Researcher Shatha Khalil *
Sovereign wealth funds operate – created by state governments for macroeconomic purposes – to maintain and manage wealth and assets in an orderly and sound manner and use several investment strategies to achieve the financial goal.
The funds are sovereign wealth (or sovereign portfolios), and are entrusted with the management of those wealth, and contain fixed assets such as land, commercial real estate or stocks, bonds, direct ratios in these companies, and governments seek to preserve their wealth on the one hand, and increase returns on the other hand . In other words, it is the investment arm of countries with surpluses.
It is the best way for countries with a current surplus to save for any event, emergency or financial economic crisis in the future. It is noted that more than one fund should be set up so that there is a diversity and balance of investments and be cautious and managed by a selection of professional administrators to obtain the desired results and not vice versa.
One of the reasons for the emergence of sovereign funds is the need of countries that have large savings and want to maintain these savings, and even seek to increase their profits, but are not invested in high-risk assets, as they are owned by the state and invest in traditional assets, as the savings of some countries are owned of commodity wealth (especially oil and gas), as in China and Singapore, which have a large trade surplus.
The history of the establishment of sovereign funds varies, but we can say that they began since the fifties of the last century, and then spread in several countries, contrary to what some believe that these funds are an exclusive phenomenon in the Gulf States, there are several countries around the world have similar funds, including Norway.
The objectives of the SWFs are:
– Protect the country’s wealth and invest it properly, which can be used in the future when it is needed, for example in the economic crises that the country is suddenly exposed to.
– Protecting the national economy and the state budget from the risk of external crises that result from fluctuations resulting from revenues and exports.
– The principle of justice, which is achieved through the distribution of wealth between generations by maximizing the savings that goes to future generations.
– Diversify state income and thus reduce dependence on non-renewable audio exports.
– Increase revenues in foreign exchange reserves.
– The monetary authority helps to withdraw unwanted liquidity.
– Provide a tool for financing economic development programs.
– Achieve sustainable long-term growth in the Fund’s holders.
– Achieving political, economic and strategic objectives
– Addressing the negative effects of financial flows resulting from natural wealth, this is known as the Dutch disease, which causes undesirable effects in the productive sectors, especially industrial as a result of oil discoveries that created a state of laziness and inaction in the job that hit the Dutch people during the years 1900-1950 after the discovery of oil and gas in the north, they went to luxury and comfort, until they reached the stage of depletion of the natural resource of wells depleted by excessive and unproductive consumption.
Norway is the largest fund in the world: Founded in the 1960s, the Norwegian fund aims to immunize the Norwegian economy from fluctuations in the oil markets and aims to ensure a future source of wealth from current revenues derived from oil and gas sales in Norway. The fund invests in equities, foreign bonds and real estate. Thus , Norway has one of the largest funds in the world with assets estimated at more than $ 818 billion, according to the latest data. The Norwegian sovereign wealth fund announced several days ago that it achieved a return on investment of three percent in the second quarter of this year, to reap 256 million T Norwegian crowns ($ 28.5 billion).
During the second quarter, the yield of the Norwegian sovereign fund was about 3%, with shares rising 3%, bonds by about 3.1% and real estate by about 0.8% during the second quarter, where the holdings of the fund of shares amounted to about 69.3% and bonds about 28.0%, and real estate about 2.7%.
Sovereign wealth funds are not without losses due to the poor performance of global financial markets.It lost about 485 billion crowns, or an estimated $ 56.4 billion in 2018, and are the surest way to manage the country’s wealth.
Similarly, Singapore, China and Russia run large-weight funds, and Chile and Venezuela have established such funds.
At the end of the second quarter of the current year , the fund had a market capitalization of 9.162 trillion crowns ($ 1.025 trillion), with 69.3% invested in equities, 2.7% in unlisted properties and 28% in fixed income instruments.
The fund makes investments in more than 9,000 companies worldwide in 75 countries and holds an average of about 1.5% of the world’s listed shares.
Norway has a population of about five million, which means that the wealth of each citizen is estimated at two hundred thousand dollars.
In September 2017, when the Norwegian sovereign fund’s assets reached $ 1 trillion, a Norwegian central bank official said, “I don’t think anyone thought the fund would reach $ 1 trillion when the first batch of oil revenue was transferred in May. 1996 ”.
“The $ 1 trillion is a focal point, and the growth of the fund’s market value has been spectacular,” the official said.
The market value of the Norwegian fund outperforms the economies of a number of strong countries such as Indonesia, the Netherlands and Saudi Arabia, Turkey, Switzerland, Sweden and Belgium, and this value is close to the GDP of major countries such as Mexico, Australia, Spain and Russia.
