GROWTH ECONOMICSand Fund-raising in international cooperation

SECS-P01, CFU 9Economics for Development

academic year 2019-20

Roberto Pasca di MaglianoFondazione Roma Sapienza-Cooperazione Internazionale

roberto.pasca@uniroma1.it

14. SOVEREIGN WEALTH FUNDS IN THE WORLD CAPITAL MARKET

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Swf definition

Funds or other public investment vehicles powered by capital from different sources and managed separately from monetary

policy reserves (IMF definition)

The term “Swf” appairs first time on 2015

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Role of the Swf in the international capital markets

While for a long time, capitals moved from industrialized countries towards developing areas, actually, Western economies are facing

capital flows from the oil-rich countries and from the emerging countries towards the more secure and stable developed markets

Sovereign Wealth Funds (Swf) are playing an increasingly role in international finance, with regards particularly to both merger and acquisitions (M&A) and

foreign direct investments (Fdi).They are confronted with both opportunities and concerns:• Stable institutional and legal framework, efficient public administration, high

technology industries structure, modern services, infrastructure availability, etc. are elements of attraction of new investors.

• The financial crisis, the lack of capitals open their door to new actors.• Swf’s capital participation strategy could be influenced by political choice as

great part of Swf agencies are run by countries often ruled by undemocratic regimes.

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Swfasset under management ($bn)

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Swforigin and dimension

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Swf characteristics and regulatory needs -• In a context characterized by the deep structural financial instability, the Swf,

as "silent" investors, are attracting the interest of private and public companies as well as that of policy makers, who are all seeking new sources of funding to compensate for the lack of capital.

• The need for a regulatory framework that meets the requirement of free capital movement and transparency of foreign investors pushed main players in the international financial system to look for a common proposal. The setting-up of the International Working Group on Swf, which brings together the representatives of the Sovereign Wealth Funds and of the main multilateral financial institutions (IMF, OECD, EU), is the concrete demonstration of the necessity to approve a proposal for a voluntary code of conduct in 24 principles, which China has already adopted.

• Within the members of the EU, there are different attitudes: from the liberal position of the United Kingdom down to the more conservative and protectionist view of France and Germany, even if there are some differences between them as well. The Italian attitude would seem to be more open to capital inflows as the need to attract Fdi is greater.

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Swfwhere the finance come from

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Fiscal transfer 15%

Natural resources 65%

Other 20%

Swfobjectives / provenience

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Objectives:• Stabilization funds• Saving funds• Development funds• Pension funds

Provenience• Commodity funds• Non commodity funds

Swfgeographic concentration

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Asia; 28%

Europe 13%

Africa 4%

North America 2%Latin America1%

Middle Est52%

Swfreasons for creating

• manage budget surpluses• coping with the financial crisis• drop in commodities’ prices• wide possibility for merger & acquisition• necessity for sovereign investors to work alongside other

actors both private and institutional to create positivesynergies and catalyze the capital available to sovereignfunds in the most financially sustainable and sociallyeffective manner

• lack of access to financial services or to more traditionalpublic goods and the looming threats of climate change,poverty and food insecurity

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Swfexpected growth

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Swfmain funds

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Swfsome conclusions

• Reversing the historical trend that show capital be moved from developed countries to developing areas, today the flows come from the oil-rich and new emerging countries

• M&A strategies of SWF seek to influence and control top management of large multinational companies and, because the actors are publicly owned, the risk of political constraints grows.

• An estimation has been made of the extent to which global investments are significantly influenced by Sovereign Funds: for each unit of growth of the Sovereign Funds, foreign direct investments increase by 12%, while the other main financial actors (hedge funds and pension funds) tend to lose their role and importance as their main interest remain closer to the financial speculation and not to real investment

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