A new breed of sovereign
wealth fund - without the wealth
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[March 20, 2017]
By Claire Milhench
(Reuters) - Once the preserve of rich oil exporters or nations with
trade surpluses, like Norway, Kuwait and Singapore, an unlikely new
breed of sovereign wealth fund is emerging - in countries with large
deficits and deep debt.
Sovereign wealth funds (SWFs), which first emerged in the 1950s, are
traditionally associated with huge financial firepower. They control
about $6.5 trillion, according to data provider Preqin, and have
transformed the global investment landscape by snapping up stakes in
multinational companies and landmark real estate in cities from London
Now Turkey, Romania, India and Bangladesh are launching sovereign funds
- but for very different reasons than usual, and with very different
Traditionally, wealthy nations use SWFs to invest their surplus billions
overseas to prevent inflation at home, diversify income streams and
accumulate savings for the day when commodity revenues run out.
In stark contrast, the countries launching the new funds, burdened by
large current account deficits or external debt, are using them as
vehicles to get their economies moving in the face of a global slowdown
and lower trade volumes. And rather than splashing cash abroad, the plan
is to attract finance from overseas and invest it at home to stimulate
"Sovereign wealth fund is a term that's used very loosely in the
labeling of some of these new entities, they are more like sovereign
holding companies," said Elliot Hentov, head of research for official
institutions at asset management firm SSgA. "They need to lever up –
they need private sector co-investment to work."
There are both potential benefits and risks to this strategy - and only
time will tell whether it will be effective.
One of the advantages of having an SWF, apart from the cachet it
bestows, is the fact it opens the door to industry associations and peer
group networks that offer guidance and - crucially - contacts in the
Turkey runs an annual external financing deficit of around $30 billion,
so it must attract foreign money to plug the gap.
By putting the government's stakes in big companies into a sovereign
fund, Turkey hopes to attract external funding, by borrowing against the
companies and tapping other SWFs for money.
Similarly, Romania plans to finance roads and hospitals by raising debt
against the value of the government's company stakes, or selling them
via public listings.
India and Bangladesh want to kick-start infrastructure projects via new
sovereign funds, with India seeking co-investors amongst SWFs and
pension funds for its National Investment and Infrastructure Fund (NIIF).
Other funds have been mooted in countries like Lebanon Guyana, but have
yet to be established.
Such plans have had a varied reception depending on the country.
Economists and industry experts have also warned of potential pitfalls
that need to be avoided.
Critics worry that domestic-focused funds in general can fall prey to a
misallocation of resources or outright corruption, citing the example of
Malaysia's 1MDB, which is the focus of money-laundering probes in at
least six countries.
"The danger with (this model) is that in many cases normal budgetary
procedures don't apply, so they are a way of getting around
parliamentary oversight and ministry scrutiny of projects," said Andrew
Bauer, senior economic analyst at the Natural Resource Governance
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lack of transparency can mean there is little way to verify how the money is
spent, he added. One risk is that unviable "vanity projects" get funded.
However in many ways it is in the interests of countries to ensure funds are
free of political interference, have a robust legal framework, a clear mandate
and professional management - as these are likely to improve decision-making
and, ultimately, returns.
Grouping state company holdings into a professionally managed fund can improve
the performance of the assets - with, for example, Bahrain's Mumtalakat
considered a success in this regard. Abu Dhabi's Mubadala is also cited as a
fund that has helped diversify the UAE economy by developing industries in
Romania, separating company ownership from policy-making should improve
transparency and accountability, said Greg Konieczny, fund manager of Fondul
Proprietatea, a Romanian investment fund created by the state to compensate
those who lost property under the former communist regime.
"Right now these companies are under line ministers that also set policy and
strategy for the sectors they are responsible for - that never works," Konieczny
Similarly, in India, where infrastructure projects are hobbled by red tape, a
dedicated state fund may offer a way to accelerate the process, said Nikhil
Salvi, a manager at Aranca, an investment research and analytics firm.
A major sticking point will be assessing performance - railways and ports may
boost economic growth, but won't show up on the fund's balance sheet. The social
benefits of new schools and hospitals can take years to come through.
of these (inward-focused) funds do not publish a return benchmark," said Sven
Behrendt, managing director of consultancy GeoEconomica. "Whether or not
investments are profitable ... often remains unclear."
The new funds also need to avoid the fate of those in poor countries such as
Suriname and Zimbabwe, which failed to get off the ground due to a lack of
India's NIIF has been allocated $150 million for the 2017/2018 fiscal year, and
plans to tap strategic partners to raise $1.2 billion in the coming fiscal year.
Bangladesh's planned $10 billion fund will be seeded from foreign exchange
reserves over the next five years.
"The fund will be used for mega projects, including repayment of any loans taken
by the government in dollars," said Jalal Ahmed, additional secretary at the
ministry of finance.
Turkish fund head Mehmet Bostan told Reuters last month he would finalize a
strategy plan and present it to the cabinet soon. The government has already
transferred company stakes worth billions to the fund, and hopes it will be
managing $200 billion soon.
Click http://tmsnrt.rs/2nVgTwc for graphic on SWF assets under management
(Additional reporting by Ruma Paul and Rajesh Kumar Singh)
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