Adhvith Dhuddu, CT Regular Columnist
Wednesday, December 5; 12:00 AM
"Singapore buys Burger King," "Norway purchases Bank of America" or "Saudi Arabia buys stake in Microsoft," could be some of the headlines you might come across in the future. A country purchasing a company might sound absurd, but a number of foreign governments are setting up sovereign-wealth funds to do just that.Think of a sovereign-wealth fund as a mutual fund set up by a country. The primary sources of capital are the foreign exchange reserves held by the country and trade surpluses that have accumulated over the years. These funds invest in debt, equity and assets for long term capital appreciation, a steady flow of interest rate payments or dividends.
These wealth funds have gained prominence in the recent years and have simultaneously created a stir in some parts of the world. About 20 nations have a fund like this and are valued at approximately $3 trillion in total. These staggering numbers are reflective of the potential influence they can exert on the global financial system. In less than a decade, by 2015, these wealth funds will have close to $10 trillion at their disposal, making them dominant and influential players in the financial markets.
The petrodollar boom has boosted the fortunes of oil-rich nations and these countries (Saudi Arabia, Kuwait, United Arab Emirates and Russia) account for 70 percent of these funds. Cash flows to these nations are not slowing down anytime soon, and recipient governments are determined to put the excess cash to work. Heavy exporters of products and services (mostly southeast Asian countries) are the other major players.
Recently, the Abu Dhabi government bought a 4.9 percent stake in U.S. banking giant, Citigroup, for $7.5 billion. Reactions to this capital infusion were mixed, but two important and contradictory statements that capture the essence of the on-going debate are worth mentioning. The United States Treasury Secretary, Henry Paulson, expressed that foreign investments from sovereign wealth funds are welcome, and they represent the highest vote of confidence anyone can pay to the U.S. economy.
But, Sen. Evan Bayh (D- Ind.) raised a red flag by correctly pointing out that the lack of transparency in these funds undermines the theory of efficient markets and jeopardizes the proper functioning of the financial markets. Bayh's remarks raise a vital question about the true objectives of some of these funds. History is being created with the rise of these funds because such huge capital was previously invested only by private investors, banks and mutual funds for one purpose: to make money.
But now, the strategies of these government-controlled funds are being questioned, due to the increased risk of making investments for political rather than economic reasons. The temptation to exert political influence rises with an increase in capacity to buy strategic assets and natural resources of other countries. The close-ended and opaque approach adopted in handling these funds, without a doubt, raises significant and valid concerns.
Many economists have, however, been critical of some governments for allocating too much capital to these funds when poverty, unemployment and famine are rampant in their own backyard. They argue that governments are deviating from their primary functions: to improve the quality of life of their citizens.
The most vivid example is China, where poverty is widespread, and the gap between the wealthy and poor still exists. But the government sits on $1.5 trillion of foreign exchange reserves (highest in the world) and is exploring how it can expand its already existing $200 billion sovereign wealth fund.
Nobel Prize winning economist, Joseph Stiglitz, points out that the excess foreign exchange and trade reserves generated by Southeast Asian economies should definitely be put to use and not sit idle. But where the governments use these funds is pivotal to the success of the nation. Governments should invest in their people, infrastructure and education and not become a for-profit corporation.
Although these sovereign-wealth funds have not attracted widespread limelight, their rise will affect the global, political and economic arenas in the coming years.
Online link to this column:
http://www.collegiatetimes.com/stories/2007/12/05/new_economic_trend__when_a_country_buys_a_company
