II. LITERATURE REVIEW
2. T HE EMERGENCE AND THE GROWTH OF SWF
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
changing objectives when situations change. For example, some countries establish SWFs for savings and stabilization purposes, but when the circumstances change, the purpose they emphasis may also change (e.g., change to development funds). This is especially true for countries that export natural resources.
2. The emergence and the growth of SWF
The first SWF recognized in the modern era can be traced back to the 1950s. In 1953, the Kuwait Investment Board was set up with the aim of investing surplus oil revenues to reduce the country’s reliance on its finite oil resources (Steffen Kern, 2007)5. In 1965, it was replaced by the Kuwait Investment Office (KIO), a subsidiary of the Kuwait Investment Authority (KIA). Today, KIA organization manages a substantial part of the Future Generation Fund (FGF), which allocates 10% of the country’s (Kuwait) oil revenues annually.
The second SWF was established by is British colonial administration in the Gilbert Islands (the Republic of Kiribati since 1979) in 1956, the Revenue Equalization Reserve Fund (RERF). This fund was set up to hold royalties from phosphate mining in trust for the Pacific island state. It is the major source of revenues for the country and well diversified with investments overseas. Since its inception, assets under management by RERF have
5 Steffen Kern, “Sovereign wealth funds-state investments on the rise”, Deutsche Bank Research, September 10, 2007, p.4
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
grown to nine times of Kirbati’s GDP (AUD 636 millions) and returned investment income of around 33% of GDP (Steffen Kern, 2007).
After these first two funds were established, the SWFs have been set up essentially in two major waves (Steffen Kern, 2007). The first one is in the 1970s, (e.g., the Singapore’s Temasek Holdings in 1974 and the Abu Dhabi Investment Authority, ADIA, in 1976), and the second one began since 1990s with setting up of Norway’s Government Pension Fund-Global.
However, the massive increasing trend of SWFs is from 2000. According to International Financial Service London (IFSL) research (Figure 1), there are 56% of top 50 SWFs which set up between 2000~2009. The fact behind this phenomenon is the current account imbalance between main developed countries and developing countries.
Figure 1. Launch year of top50 SWFs, % share by number6
Source: International Financial Service London (IFSL) Research
As Figure 2 shows, the current account deficit of U.S.A. has been increasing since 1991;
what the worse is that the deficit was more than 800 billion dollars in 2006, or 6% of
6 “Sovereign Wealth Funds 2010”, International Financial Service London (IFSL) Research, March 2010, p3
Pre‐1990 27%
1990‐1999 17%
2000‐2009 56%
‧
American GDP. This huge deficit would be a serious worry for America, and also reflect the increasing current account surplus in Asia and oil-exporting countries. Therefore, due to holding with huge current account surplus, Asian countries and oil-exporting countries have lots of incentives to take advantage of it, and these countries became the main forces to stimulate the fast growing of SWFs.
Figure 2. Current Account Imbalance7
Source: IMF, WEO DATA BASE
Asian Countries
As Figure 3 shows, the global foreign exchange reserve has been increasing more than three times since 2000, and it almost reached 7000 billion dollars at the end of 2008. This phenomenon is important because the distribution of these foreign exchange reserves is very
concentrate to Asian countries.
7 IMF, WEO DATA BASE. Asian countries are China, Korea, Japan, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and Vietnam. Oil exporting countries are Saudi Arabia, Russia, Norway, Iran, Iraq, Venezuela, United Arab Emirates, Kuwait, Nigeria, and Algeria.
-1000
‧
Table 2 shows the top 10 countries with foreign exchange reserves. It is obvious that China and Japan are the 1st and the 2nd biggest countries holding with foreign reserves (2,399,152 million dollars and 1,053,070 million dollars respectively); Hong Kong and Singapore have the huge percentages of foreign exchange reserves relative to their GDP (122.5% and 115.1% respectively); and 7 of top 10 countries are Asian countries: China, Japan, Taiwan, India, South Korea, Hong Kong, and Singapore. Most of these Asian countries are not natural resources abundant countries (Taiwan, Singapore, Hong Kong, Japan, and Korea); however, they accumulated their wealth through exporting. Holding with enormous foreign exchange reserves, setting up SWF becomes a better way to utilize the capital and seek for better profitability (e.g., CIC in China, KIC in Korea, and Temasek and GIC in Singapore…etc). Therefore, these Asian exporting countries accelerated the growth of SWFs.
Figure 3. Global Foreign Exchange Reserves8
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
million USD
Year
Global Foreign exchange reserves
Source: IMF, COFER DATA
‧
Table 2. Top 10 countries by foreign exchange reserves9
Rank Country Foreign Exchange Reserves (millions of USD)
10 Singapore 187,809(Dec.2009) 115.1%
Source: IMF, Central Bank of China and Taiwan
Oil Exporting Countries
For oil exporting countries, the volatility of oil price and the nonrenewable feature of natural resources became the main motive for them to set up SWFs. By establishing SWF, oil exporting countries have more investment choices; they can reduce their reliance on nonrenewable natural resources and stabilize their national income from volatile oil price. As Figure 4 shows, the world crude oil price had been increased dramatically since 2000, and reached the highest price is $137.11 per barrel in July 2008. Hence, oil exporting countries accumulated lots of national wealth during this period and make use of this capital for setting up SWFs. This raise of oil price boosted the rapid growth of SWFs.
