IY SMU Publication: The Straits Times, p S8-9 Date: 19 January 2008 Headlines: Sovereign wealth funds: Will the welcome mat wear out?

Sovereign wealth funds: Will the welcome mat wear out? Government-owned sovereign wealth funds are swelling in size and influence but could their high-profile acquisitions provoke a nationalistic backlash? Lydia Urn and Lynn k find out UBS TO be renamed Union Bank of Singapore?

That was a nrnniag joke in the international nexGipa ra when the Government of Fin- gapore Investment Corpora- t ion (GIC bought a 9-per-t stake in the wealth mana ement giant for ~$14.4: biion last month, be- sop its s i d e

Barely a month later, the Singapore Government's in- vestment management mmm- ny m e to action again, t&p. inn SS9.82 billion into %elu- g&red American bank@ gi-

an tEV&ber a h saw Te- masek Holdin s taking a SS6.4 billion stale in Ameri- can Invsiment bank snd brok- ing firm M e d Lynch.

These were parl of a buy- ing sweep by Asian and Mid- dle Eastern sovere' wealth f u n d s ( S W F S ~ i n t o brand-name financial institu- tions that had been left s v b h g - by the US subpnme mo age meltdown - for capi- tal L o n s .

These institutions had bought bilIions of dollars worth of sub rime loans, which they ha8 to write off when the US housing bubble deflated and homebuyers with poor credit records de- faulted on their mortgages.

Before this latest crisis, large state-owned SWFs have more often than not been por- tn ed as interlopers.

i u t today, they receive a hem's welcome.

Aa the size and influence of the SWFs swell with soaring commodity vrices and fareinn exchange- ieserves, govern- ments and financial regulators sense an urgent need-to up their vigilance of s 3 funds.

How could that colour the investment outlook for SWFs?

Axe there other storm douds hanging on the hori- zon?

And how can funds navi- gate ast the squalls to find safe L o u r s with the pros- pect of good retmns?

Creeping nationalism THE outlook for SWFs hinges on which way the wiods of na- tiodirn blow in the major economies.

These could range from populist fears that iconic wm- anies will fall into fo

L n & , to worries that% huge amount of funds man- aaed bv S W s end UD misused oi mismana ed, caking mas- sive finandl m 0 a .

Across western Europe, na- tionalist heckles have been raised because of the moves by Russian conglomerates - some with close ties to the Kremlin - to buy stakes in en- ergy and defence-related com- panies.

Germany is now leading a push for Europe-wide meas- ures to vet corporate aquisi- tions by state-controlled.inws-

wielded by their government owners.

At the same time, the US Treasury department has warned that #ving in to such fears wuld trigger a wave of investmentfmtectionism that would be very harmful to the obal ewnomy".

&stifying before a Senate banking committee last No- vember Mr David McCor- mick, &e department's un- der-secretary for international affairs, otressed that measures to add;ess legitimate wncerns with regards to SWFs must "ensure that the United States remains open to and welcom- ing of foreign investment".

Govermnents all over will strive to balance the push of nationalistic fervour a ainst the ~ l l of foreign capit3

&me economists say 'that the code of best practices that the IMF and World Bank are drawing up for SWFs will pave the way for a smoother operating environment for these funds.

?hey believe that many of the fears surroundmg SWFs stem from a lack of under- standing about these funds and their goals.

In a eech at the Lee Kuan Yew SXool of Public Poli on Thursday, Mr Edwin Truman, Senior Fellow at the Peterson Institute of Interna- tional Economcs, predicted that a code of best practices would reduce anxiety in host countries as it would ensure greater trans arenc and ac- countabiiiy Rom s&.

ing two sovereign wealth funds on the list of Super Sev- en with 'assets worth over USSlOO billion (S$143.4 bil- lion), scco- to a recent re-

E' rt by Stan ard Chartered ank and hdon-based con-

"%,"Yr$%A!d%g?%~e two as the Government of Sin- gapore Investment Corpora- tion o r GIC and Temasek Holdiags:

But gven how definitions of SWFs are still being debat- ed, it is an open question if an investment com any like Te- masek is an s d .

US Deputy Treasury Secre- tary Robert M. Kimmitt, in a recent articIe in Foreinn Af- fairs ma azine, for exirnple, defines S ~ S as "zovemment investment vehicles funded by foreign exchange assets and managed sefarately from official reserves .

