ICF Project Report - Sovereign Wealth Funds - Section B

8/8/2019 ICF Project Report - Sovereign Wealth Funds - Section B

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Outline of the Project

1. Introduction to Sovereign Wealth Funds 3

2. Types of Sovereign Wealth Funds 4

3. Major Factors that impact the size of Sovereign Wealth Funds 5

4. Comparing Sovereign Wealth Funds to other types of funds 6

5. Investments of Sovereign Wealth Funds 7

6. Concerns raised about Sovereign Wealth Funds 10

7. Economic Implications of Sovereign Wealth Funds 11

8. Impact of the recent Financial Crisis on the Sovereign Wealth Funds 14

9. Major Sovereign Wealth Funds of the world

o China SWF 16

o Singapore SWFs 18

o Middle Eastern SWFs 22

10. Analysis of Indian case for SWF and developing investment model 25

11. Countries which can develop SWF 28

12. References 29

13. Appendices 30

2 Sovereign Wealth Funds; Section B


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Introduction to Sovereign Wealth Funds

The first Sovereign Wealth Fund was started in the year 1953 in Kuwait. Initially the Sovereign

Wealth Funds were started mainly by the Oil Exporting countries.

Sovereign Wealth Funds are state-owned investment funds. They invest

in financial assets such as stocks,bonds,property, precious metals or otherfinancial instruments.

Sovereign wealth funds invest globally. They are used by countries to maximize their long term

returns on the foreign currency holdings. Instead of keeping the excess money in the central

bank or plugging it back into the system, a country may choose a Sovereign Wealth Fund to put

it into investments. Sovereign Wealth Funds are funded by foreign currency reserves but

managed separately from official currency reserves.

Since 2000 the number and size of Sovereign Wealth Funds has grown at phenomenal rate. IMF,

in 2008, had estimated them at about US$ 2-3 trillion and states that it expects the Sovereign

Wealth Funds to reach around US$ 10 trillion over the next decade. Currently around 20 nations

in the world hold a Sovereign Wealth Fund, with the top five funds holding about 70% of the

assets under management.

A comparison of global financial assets (in $ trillion) is given below that highlights the

importance of Sovereign Wealth Funds in todays world (2008 figures).


$48.1

$23.6

$7.5 - $10.0

$5.4

$3.0

$1.9

$1.3

Retirement Funds AUM

Projected Sovereign Wealth

Foreign Exchange Reserves

Sovereign Wealth Funds

Hedge Funds AUM

Private Equity AUM
http://en.wikipedia.org/wiki/Investment_fundhttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Propertyhttp://en.wikipedia.org/wiki/Precious_metalhttp://en.wikipedia.org/wiki/Financial_instrumentshttp://en.wikipedia.org/wiki/Investment_fundhttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Assethttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Propertyhttp://en.wikipedia.org/wiki/Precious_metalhttp://en.wikipedia.org/wiki/Financial_instruments


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Types of Sovereign Wealth Funds

The following classifications are available for Sovereign Wealth Funds:

Commodities: These SWFs are either owned or taxed by the government and are created throughsurplus forex earnings through commodity exports.

Over $2.5 trillion in value in 2008

NonCommodities: These SWFs are created by transferring assets from official exchangereserves, i.e. assets accumulated as a result of current account surpluses.

$1.4 trillion in value in 2008

Stabilization Funds: To insulate the economy against the commodity price swings

Savings Funds: To enable savings for future generation through a diverse portfolio of assets

Reserve Investment Corporations: Have higher risk, but established for higher return onreserves

Development Funds: To fund the countrys domestic socio economic projects

Contingent Pension Reserve: For financing health expenditures and social security, especiallyin countries with an ageing population



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b) Have led to a build-up of foreign currency reserves in these countries

c) Since 1995, reserves have more than doubled but the currency reserves in developing

economies have increased sevenfold

d) Asian exporting countries combined current account surpluses grew from $53 billion in

2000 to $443 billion in 2007. The U.S. dollar accounted for slightly less than two-thirds of

total central bank foreign reserve holdings of all the countries as of the first quarter of 2008

