Sovereign wealth funds as actors of financial stability?

Person using futuristic HUD interface, KPI and BI, technology, data

Sovereign Wealth Funds that have only existed for 60 years have in a very short time become key investors on the world stage. Sovereign wealth funds are an efficient way to invest the reserves accumulated by governments and thus provide liquidity without the need for debt. They lead to financial stability. More particularly for oil-producing countries, their sovereign wealth funds constitute a protective resource to cope with the depletion of future oil resources and thus make it possible to secure their future.

financial stability

Some sovereign funds even invest in their own country as the TEMASEK fund in Singapore by acting as a development fund to support the domestic economy. Many Golf commodities thus play the role of development funds.

However, such domestic investments increase the demand for money and thus appreciate the currency, which may conflict with exchange rate policy if we seek to improve the competitiveness of tradable products. This is why many sovereign wealth funds have turned to foreign investment.

In addition to supporting companies, sovereign wealth funds can have a countercyclical effect when the economy is at its lowest. Sovereign wealth funds have a role to play in financial crises. For example, during the 2007-2008 financial crisis, emerging country sovereign wealth funds came to the rescue of affected Western banks by investing in them. They were able to provide liquidity where the financial sector was lacking and thus they had financial stability for the economy even if it was not enough to solve the crisis.

Only sovereign funds recorded capital losses following the crisis and their investments caused scandals in emerging countries. From 2008 onwards, investments were refocused on investments in their own countries. Sovereign wealth funds continued to play a counter-cyclical role, this time for their home countries.

They then played the role of the lenderas a last resort for their domestic banks as in Russia and Australia. They can also act as a substitute for banks in the event of a crisis. For example, in Saudi Arabia, in response to the difficulties faced by local banks in granting credit, the government has drawn on sovereign wealth funds to provide credit to local companies.

Finally they play the role of a relief fund as was the case with the Singapore fund GIC which released 13 billion dollars to finance the government’s recovery plan or with Russia whose sovereign fund was used to finance the federal budget.

Only because of their lack of transparency, we cannot know whether they have a purely financial purpose or whether they hide a political objective. Thus, in the coming years, governments will have to decide whether to remain true to their liberal model and allow SWFs to invest in their companies or whether to restrict their activities even if it means taking the risk that the management of their assets will be held by more speculative players.



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