9 IMF, The people’s bank of China, Central Bank of R.O.C.(Taiwan)
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Figure 4. Crude Oil Price10
Source: U.S. Energy Information Administration
Since last decade, what attracted the world’s attention about the SWFs was the anticipated rate of growth. The combined heft of SWFs is currently estimated to be $3.9 trillion in 2009, or between 1 and 1.5 percent of global asset markets. They have grown at an annual rate of 24 percent over the past five years. The persistence of global macroeconomic imbalances and the inelastic demand and high price of oil lead many analysts to predict an annual 20 percent growth rate over the next decade. The total valuation could range in size from $9 trillion to $16 trillion by 2015, or close to 4 percent of global asset markets. (Daniel W. Drezner, 2008)11
Whether this size is large or small depends on what it is compared with. Figure 5 shows the comparison among SWFs and other assets. If one wants to make SWFs appear large, one can compare SWFs’ scale to those of Pension Fund and Private Equity Fund. That will be
10 U.S. Energy Information Administration
11 Daniel W. Drezner, “Sovereign wealth funds and the (in)security of global finance”, Journal of International Affairs, Fall/Winter 2008, Vol. 62, No.1.,p 116
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
$3~$3.9 trillion with SWFs compares to estimated $1.7 trillion with Hedge funds, and $0.7 trillion with Private Equity Fund (IFSL estimate, 2009). On the contrary, if one wants to make SWFs to appear small, one can compare the number with other figures, like the world’s GDP (which is around $48 trillion); or note that the $13.9 trillion is only a fraction of the global financial assets, which are roughly $140 trillion in March, 2009($50 trillion reduction from 2008 due to the subprime crisis).
There are two critical points: One is that SWFs are already large enough to be systemically significant. The other is that SWFs are very likely to grow larger with a stunning speed in the future.
Figure 5. Asset Comparison-Investment and Asset Classifications12
Source: SWF Institute
As Figure 6 shows, till the end of 2009, Middle East countries and Asian countries hold
12 SWF Institute, http://www.swfinstitute.org/research/assetcomparison.php
‧
over three-quarter of global SWFs’ market share (42% and 36% respectively). This distribution means the economic status change is happening now. For the past years, developed countries had always played a dominant role in the world economic growth;
however, the developing countries are becoming more and more powerful and influential since they hold the huge capital- SWFs.
Figure 6. SWFs market share by continent13
Source: International Financial Service London (IFSL) Research
Until now (2010), there are 59 SWFs which are recognized by SWF Institute, relative only 35 SWFs as 2008. Table 3 indicates the estimates of assets under management for main SWFs. The top 3 SWFs are all funded from oil revenues; the biggest is ADIA of UAE, which is about 16.5% of global SWFs scale; the second biggest is SAMA Foreign Holdings of Saudi Arabia, which is 11.4% of global SWFs scale; and the third one is GPFG of Norway, which is 10%. SWFs in China, Singapore and Hong Kong are funded from foreign exchange reserves;
13 “Sovereign Wealth Funds 2009”, International Financial Service London (IFSL) Research, March 2010, p3 Middle East
Origins of SWF, market share by continent (end of 2009)
‧
CIC of China is 7.6% of global SWFs scale; the GIC in Singapore is 6.5%; Temasek Holding is 3.2%, and Hong Kong Monetary Authority IP is 3.7%. Kuwait and Russia are 5.3% and 4.4% respectively.
These SWFs (with assets more than 100 billion dollars) gain over 68% of global SWFs assets, and most of them are developing countries, or say, oil-exporting countries and south-east Asian countries.
Table 3.Estimates of Assets Under Management for SWFs14
Name of Fund Assets ($ bn) Source
UAE Abu Dhabi Investment Authority (ADIA) 627 Oil
Saudi Arabia SAMA Foreign Holdings 433 Oil
Norway Government Pension Fund-Global 380 Oil
China China Investment Corporation 288.8 Non-commodity
Singapore Government of Singapore Investment Corporation 247.5 Non-commodity
Kuwait Kuwait Investment Authority 202 Oil
Russia Russia National Welfare Fund & Oil Stabilization Fund 168 Oil
Hong Kong Hong Kong Monetary Authority Investment Portfolio 139.7 Non-commodity
Singapore Temasek Holdings 122 Non-commodity
Libya Libyan Investment Corporation 70 Oil
Qatar Qatar Investment Authority 65 Oil
Australia Future Fund 49.3 Non-commodity
Algeria Revenue Regulation Fund 47 Oil
Kazakhstan Kazakhstan National Fund 38 Oil, Gas, Metals
14 IMF, “Sovereign Wealth Funds—a work agenda”, February 29, 2008; SWF Institute
‧
國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Brunei Brunei Investment Agency 30 Oil
Korea Korea Investment Corporation 27 Non-commodity
UAS(Alaska) Alaska Permanent Fund 26.7 Oil
Malaysia Khazanah Nasional Berhad 25 Non-commodity
Iran Oil Stabilization Fund 23 Oil
Chile Pension Reserve & Social and Economic Stabilization Fund
21.8 Copper
Source: IMG, SWF Institute
To make a summary about the emerging and growth of SWFs: SWFs had been existed in the world since 1950s, but it grew dramatically only during these years (from 2000) due to the increasing oil price and current account imbalance. The SWFs assets scale are estimated to 3.8 trillion in the end of 2009, and over 68% of SWFs are composed of (1) natural resources abundant countries (oil-exporting countries) and (2) exporting countries (Asian developing countries). The distribution of origin countries of SWFs, the government-owned feature of SWFs, and the fast growth rate of SWFs, make it more and more important and grab the world’s attention.