5) Foreign Exchange Reserves of a Country

a) Major exporting nations or natural resource (like oil, etc) providers may accumulate large

amounts of FOREX reserves

b) Nations invest their foreign exchange reserves in assets such as the sovereign debt of

other countries, including securities issued by US Treasury

c) Some countries invest a portion of their excess foreign currency reserves in assets which

would earn higher returns, such as the equity shares

d) These especially include countries that are major exporters of commodities or natural

resources, such as oil, as well as those, like China, that are exporters of manufactured

goods.

e) In contrast US, the worlds largest importer of goods and natural resources, has run

increasingly large current account deficits since the early 1990s

Sovereign Wealth Funds vis--vis other type of funds

The key aspect in which Sovereign Wealth Funds differ from other type of funds (Hedge funds,

Pension funds) is the objective of the investment:

1. Accumulate sufficient assets, through contributions and investment income

2. Satisfy all pension obligations of the contributors on a timely basis

3. Primary aim of most hedge funds is to reduce volatility and risk

4. Preserve capital and deliver positive returns under all market conditions

Unlike the aforementioned objectives of different funds, the aims of SWFs are as follows



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Comparison of investment vehicles

1. SWFs exceed the size of hedge funds (around US$1.7 trillion), but comparison is

somewhat misleading because of leverage

2. SWF Portfolios are more diversified than traditional reserves holdings

3. Greater Stakes in Equities and Wider Geographical Dispersion than other forms of

investment funds

4. Market Participants expect SWFs Portfolios to look like those of the larger Public Sector

Pension Funds

5. Some SWFs are also exploring Alternative Investments, including Hedge Funds,

Private Equity, and Real Estate

The following are the risks involved in SWFs which could culminate into a National Security

Risk

Investments of Sovereign Wealth Funds

The Investment Behavior of Sovereign Wealth Fund is determined by the investment objectives.

The objectives determine the Investment Horizon and the Risk/Return Trade-offs.

Singapore SWFs are the most active internationally - oriented funds and the Chinese fund has

focused on the home market front.



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Source: SOVEREIGN WEALTH FUND INVESTMENT PATTERNS AND PERFORMANCE (Apr 2009) by

Bernardo Bortolotti, Veljko Fotak, William Megginson and William Miracky

Industrial and Industrial Distribution of SWF Investments:



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Norways Government Pension Fund-Global is the worlds second largest SWF. The fund sub-

contracts out all of its investments to asset managers, and so the fund is never listed.

SWFs favor investing in the financial industry. The 376 financial firm investments account for

30.9% of all deals, by number, and over half (54.6%) of the value of all acquisitions.

Singapore receives the largest number of SWF investmentsmostly from Singaporean SWFs

total value of investments ($13.23 billion) yields sixth place ranking.

United States is the most popular target for SWFs with 10.9% of the number and 22.2% of the

total value of SWF investments being channeled to US headquartered companies. China is the

second most popular target nation, though almost all of the 79 deals worth $31.0 billion are

domestic investments by the China Investment Corporation

Apart from investing in a few home-country firms, it seems clear that SWFs prefer to purchase

stock and real estate in the capital markets of the principal English common law countries :

America, Britain, and Australia.

Temporal Distribution OF Sovereign Wealth Fund Investments, January 2000-Dec 2008





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The graph shows the massive spike in SWF investment in 2007 (and 2008) versus previous years,

as well as the rising share of financial deals in aggregate investment value

Concerns raised about Sovereign Wealth Funds

Transparency/ Poor Accountability

1. Distinct policy concerns about the effects of SWF investment

2. May pursuepolitical objectives or policies that are not strictly financial

3. Fewpublish information about their assets, liabilities, or investment strategies

4. Rogue traders have taken large speculative positions and lost heavily. Traders acted without

the approval of the appropriate credit risk managers.

5. Largest share of assets is with the countries in which thestate has played a dominant role in

the society and the economy; and where representative institutions are relatively less

established

Global Macroeconomic Stability

1. Macroeconomic imbalances - Over-consumption by the United States, and mercantilist

policies of North-East Asian countries, particularly China.

