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The accumulated funds have their origin in, or may represent foreign currency deposits, gold, SDRs and international fund reserve position held by Central Bank and monitory authorities along with other national assets such as pension investments ,oil funds etc. These are assets of the sovereign nations which are typically held in domestic & different reserve currencies such as the dollar, euro and yen.
HISTORY
The term sovereign wealth fund was first used in 2005 by Andrew Rozanov in an article entitled, 'Who holds the wealth of nations?' in Central Banking journal.
The previous edition of the journal described the shift from traditional reserve management to sovereign wealth management.
Subsequently the term gained widespread use as spending power of global officialdom has rocketed upwards.
TYPES OF SWF
1. Stabilization Funds: set up by countries rich in natural resources to provide budgetary support & insulate the national economy from volatile international commodity prices. Example- The Reserve Fund of Russia. 2. Savings Funds: set up by governments for longer term wealth creation to meet future needs. The sources of these funds are commodity based or fiscal, reserving the countrys wealth for future generations. Example- Alaska Permanent Fund of US.
3. Pension Reserve Funds (PRFs): set up with a specific mandate to finance future public pension expenditures. Owned directly by the government, the pension reserve funds are often treated as SWFs. Example- Norways Government Pension Fund-Global
There was an additional $6.8 trillion held in other sovereign investment vehicles, such as pension reserve funds, development funds and state-owned corporations funds and $7.7 trillion in other official foreign exchange reserves.
An important point to note is the SWF to Foreign Reserve Exchange Ratio which shows the proportion a government has invested in investments relative to currency reserves. According to the SWF Institute, most oil producing nations in the gulf have a higher SWF to Foreign Exchange Ratio
for example, the Qatar Investment Authority (5.89x) compared to the China Investment Corporation (.12x) reflecting a more aggressive stance to seek higher returns.
Sep2007
Dec2007
Mar2008
Jun2008
Sep2008
Dec2008
Mar2009
Jun2009
Sep2009
3,190
Jun2010
3,184
Sep2010
3,354
Dec2010
3,843
Mar2011
3,981
Jun2011
4,067
3,678
3,719
3,843
4,033
4,080
4,332
4,477
4,657
Revenue and Financial Impact of SWF : Where is the wealth coming from and total investments($b) by SWFs.
Surge in commodity prices Willingness of governments to allocate more funds from Foreign Exchange Reserves to Sovereign Wealth Funds SWF in 2007 was $3.0 trillion SWF in 2012 is expected to be $7.5 - $10.0 trillion $66.6 Investments in Other Industries Investment:3.8% of Total
$44.6 $1.7
Investments in Financial Services
$42.6
63.8% of Total
$20.6
$42.9
$24.0
2007
$19.2 $1.4
93.3% of Total
2006
Jan-08
China: $0.83
US: $3.38
India: $0.83
Current 5-Yr GDP Growth Forecast Estimated 5-Yr GDP Forecast With Incremental Capital Inflow
2.4%
3.0%
2.4% 2.7%
US
US
India
China
Concerns
As the SWFs continue to increase its share both in terms of value and importance, its potential impact on the various asset markets also increase. These reasons have resulted in various concerns.
The major looming factor is how government will use SWFs in practice
Their inadequate transparency is a concern for investors and regulators. Very few of them publish information about their assets,liabilities or or other strategy of investment.
For instance, a government could use SWFs to learn how companies in other countries operate and then use this information to bolster enterprises.
PROs:
IMF guidelines : FOREX reserves of a country should be sufficient to meet 3-4 months of its import requirements. Indias status: Import coverage:14 months FOREX Reserves-$315.7 billion as on July 8 2011. Greenspan-Guidotti rule: Reserves should be no less than the short term debt liabilities of the country. Indias status : Short term debt totals to less than 15% of the reserves amount.
May be used to acquire assets globally for India's long-term energy and resource needs- oil and gas, coal & infrastructure.
SWF could parcel out money for boosting the local fund management industry investing in overseas markets
CONs :
Whos Against? SEBI Reason Indias foreign currency reserves built on capital account inflows exposed to the risk of such flows reversing at any time. reserves used for financing Indias Current Account Deficit (CAD). In 2010-11, India's CAD was 2.6% of Gross Domestic Product (GDP)
RBI
Shareholders
New Venture-High Risk involved. No infrastructure to detect high return opportunities and investing in them, unlike Singapore.
The real buyers of mineral resources overseas in India are private companies. So long as Indian private firms can raise capital, they dont need an SWF to help them. Role Of Government: Roots back to the oil ministry a few years ago On-Off debates on a periodic basis Considering setting up a SWF with more than USD 10 billion, Option of budgetary allocation also considered. Latest Five-year Plan includes $492 billion of infrastructure spending, but it expects the private sector to come up with two-thirds of the cash.
CONCLUSION
India is reportedly toying with the idea of ploughing some of its $285 billion (Rs11.23 trillion) foreign exchange reserves into a state-owned investment vehicle. That would put the country in the new developing world elite along with cash-rich countries as China, Abu Dhabi, Qatar, Kuwait and Singapore.
India looks to have enough money to join play, if only in the second league. At $285 billion, its total foreign reserves have grown $300 billion in 2010, and are up from a mere $1.5 billion in 1991.
But the cash doesnt really represent sovereign wealth. Unlike established SWF rivals, Indias reserves are not a result of high commodity prices or excess savings.
product (GDP). It needs to keep a fair amount of cash on hand just to ensure that trade keeps flowing.
More important, India is still very poor and crying out for investments. Investment accounts for 33% of GDP in India, far below Chinas 43%. The government recognizes the problem. Its latest Five-year Plan includes $492 billion of infrastructure spending .It would make sense to use any extra unneeded foreign currency to increase the governments share. In the long term, the returns on even modestly well thought out domestic investments will surpass those earned by a sovereign wealth fund.
IN SHORT SWFs are in fashion.. India need not become a fashion victim.
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