The Role of SWFs in

Financial Markets

Middle East Investment SummitDubai, 5- 8 March 2012

Dr. Fabio ScacciavillaniChief Economist, OIF

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Shift in Barycenter

2Source: World Bank Global Development Horizons 2011

Millennial View

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Western

Europe FSU

United

States Japan China India

1500 17.9% 3.4% 0.3% 3.1% 25.0% 24.5%

1600 20.0 3.5 0.2 2.9 29.1 22.5

1700 22.5 4.4 0.1 4.1 22.3 24.4

1820 23.6 5.4 1.8 3.0 32.9 16.0

1870 33.6 7.6 8.9 2.3 17.2 12.2

1913 33.5 8.6 19.1 2.6 8.9 7.6

1950 26.3 9.6 27.3 3.0 4.5 4.1

1973 25.7 9.4 22.0 7.7 4.6 3.1

1998 20.6 3.4 21.9 7.6 11.5 5.0

2006e 19.0 3.8 19.7 6.3 15.1 6.3

Source: Angus Maddison, The World Economy: A Millennial Perspective, OECD (2001); IMF; Morgan Stanley Research

Contribution to global GDP in the last 6 centuries at 1990 International (PPP) US$

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The “New” Economics

THE ECONOMIST

“The crisis of Western liberal capitalism has coincided with the rise of a powerful new form of state capitalism in emerging markets”

“The crisis of liberal capitalism has been rendered more serious by the rise of a potent alternative: state capitalism which tries to meld the powers of the state with the powers of capitalism”.

Source : Special Report on State Capitalism

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Public vs Private

• Historically, the demarcation between public and private sphere in the economy swings like an irregular pendulum in response to circumstances.

• Financial markets were widely viewed as a preserve of individuals, firms and private institutions,

• Any interference by a publicly owned entity was deemed an undue interference at odd with well-established laws, norms and practices.

• The massive bail out of key international banks and industries like car manufacturing shattered this sanctimonious attitude.

• KfW, EDF, ENI, Fannie & Freddie, Landesbanken etc.

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One size does not fit all

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Reversal of Capital Flows

• Until the 1970s, the capital flows typically moved from the developed world towards the emerging markets and the developing economies.

• This situation had prevailed since the industrial revolution and was a dominant feature of the first wave of globalization between the end of the 19th century and the early 20th, when the British Empire and the US were the unmatched powerhouses.

• In essence a Brazilian or an Asian company looking for financing would obtain it directly or indirectly from London or New York.

• Slowly, but with a remarkable acceleration over the last few years capital flows inverted their course: particularly from emerging economies to the US. China, Japan, some Asian Tigers and the Middle East are net supplier of capital.

• ‘South-South’ flow are rising, including FDI. Intra emerging market flows could be channeled directly without the intermediation of the developed counties financial centers by strengthening the links among the outer nodes.

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Financial Barycenter

• The “hubs and spikes” model of global financial markets is inadequate for a multipolar world and implies a dangerous concentration of systemic risks

• Pinnacles: London and New York

• Cobweb model is the most natural alternative

• South-South relationships need to strengthen and find alternatives linkages

• Towards a multi-currency regime

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Global Role

• The end of the saving glut and the coming era of capital scarcity

• Long term investments: SWFs as the ultimate risk bearers

• SWF emerging investments trends

• SWFs investing in the less developed economies: Africa as the last investment frontier: savings – investment bottleneck

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Top Down Approach

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Risk

Mismanageme

nt• Most Western countries have been living above

their means, thanks to mounting private liabilities in the US, UK, Spain and public liabilities in most Continental Europe.

• This came as a result of an attempt to counter the loss of technological edge and a demographic decline

• Public opinion and leaders in developed opinion is still in denial

• Cuts to discretionary spending, marginal entitlement trimmings and cuts in public investments are mere palliatives

• It is required a re-engineering of the fundamental functions of the public sector and its financing: this was the knot of the recent fight between Congress and President Obama

Money printing …. does not work

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Labour Market indicators

Long Run Growth Drivers

and Implications for Risk

Management

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• Demographics & Education

• Infrastructure & Urbanization

• Natural Resources Supercycle

• Technological Advances

• “Fluidification” of Business Environment

• High growth high barriers to entry

• Diamonds in the dirt

Implications for Risk

Management

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• Herd Behavior:

– Benchmarks,

– Ratings,

– Capital Adequacy Ratios

• Tail events, Black Swans and Persistence

• Financial returns diversification vs growth drivers diversifications

• Institutional Capital

Concluding Remarks

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• The classification of developed economies and emerging economies starts to be out of touch with reality, because some of the emerging economies have in fact emerged and overtaken some of those classified as developed which in turn are sinking (Greece is just a point in case) like South America in the 1960s. So it would be more apt to talk about mature and high growth economies.

• The expanding role of SWF reflects this secular inversion in the distribution of global wealth from mature economies, primarily the United States and Europe, to countries such as China, India and Brazil which enjoy favourable demographics, and to those with sizable natural resources such as the UAE, Norway, Australia and Russia.

• The surge in capital flows that we have witnessed over the last 25 years is the fundamental propeller of this re-balancing because it transformed the sign of the demographic variable in the equation of economic development.

Thank YouFabio ScacciavillaniOman Investment Fund (OIF)

P. O. Box 329, P.C. 115Sultanate of Oman

T: +968-2464 3035

M: +968-9321 4978

F: +968-2469 1344

E: fabio@oif.om

W: http://www.oif.om

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