2. Continued acquisition of excess reserves and policies to maintain under-valued currencies,

perpetuate imbalances and adversely impact on financial stability

3. Mitigated by provision of liquidity that the SWFs can potentially provide

Conflicts of Interest, Potential Insider Trading and Regulatory Effectiveness

1. When governments which are regulators become investors

2. SWFs as government agencies could have access to commercial and security sensitive

information. Could also lead to insider-trading

3. Prosecuting officials of foreign governments -Diplomatic dilemma

Potential to Disrupt Financial Markets

Cause volatility in markets

Use status as government instruments to compete unfairly



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Protectionism

Protectionist reaction by the investee country government

Countries pick and choose who can invest in what

Exercising Influence as a Shareholder

Shareholders with even seemingly small ownership percentages could exercise influence

disproportionate to their shareholding

Use their influence in a company to:

extract technology

protecting their national industries from competition

Disguised Political Objectives

If the governments will use the SWFs simply as financial tools or to implement political

power

Political objectives might influence their management

Use funds to create artificial monopolies

Transfer ofstrategic assets

Key industries and technologies

Trade & state secrets

Natural resources

Economic Implications of Sovereign Wealth Funds

Increase in demand for capital market products

1. SWFs enjoy considerable freedom in their investment decisions and are expected tomaximize performance, hence a substantial inflow of funds from SWFs in emerging

economies expected

2. In their asset management, SWFs behave similar to investment, pension, hedge or private

equity funds; therefore, they are seeking to diversify across a wide range of asset classes

in different countries.



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3. This suggests that SWF growth will likely lead to an increase in demand for stocks,

private and public bonds, as well as real estate, but also private equity, possibly also

funds or hedge funds, as well as the use of derivative instruments.

Substitution effects on asset classes

1. The investment of official central bank reserves in liquid assets will be replaced by

investments in assets with higher expected returns, i.e. stocks or private bonds

2. This may have a perceivable impact on market demand and yields

Demand for asset management and investment services

1. SWFs have the choice of outsourcing all or a part of their funds to outside fund

managers; can purchase parts of the asset-management value chain from independent

suppliers

2. Market analysis and investment evaluation, portfolio construction and monitoring,

securities trading, clearing and settlement, hedging and risk mitigation are services which

will pick up

3. Complex investment banking services like advisory, valuation and due diligence, legal

and accounting advice, placement and distribution, and settlement services will incresae

Impact on exchange rates and asset prices

1. Impact asset prices and exchange rates through price pressures or a change in risk

aversion

2. A direct impact on asset prices or exchange rates through price pressures triggered by

SWF demand (e.g. equities) or supply (e.g. government bonds)

3. Impact on asset prices through a rise in global risk aversion, given their return-orientation

and longer-term investment horizon.

Potential risks to international financial stability

1. Triggering herding behavior

Large sums of capital are concentrated in the hands of a limited number of large actors. In the

absence of SWFs, these surpluses would be distributed among domestic citizens



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The presence of a large player with a high-risk appetite can induce market behaviour that

could lead to a negative outcome.

2. Lack of transparency and short-term volatility

Inducing other traders to mimic strategies, leading to greater buying or selling on one side of

the market

Since SWFs have become more widely known, many analysts have tried to anticipate their

strategies, based on the investment strategies of similar institutional investors. The lack of

transparency about the holdings of SWFs introduces an element of uncertainty into markets

3. Non-economic objectives and financial protectionism

A protectionist backlash against SWFs would restrict cross-border investment and slow

economic growth. The reaction of Western states to SWF investment may lead to the

adoption of barriers, preventing the free movement of capital

4. Investor activism and monitoring of managers

Many SWFs have done their utmost to prove that they will be passive investors, including

forgoing any voting rights. While this may ward off protectionist sentiment, it may also

impede the monitoring of managers. When a company experiences large capital losses, more

active investors usually push for some sort of reform to avoid losses in the future



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Impact of the recent Financial Crisis on the Sovereign Wealth Funds

Not all SFWs suffered equally,

Libya's SWF ($50.6 billion) returned profits of about $2.4 billion since 2006, (78% of the

portfolio invested in short-term financial instruments and only $8 billion in equities,

spread mostly across North Africa and Asia.)



