translate into the reduction of Indiasexport competitiveness since the current reserves ensure that anappropriate level of currency prices is sustained.
- 16. India facing challenges despite market recovery It has been said that the market situations have considerablyimproved over the recent months, India should look to takeadvantage of opportunity to set up a SWF and acquire assets atinexpensive rates. Though it is true Indian companies have done very well over thepast couple of quarters, bettering expectations. On the other hand,the current fiscal deficit of US $270 billion, surging oil prices andthe spiking inflation levels are indicative of the real situationwhich, on the whole, is far from favorable. Therefore, despite a promising market performance, SWFs mayprove to be far less yielding than expected, or may have longergestation period for maturity.
- 17. Domestic Needs v/s Overseas Projects: Quenching WhoseThirst First? Setting up of SWFs is possible in countries which do not havechallenging domestic needs. In other words, a poverty struckcountry like India setting up a SWF is, at best, unusual. India faces various domestic challenges and would need to focusmore on and give a higher priority to the problems of poverty,infrastructure development, fiscal deficits.
- 18. Post Recession Investment With proper and scrutiny judicious investment India can makesmall investments to obtain otherwise expensive assets
- 19. Indias Current Financial Restraints As per some analysts, figured in the list of countries with the mostaccumulated reserves With a fractional fund earmarked for a SWF, India can start arelatively smaller SWF continue its knowledge gathering beforemaking large investments SWF investments over the next few years, India can movetowards reducing its fiscal deficit
- 20. Strategic Investments - A Gain in Exchange SWFs are also tools of mutual strategic relationship building forcountries, India becoming a world-power should leverage on that Investments through SWFs are often used to fulfill the objectivesof a wider economic and/or political strategy of a country. For instance, an investment made using a SWF can furthereconomic relations between the host and the investor country, andcan be translated into mutually beneficial terms of development. For SWF a body like SEBI will be created which will monitor,manage and regulate
- 21. Domestic v/s Abroad Since Indias economy is investment thirsty a nominal amountinvested judiciously in SWF would prove beneficial than to havea blanket ban policy to restrict investment Returns from these investments can be cycled back into aidingdomestic development