Iraq and its need to establish an Iraqi sovereign fund:
The Iraqi economy today is in dire need of a sovereign fund for development in order to encourage the financing of economic and social projects and to strengthen industrial policies to increase the real production within the Iraqi economy. This type of funds will bring a set of positive effects to the Iraqi economy , the most important of which is the reduction of unemployment rates and the development of productive sectors , especially in the Industrial and agricultural fields , and improving services…
There are internal and external reasons including:
1. Internal reasons:
• Oil is a depleted and unreliable resource, whether long-term or near-term in terms of depletion.
. Oil is considered a financial asset after it is transferred from physical assets .
. Reducing dependence on oil makes Iraq prepare for the post-oil period as Saudi Arabia does in its strategic plan 2030, which is to rely on 30% of the proceeds of the funds for the budget without oil.
2. External reasons :
• Unstable oil prices globally: The instability of oil prices globally and fluctuating indiscriminately, due to a combination of political and economic factors, and it is natural for Iraq to rely on a fund derived from oil surpluses, if they are existed .
-Withdrawal of surpluses: This fund withdraws surplus of funds from oil exports to overcome the fluctuating world oil prices, and can also take advantage of negative oil shocks, and the process of any collapse that may occur in global oil prices.
. Foundations for the establishment of an Iraqi sovereign fund:
1) Legislative and legal system: This is the essential element for the establishment of a sovereign wealth fund for Iraq, through the legislation of it by the Iraqi parliament, and this element is the first element in terms of importance and without this legislation there is no project originally proposed.
2) Funding the fund is initially funded by the Iraqi Ministry of Finance and is responsible for this fund for a few years.
3) Management of the Fund: The Central Bank of Iraq manages directly the management of the Fund, and provides an experienced cadre of administrative and specialized in the field of investment (direct and portfolio) in particular, can benefit from the expertise in foreign financial institutions, because of the lack of experts in this area, as the Iraqi stock market is limited market , and the lack of private financial institution as insurance funds and investment funds.
The assurances of international financial organizations (such as the International Monetary Fund) point to the possibility of Iraq to establish such a fund, and we believe that the creation of such a fund reflects the recognition of the current generation, and its recognition of the right of future generations to the equal distribution of wealth gains derived from the oil resource, which belongs to all Iraqis, justice should be achieved in its distribution between the present and future generations.
Types of Sovereign Wealth Funds Based on the Fund’s Field of Work:
1) Local sovereign funds: These are funds whose investment and savings activities are concentrated within the country.
2) International sovereign funds: These are funds whose investment and savings activities are concentrated outside the country.
3) Mixed sovereign funds: These are funds whose investment and savings activities are concentrated outside the country and within the country simultaneously.
Types of sovereign wealth funds based on degree of independence:
1) Non-independent sovereign funds: These are funds managed directly by the government and do not enjoy the independence of the decision. Most of these funds are characterized by their lack of independent control, accountability and disclosure.
2) Relatively independent sovereign funds: These are funds managed directly by the government, where other entities such as central banks and independent bodies are involved in their management, the most important characteristic of which is that they enjoy relative independent in decision-making, and are subject to independent control, accountability and disclosure.
The difference between the sovereign fund and the central bank reserve:
The picture is illustrated in the comparison between the sovereign fund and the central bank reserves when considering how to finance and build each.
1) Central bank reserves (SAMA), these reserves accumulate and decline from year to year through differences between oil income and government spending.
2) Whereas the funds or reserves directed to the sovereign fund come from a government decision to save for the future and to create another source of income, ie, it is a national savings program for the future parallel and complementary to oil income.
3) It is applicable in this area when establishing sovereign funds in the world to issue a government decision:
First, transfer part of the reserves available to the Central Bank to establish and finance the sovereign fund.
Second: The adoption of a savings mechanism that includes the transfer of part of the state’s income periodically to the sovereign fund, for example, the sovereign fund in Kuwait is financed by transferring (25%) of oil income directly to the sovereign fund.
Third, a mechanism is also needed to control government spending, so that the state budget (government spending annually) is consistent with the country’s long-term potential.
Size of SWF Assets:
The size of assets of these funds are estimated to be equivalent to 12% of the total value traded on the New York Stock Exchange or 42% of the total value traded on the Tokyo Stock Exchange. It is expected that the amount of funds that these funds will hold in a decade will exceed $13.4 trillion, while Morgan Stanley estimates assets will reach of $ 17.5 trillion.
Most governments have recently become a strategy to invest in short-term securities and bonds, and the authority currently manages a huge amount of capital, and this authority is one of the largest sovereign funds.