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The Saudi Arabian Monetary Agency (SAMA), did not lose much due to its conservative

dollar-and-bond-heavy portfolio.

Lessons learned: Spurred SWFs to rebalance their portfolios within individual asset

classes,

o Moving developed market investments away from equities and towards bonds.

o Allows SWFs to increase their holdings of more liquid bonds, without sacrificing

their other developed and emerging market investments; perhaps showing that

SWFs believe the prospects for growth among higher-risk and higher return

equities are highest outside the US.

Despite global crisis, SWFs have continued to follow two core investment mantras

(1) Capitalising upon short-term market lows for long-term gain

(2) Investing in industries that help build the comparative advantage of the home country

These mantras may not be the best strategy. : Sovereigns are more likely to call upon

SWFs for domestic stabilisation purposes.

SWFs will need to hold a large share of counter-cyclical assets to avoid realising large

losses.

Real estate, commodities and direct investments in firms that enhance a sovereigns

comparative advantage tend to movepro-cyclically with the SWFs domestic economy.

Hence SWFs face a pull between market opportunities, and core investment

competencies.

Lastly, sovereign governments have re-evaluated the management and oversight of

SWFs.

Slowdown may only be transitory. - High commodity prices return and large global

imbalances will increase the volume of their inflows.

Strong inflows into SWF is very likely:

(1) Unwillingness of Chinese policymakers to alter their currency peg

(2) Continued rise in commodity demand

(3) Nascent stage of renewable energy technologies



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China Sovereign Wealth Fund

1. China Investment Corporation (CIC)

2. One of the largest SWFs after UAE and Singapore

3. Established in 2007 with $200 billion AUM. It has grown to a value of $332 at year end

2009

4. $2.5 trillion in currency reserves in China

5. Want to utilize these reserves for the benefit of the state, modelled according to

Singapore's Temasek Holdings

6. Initial investment:

a. Invest in ~50 large enterprises around the world

b. Special treasury bonds issued to raise $207.9 billion to create capital

7. Governance:

a. 11 member board of directors

b. Reports to the State Council of the country

c. Considerable influence of Chinas MoF

8. Investment Strategies:

a. Need for high return rates given the access to the country foreign exchange

reserves

b. Focus on a portfolio of financial products

c. Considering investments in Hong Kong and Taiwan

d. Considering opening overseas branches

e. Has invested money in struggling financial firms during the time of US financial

crisis. E.g. Morgan Stanley

f. Looking to invest in sectors like natural resources, telecommunication and real

estate

9. Concerns:

a. Gives China a theoretical ability to purchase controlling interests in major

corporations, raising potential national security concerns

b. Countries with huge trade deficits at more risk

c. Concerns about the sovereign wealth funds clear investment strategy free form

the political influences of the country



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Major Investments:

10. Implications for Chinas economy:

a. New vehicle for managing forex reserves; soak up excess liquidity

b. Prevent domestic inflation or speculative bubble in China due to excess money

supply

c. Reduced pressure to appreciate currency (allegedly undervalued)

d. Accumulation of US debt with excess money not very profitable; gives the

government to earn a positive rate of return on investments

11.Implications for Global Financial Markets and the US Economy:

a. Types of investments made is a critical issue

b. Shift in portfolio from US treasury to other assets could lead to upward pressures

on the interest rate (currently Fed trying to bring them down)

c. Purchase of strategic assets for geopolitical purposes will raise security concerns



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Singapore Sovereign Wealth Fund

Temasek Holdings

1. Incorporated in 1974 and supported by 12 affiliates. It has a portfolio of S$186 Bn as on

31 March 2010 which focuses on emerging economies

2. Initial portfolio had 35 investments and the value of the portfolio was S$ 354 million;

investments included shipping companies among others. Gradually, Singtel and

SingPower were transferred to the company.

3. Funded through the dividends from the portfolio, divestment earning and leveraging.

Close to 75% of the exposure is to the emerging markets of Asia with sector focus being

on financial services; telecommunications, media & technology; and transportation &

industrials.