By this definition, GIC is an SWF, Temasek is not. GJC is a custodian manager of Si- gapore's fonign reserves.

At a recent dialogue, Minis- ter Mentor Lee Kuan Yew, re- ferring to Temasek and GIC, said the were relativeiy small a n i he did not see a backlash against them from Western v m e n r s .

lndee$ the problems of SWFs in Rrst World countria h a w not surfaced for either GIC or Temasek. GIC is the more consenw-

tive investor of the two and has a diversified portfolio of assets that indudes fixed in- come, foreign exchange, mon-

cal winds blow and the state of bilateral ties. Mr Andrew Tan, 32, a p l y -

ning analyst and Indones~an nahonal who has lived here for two decades, says:

"It's difficult to ut a posi- tive spin on SWFs gecause in many Asian countries, the p y is fiercely nationalistic.

But SWFs can still do more to sell their story better. And they must also evaluate the risk factors more es ly when they are inienF% buy $to strategic nationa as- sets.

Temasek defines itself on its website as "an active share- holder and investor in diverse industw sectors from bankinn to t e r t to telecommunica~ tions and ene

Unlike 8':. Temasek 9 e s large, controlling stakes in some regional companies.

So far, its strat w e r "sics for hi,"',"Z has paid off.

In the three decades from 1976 to 2006, its total share- holder return by market value was 18 per cent a year, as wm- pared to GIC's average annu- al retun of 8.2 per cent in the 25 years from its inception in 1981 to 2006.

But while some of its invest- ments have flourished, others, such as the 2006 urchase of Shin Corp, have &uudered.

In the Shin case, the losses were due to a political beck- lash against the deal.

Thai academic Pavida Pana- nond, an asmiate professor of international business at

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Publication: The Straits Times, p S8-9 Date: 19 January 2008 Headlines: Sovereign wealth funds: Will the welcome mat wear out? V SMU

At a 'White House press conference last month, US Resident Gecme W. Bush de-

tom Last ear, its Chancellor

Angela & erkel Usted that as one of het priorities for the rest of her term, which ends next year.

In the US, the threat of a looming recession a d d put

.prrssun on politicians to wave the Ibntionaiist flag. In a televised debate this

week, Democratic residen- tial candidates mieel m- about the biion-dollar bail-

mmtP to extract techlolo givetheirnational f i n n s a g up, or boost the Muence

to a code of a muld neutral- nw trying to

said, addiq that "the best de- fence bere IS a good offence".

ey markem, real emam and pri-

n'hlui$thase twwtments are not the mrl to 8th emo- tions as they are in fmandsl In- sttlrmento rather than mtional assets. What's more GICs In- vestments my d w d .

Mr Leon erera group m a m p director of $pire ~ e - sea and Consulting sa s that when investing in &e YS and Eumpe, Singapore "will be at an advantage compared to SWFs from the Middle East and Chins, as Singapopom may be seen aa less pohtrcally 'threatening;. But the nsk quotient could

the as GIC ups its exposure to markeb, private eq-

%=hedge f u d ~n a for higher returns.

Tmasek Holdings facea a different set of chanenges alto-

= m o f itsassetsarein Asia, where mess to Slngporr c$%?au be un- pred~ctable depending on which way the domestic politi-

elared: "

"I'm fine with forolgn capi- taleomfngin£romowmesto MD b o h a our hamial insti-

Singapore's Prospects

~ o n s . " Yet economists wonder

such an open em- kL13 kt.

:Right now, the SWW are be- courted as mviow and

%y so, for be ~ t p they can pro& a sector that so ~nwm etently and a m -

d e d to M-pIice. s w o n lDDrm or

ifgrowthdowswithh@mm-

3 loyment, then the SWPs be vilified,

"It would be a mistake to a ~ s u m e t h a t ~ s o n t h e ~ we now sea wdl have a con- stant relrtialmpwith fo* nationals - there are always losers in economic cnmpeti- tion."