4. Temasek Claimed in 2008 that it couldnt be classified as an SWF as it sells assets for

new investments and this does not require approval from the government



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Investment Strategies of Temasek

Portfolio Investments by Geography

Majority of the holdings are in the emerging economies of Asia, a large part is in Singapore itself.

Portfolio Investments by Sector

It has a diversified portfolio with investments in varied fields.



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Performance of Temasek Holdings

Tamasek Holdings has given a consistent return of17% compounded annualreturn over its life

and 42% is their one- year total shareholder return. Tamasek Holdings has a strong foundation

base of Singapore Blue Chip companies. In the latest fiscal year the Wealth Added was S$42

Billion.

Controversies

1. Tamaseks close association with the Singapore Ministry of Finance has been a bone of

contention

2. When ST Telmedia (Tamasek company) acquired a stake in Indostat there were labour

strikes & protests

3. When ST Telemedia tried to acquire a stake in Global Crossing the deal had to be

approved by the US government as it was wary of foreign control.

4. A major controversy took place when Tamasek acquired Shin Corporation (Thai prime

minister owned company). This led to massive protests and a political crisis in the

country. Lately Tamasek had to divest a large part of its holdings.



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Government of Singapore Investment Corporation

It is a global investment management company founded in 1981. Its main aim is to manage

Singapore's foreign reserves. It invests in equities, fixed income, natural resource, treasury &

currencies, real estate, private equity and infrastructure.

GIC Investment Process

The aim is to construct a

diversified multi-asset class

portfolio by increasing

alternative investments

such as private equity and

real estate.

In 2009-10 the Portfolio

underwent a loss of more

than 20%.



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Controversies

GIC had invested in UBS and Citigroup to a large extent. During the financial crises GIC

converted its preferred stock holding to common stock at a price of USD 3.25/ share to reduce

their loss.

Middle East Sovereign Wealth Fund

Structure of Sovereign Wealth Funds (mid 2008)

1) Kuwait Investment Authority

Country Established

in

US $ Billion Origin Investment

Style

Entity

Structure

Kuwait 1953 202.8 Oil Mostly

Portfolio

Fund

The Kuwait Investment Authority (KIA) is the parent organization of the Kuwait Investment

Office, which was initially established as the Kuwait Investment Board. The KIA invests in the

Local, Arab and International Markets.


Oil and

Own funds

Borrowed funds


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Investment Strategy & Objectives

The Kuwait Investment Authority is a long term investor. Objectives include

Maintaining the real value of the funds entrusted to the Office for the Future Generation

Fund,

Achieving a fair return over the long-term

Increase the favorable reputation as an expert and progressive institution in the

international financial markets.

Transparency Rating: 6

2) Iran Oil Stabilization Fund

Country Established

in


Style

Entity

Structure

Iran 1999 23 Oil Hedging Corporation

This fund was created to invest Irans oil revenues and act as a stabilizer against fluctuating oil

revenues.

The investment arm is the Iran Foreign Investment Company (IFIC). It was incorporated in

March 1998 as a Private Joint Stock company with a mission to manage and expand Iranian

holdings abroad.

IFIC has interests in energy, telecom and IT, banking, insurance, stock markets, industry, mining,

oil, gas and petrochemicals, as well as new and future technologies.

Transparency Rating: 1

3) Bahrain Mumtalakat Holdings

Country Established

in


Style

Entity

Structure

Bahrain 2006 9.1 Oil Portfolio Corporate

The primary funding source of wealth comes from oil. Currently, their investment portfolio is

heavily weighted into the local Bahrain economy in a number of industries ranging from real

estate to telecommunications.



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The fund is primarily made up of state owned enterprises such as Gulf Air, Bahrain Real Estate

Company (Edamah), and the General Poultry Company. They are in the process of diversifying

their investment portfolio.

4) Abu Dhabi Investment Authority

Country Established

in


Style

Entity

Structure

UAE 1976 627 Oil Mixed Fund

Established in 1976, the Abu Dhabi Investment Authoritys (ADIA) main funding source is from

a financial surplus from oil exports.

Investment Strategy and Objectives

The Abu Dhabi Investment Authority invests in a variety of asset classes. Benchmarks can range

from the MSCI Index to the S&P 500 Index.

Some of their asset allocation consists of:

Equities Developed Markets

Equities Emerging Markets

Hedge Funds

Futures Sovereign Debt

Corporate Debt

Real Estate (Funds or Direct Investments)

Private Equity

Infrastructure



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Analysis of Indian case for SWF

Major reasons for building Sovereign Wealth Funds:

Excess Foreign Reserves: India needs to park their excess reserves as there is a cost involved in maintaining such

reserves/ liquidity which is the loss of possible returns.

Better Management of foreign Reserves:

The foreign reserves could be invested for long term in slightly risky and illiquid assets

which can provide better returns.

The Sovereign Wealth Funds of Singapore has managed to gives returns in excess of 15%

for many years.

Acquiring Strategic Assets:

SWF help the domestic companies to arrange the necessary funds to acquire these assets.

The China Investment Corporation (CIC) is mainly investing in the Power Sector trying

to acquire strategic assets abroad.

Major arguments against creating a Sovereign Wealth Fund:

Indias reserves are built from capital account inflows and are hence assets that are subject

to capital flight:

India has huge merchandise trade deficit and current account deficit whereas reserves of

other countries have been built up from huge current account surpluses.

Indias reserves are driven by capital account surpluses rather than the current account.

Hence they is need to maintain reserves in liquid and lower-yielding assets

Sovereign Wealth Funds usually make illiquid, long term investments.

Political Independence in Management and formation:

Control of the RBI or the Ministry of Finance.

Fund will be managed too cautiously affecting the returns of the fund. If the investments

are not made for a long term horizon in some slightly risky assets then the entire purpose

of creating such a fund will be defeated.

Concerns about accountability and fiscal indiscipline



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Difficulty in acquiring Strategic assets:

Direct investment in strategic assets by a Sovereign Wealth Fund will invite severe

criticism for its alleged non-commercial and political objectives.

Santiago Principles

Possibility of huge losses:

No guarantee that the investments made by the Indian Sovereign Wealth Fund will be

profitable

During the global financial crisis, Sovereign Wealth Fund from West Asia, Singapore,

China and Norway suffered huge losses in their investments in Western banks and private

equity funds.

Global SWFs

China

CIC

Middle East

Gulf Cooperation

Council

Singapore

Temasek

Singapore

GIC

AUM $ 200 Bn More than $ 2000 Bn $ 186 Bn $ 124 Bn

Source of

Countrys SWFCurrent Account Surplus

Oil and commoditybased SWF

Current AccountSurplus

Current AccountSurplus

Additional

Capital

Special bonds issued

worth $ 207 Bn

Low proportion of

funds borrowed fromoutside

Funded through

dividends, divestmentearnings

Funded throughdividends,

divestmentearnings of PSU

Investment

Strategy

2/3 Capital in USTreasury Bills

Focus on real Estate,natural resources andtelecommunications

Different investingstrategy - LT tospeculative andhedging purposes

Asset Allocationconsists of equities,futures, sovereign debt

Asia focused fund ; inthe sectors offinancial services,telecom , media andtransport

Focus ondiversifying andinvesting inalternativeinvestments likereal estate andprivate equity

Is India setting up a Sovereign Wealth Fund?

In a recent report by SEBI in 2009, the SEBI has recommended the government not to set up a

Sovereign Wealth Fund.



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According to the Indian express July 20, 2010, a proposal for setting up a sovereign wealth fund

(SWF) is expected to be put before a group of ministers. It was reported in the newspaper that the

Sovereign Wealth Fund will be created with an investment of$10 billion.

An Indian Sovereign Wealth Fund would be a pool of money, controlled by government, which

will be used to purchase overseas assets. This idea is weighed down with difficulties in the

context of poor governance in India. The main reason quoted for setting up this fund was to help

Indian companies acquire overseas assets.

Size and Investment Strategy of the Indian Sovereign Wealth Fund

Size of Investment:

India should use only 15% of reserves for investment. This is because India has current

account deficit and does not want to take the risk of a heavy loss.