Among the corylwions she dn3w from aaalvslnn the Shin deal, and othei wkaear in- vestments of the GLCs was this: 'Temasek and the OLCs WWWULO OX PAaE S%

SINGAPORE way fo rwardvS%s% through greater disclosure

-, GlC - man Tony Tan ro Sbtgapote c d f h G 2; the way by fonndating a set

lea and best practk- :a s to follow. "Such disclosure can in-

dude clarity on the relation- ship betweea S?Wa and their

SMS, m i l yar r views WHAT f y m reaction to the wthofsovedgn w e a E ' ~ ?

rcdpeahrt governments, their mwtment obfedws and gen- sral strategies, and their inter-

What is ammtign wealth fund? RESCUED:

USS12.5blE

A SOVERHGNwealth fund (swp) g e n d y dsoerIbes a d of intermtimal m owned bv

such *ds en essentially govenunsnt saviagr, have two s a ~ .

* e e L the d e of commoditiq such as oil and gas, which are either owned or taxed by the gowmnseat. The second is from a trander of d from a

s fo* exchange resuves. ""& m e dysb use the term SWPs b m b to d e h i m v form of savarednn

- - - - - - - Home bane: No

-t"-'td=%--==' lrponlton Hama Shgapore h the game sine 1981 Vdue (vsSF $215 billion

International Monetary h d (m mates that SWFs bably had no more than

~ ~ $ 5 0 0 won ( ~ 7 E i ~ i w ) in amets under

t h ? o d a 7 ent in 1990.

y , W s are thought to controI between US161.9 trillion nnd USS2.9 Won in assets

sow^ weakh fund -gem have a hklm mk tolaaaoe than then countemm

say shm the 19th century - and were known as stawtian funds previously. But their cokctiv weqht has become a source of concexn only in -t yeprs.

That r paw bscause since 19W the value of global assets controlled by SWFs & qua&upled

- --

worldwide. Last year, a Mo an Stanle mject ed

thot the figure c w i ~ owell to BsW&on by 2015 Among the small ayers are Mexico's Oil

e e s a s h t i o n & n t h about uSS5 W1*m in ~ t r coffers. Tbe est fuad - the United Arab Emitatesl A s h a b i Investment Authority -has USS625 billion in its pocket.

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2 SMU Publication: The Straits Times, p S8-9 Date: 19 January 2008 Headlines: Sovereign wealth funds: Will the welcome mat wear out?

Will the welcome mat wear out? CONTINUED FROM PAGE S8

may not be properly trained to navi- gate the political economy of emerg- ing markets, where political reforms are advancing in parallel with grow- ing affluence, new political culture, democratisation and impact of the Internet on the society and polity."

But it seems Temasek has also learnt valuable lessons from its re- cent experiences.

Last November, its chairman, Mr S. Dhanabalan, told The Straits Times of a three-pronged strategy to counter economic nationalism:

Rule 1: Avoid buying over or taking a controlling stake in companies with "iconic" value to a country; Rule 2: Look for good local

partners to invest with; t+ RuIe 3: Opt for a minority stake if investing in a company from a sensitive industry, or in an iconic firm.

Mr Inderjit Singh, who chairs the Government Parliamentary Committee for Finance and Trade and Industry, remains convinced that GIC and Temasek can still sew up deals, both in the region and elsewhere. But he says they also need to realise that they should exercise more sensitivity than other funds.

He suggests they avoid taking very large stakes in companies or taking the lead on investments, especially if they can find a credible private fund to partner them.

"Both Temasek and GIC should perhaps start thinking about not just being big and strong but also friendly and sensitive. Then they might be more welcome. This is a mindset change which might be dSf~cult to do but can be done," he says.

Temasek Holdings has started contributing to the region's growth through corporate philanthropy.

Last year, it pledged half a billion dollars to help the people of Asia through two new non-profit organisations - the Temasek Trust and Temasek Foundation.

Mr Perera says another key issue is reciprocity, that is, whether Singapore is seen by other countries as practising "give and take".

"Is Singapore allowing foreigners, or even foreign SWFs, to buy into its own large companies, or to benefit from Singapore's economy? Awardhg one of the two IR licenses to Malaysia's Genting might have been seen as just such an instance of "give and take", he tells Insight.

There is growing global recognition that SWFs are here to stay, and are likely to continue growing in size and iafluence.

The number of such funds is also set to rise, as more countries look to SWFs as a way to bolster their financial resilience.

So love or loathe them, it seems that countries at the receiving end of such funds' attention will just have to learn to Kve with them.

But nationalist feelings will not die out either.

Going forward, SWFs' toughest challenge could lie in the olitical l realm. They will have to one their ability to read which way the political winds blow as these could spell the difference between a smooth-sailing billion-dollar deal, and shipwreck.

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