Mode of Investing:

Indirect: Acquiring strategic assets is a bone of contention among many a nation, PSUs

can be use in this purpose. Like Temasek, can run them professionally and divest them

Investments:

The eastern European and African countries are mineral rich. China has already acquired

natural resource asset in most of Africa. India through its PSU s like OVL needs to use

the funds of SWF to acquire natural resources like oil fields, coal fields


Close to 10-15% ofReservesshould be used

Part of theReserves

Strategic Assets

EgOVL

Invest Through

PSU Invest inequities , Asiancompanies

Diversification


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India should not invest so heavily in alternative investments. This is because Private

equity companies are not transparent; hence there is no knowledge of what India is

investing in

India should invest in long term projects, similar to CIC like European power plants andrenewable energy plants.

In case India wishes to invest in corporations, India should follow Tamasek andfocus on

the Asian corporates as their growth prospect is very strong

India should diversify as much as possible to increase return

India should try to establish an independent management and accounting system

Countries that can develop SWFs

We have tried to analyze which other countries can develop a Sovereign Wealth Fund. The

following procedure has been followed for the analysis:

1. We started with a list of countries without SWFs and proceeded towards collecting their

reserves, imports, short term debt and long term debt figures

2. 12 month imports and short term debt figures were directly subtracted and those countries

falling short and ignored for further analysis

3. Long term debt is amortized for 10 years and interest is calculated using 1y LIBOR and

those countries found unable to service these liabilities are further removed from the

study (assuming 50% of LT debt is being serviced through reserves)

4. After deduction, 15% of remaining amount is taken as the corpus for a potential SWF

Limitations of the study

1. Country Macro-economic parameters are not taken into account. These may restrict

forming SWF or may facilitate it

2. We have not taken fiscal deficit and the source of reserves into account in the analysis

3. Volatility of reserves is also not taken into account. This may affect the sustainability of

the SWF



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An excel analysis of the same is attached along with as a part of the Appendix A



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References

1. Marrewijk, Charles Van (2007), International Economics (I Edition) published

by Oxford University Press, New Delhi.

2. F Salvator, Wominick (2001), International Economics (VII Edition) published

by John Wiley & Sons, New Delhi.

3. Dr. Y. V. Reddy (2007), Forex reserves, Stabilization Funds and Sovereign

Wealth Funds: Indian Perspective, at the Golden Jubilee Celebrations of the

Foreign Exchange Dealers, Association of India, Mumbai

4. Heller, H. Robert (1966), Optimal International Reserves, Economic

Journal,Vol. 76 (June), pp. 296-3115. Tamasek Annual Report

6. GIC Annual Report

7. Heller, H. Robert (1966), Optimal International Reserves, Economic

Journal,Vol. 76 (June), pp. 296-311

8. Behrendt, S., 2009. Gulf Arab SWFsmanaging wealth in turbulent times, The

Carnegie Endowment for International Peace, Washington, DC.

9. Chen, G., 2009. Chinese sovereign fund turning to natural resources, The New

York Times, 9 November.

10. Chong, F., 2009. Korean fund in $685m deal, The Australian,

11. Houget, G., Nugee, J. and Rozanov, A., 2009. Sovereign wealth funds: emerging

from the financial crisis, State Street Global Advisors, Boston,August.

12. International Working Group of Sovereign Wealth Funds, 2008, Sovereign wealth

funds: generally accepted principles and practices, Santiago Principles,

Santiago, October



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Appendix A Potential SWF Reserves

Country

withoutSWF

Reserv

es($ Bn)

Quarterly Long

Termexternaldebt

Annualshort

termdebt

RemainingReserves -

ShortTerm debt

Interest

Reserves

for SWF

Argentina 49,000 89,200 110.048 48,830 9,210 6,634

Bulgaria 15,123 36,698 74.312 15,013 3,789 1,968

Colombia 25,557 49,636 16.44 25,502 5,125 3,441

Croatia 12,629 58,253 25.788 12,577 6,015 1,436

CzechRepublic

37,219 62,37296.708 37,017 6,440 5,070

Denmark 72,6583,49,24

41031.52

8 71,506 36,059 8,021

Egypt 35,223 30,726 10.244 35,156 3,172 5,036

Hungary 43,167 1,98,797 117.14 42,942 20,526 4,902

Israel 63,409 55,871 144.952 63,202 5,769 9,048

Japan10,50,2

357,22,46

45455.74

8 10,44,228 74,594 1,51,040

Jordan 11,859 5,759 34.072 11,809 595 1,727

Morocco 20,006 23,045 8.84 19,963 2,379 2,816

Peru 39,093 30,743 19.54 39,044 3,174 5,619

Poland 86,4932,26,10

9 216.62 86,129 23,346 11,168

Romania 43,6561,00,45

6 66.632 43,497 10,372 5,747

South Africa 38,283 57,646 85.54 38,110 5,952 5,270

Switzerland2,55,52

24,32,53

03116.69

2 2,52,249 44,659 34,488

Thailand1,49,20

045,594

95.696 1,48,970 4,708 21,992

Turkey 76,8232,18,61

7 198.308 76,484 22,572 9,780

Uruguay 7,747 12,374 1.584 7,738 1,278 1,065

Austria 19,1336,03,75

6 908 18,081 62,338

Belgium 25,1384,57,60

23179.67

6 21,607 47,247

Finland 9,950 2,50,470 610.544 9,246 25,861

Germany1,97,10

734,84,3

346607.50

4 1,89,568 3,59,757

Greece 4,9153,95,50

1 772.644 4,060 40,835

Italy1,44,28

718,96,2

922619.43

6 1,41,258 1,95,792

Netherlands 37,753 14,94,7 3907.84 33,399 1,54,331

http://en.wikipedia.org/wiki/Argentinahttp://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/wiki/Colombiahttp://en.wikipedia.org/wiki/Croatiahttp://en.wikipedia.org/wiki/Czech_Republichttp://en.wikipedia.org/wiki/Czech_Republichttp://en.wikipedia.org/wiki/Denmarkhttp://en.wikipedia.org/wiki/Egypthttp://en.wikipedia.org/wiki/Hungaryhttp://en.wikipedia.org/wiki/Israelhttp://en.wikipedia.org/wiki/Israelhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Jordanhttp://en.wikipedia.org/wiki/Jordanhttp://en.wikipedia.org/wiki/Moroccohttp://en.wikipedia.org/wiki/Peruhttp://en.wikipedia.org/wiki/Polandhttp://en.wikipedia.org/wiki/Romaniahttp://en.wikipedia.org/wiki/South_Africahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Thailandhttp://en.wikipedia.org/wiki/Turkeyhttp://en.wikipedia.org/wiki/Uruguayhttp://en.wikipedia.org/wiki/Austriahttp://en.wikipedia.org/wiki/Belgiumhttp://en.wikipedia.org/wiki/Finlandhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Greecehttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Netherlandshttp://en.wikipedia.org/wiki/Argentinahttp://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/wiki/Colombiahttp://en.wikipedia.org/wiki/Croatiahttp://en.wikipedia.org/wiki/Czech_Republichttp://en.wikipedia.org/wiki/Czech_Republichttp://en.wikipedia.org/wiki/Denmarkhttp://en.wikipedia.org/wiki/Egypthttp://en.wikipedia.org/wiki/Hungaryhttp://en.wikipedia.org/wiki/Israelhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Jordanhttp://en.wikipedia.org/wiki/Moroccohttp://en.wikipedia.org/wiki/Peruhttp://en.wikipedia.org/wiki/Polandhttp://en.wikipedia.org/wiki/Romaniahttp://en.wikipedia.org/wiki/South_Africahttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/Thailandhttp://en.wikipedia.org/wiki/Turkeyhttp://en.wikipedia.org/wiki/Uruguayhttp://en.wikipedia.org/wiki/Austriahttp://en.wikipedia.org/wiki/Belgiumhttp://en.wikipedia.org/wiki/Finlandhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Greecehttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Netherlands


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Appendix B Important SWFs Worldwide

Documents

ICF Project Report - Sovereign Wealth Funds - Section B