Size of Sovereign Fund Assets:
The assets of the UAE’s GDP, which recently entered into a deal to buy a 4.9% stake in Citigroup for $ 7.5 billion, is the largest non-controlling interest in a Western bank.And thee are sovereign entities belong to Dubai Government which have invested in Asian assets and companies, such as India’s ICSI Bank and Japanese electronics maker Sony company.
– The State of Qatar, the Qatar Investment Authority (QIA), a sovereign wealth fund dedicated to domestic and foreign investment, was established by the Government of Qatar in 2005 to manage oil and natural gas surpluses. As a result of its strategy to reduce the risk of Qatar’s dependence on energy prices, it invests mostly in global markets (USA, Europe, Asian countries and Peace Ocean). In addition to investing in Qatar outside the energy sector, the Authority owns about 6% of EADS, 15.1% of the London Stock Exchange, and 17 of Volkswagen Group as a shareholder in the Lagardar Group with a percentage of (12.83%), as at 31 May 2011, Qatar Investment Authority bought (70%) of the Paris Saint-Germain football club, and on March 6, 2012, the authority completed the purchase of the remaining 30%, and here the authority became to own100% of the Club , and on June 4, 2012, the authority bought the 100% of the capital of the Paris Club Saint-Germain handball, also bought in Paris a range of hotels , they are the Hotel Lombard, Hotel Kinski, Hotel Landolfo Carcano, Hotel Evro, Hotel Majestic, Hotel Gray Dallion, Hotel Casselan, as well as on the Champs Elysees in Paris, the Authority has the premises of the headquarters of Virgin Megastore, HSBC, Lido, Royal Monceau, and Penance.
– Saudi Arabia, which has the Saudi Arabian Monetary Agency (SAMA), which is internationally classified as a sovereign fund, generates a return similar to that achieved by global sovereign funds. SAMA currently manages the Kingdom’s investments from oil revenues in overseas markets noting that it occupied the third place globally according to the size of sovereign funds after it was ranked the fourth and it ranked the second in Arab , and the Kingdom has four of these funds , they are:
1) The Saudi Arabian Monetary Agency (SAMA) is the main sovereign fund under the umbrella of the State and its control.
2) Public Investment Fund.
3) Pension Fund.
4) Social Insurance Fund.
Also in the State of Kuwait, the sovereign funds of the Kuwait Investment Authority are $ 213 billion.
Oil revenues are the main source of funds for the largest sovereign investment funds in the world, and in conjunction with the rise in oil prices to pre-2014, and increased revenues of crude-producing countries, the wealth of these funds has increased, as the wealth of the Gulf has become wider and more concentrated, the total assets of sovereign funds of the Kingdom and the UAE Kuwait alone accounts for up to 50% of all SWFs worldwide, and foreign reserves are also a major source.
Therefore, we see a high demand for these funds by some countries keen to diversify their investments in order to avoid possible losses (less losses), and to preserve the wealth, and the best example is China, which has four sovereign funds are, China Investment Company, and investment portfolio of the Hong Kong Monetary Agency , the National Social Security Fund, Saif Investment company , and like the US with three investment funds and the UAE with two investment funds, this is an excellent hedging approach, because it reduces investment risk, gives greater opportunities to maximize the benefits on invested wealth, and is a. Strategic engine to influence globally across global financial clusters.
China attracts SWFs for investments :
China’s unique competitive dynamics attracts SWFs seeking further diversification, although stocks continue to enjoy their position as the most preferred asset class , and about 100% of SWFs in the Middle East which have exposure to China, bear Chinese shares indicating that the government measures to open up a market for foreign investors are paying off , and participants in the report from the Middle East mentioned that they have focused on building their expertise in China by investing in partnerships, developing their competencies internally, and establishing dedicated Asian offices. .
Monitoring the increase of Middle East investors to their allocations to Asia as a region, with provisions increasing by 75% in 2018 compared to 47% of all investors surveyed, and evidence suggests that this trend will continue in 2019.
Investment risk is the biggest challenge facing investment in China for sovereign funds in the Middle East. Transparency continues to be a major obstacle to global sovereign funds in increasing their allocations in China, while investment constraints and currency risks are the main constraints for sovereign funds that do not have allocation now for China. .
Europe does not attract sovereign investment:
Europe has been decline on the list of preferred regions, with nearly half of Middle Eastern sovereign investors cutting their allocations to Europe in 2018, due to slower economic growth and growing political risk forecasts led to a decline in the attractiveness of the major European economies. And the exit of Britain from European Union (Brexit) now affects the decisions of Asset allocations to 64% of all sovereign funds, while the proportion of Middle Eastern investors increased to 78%.
Investors are looking at continental Europe with increasing uncertainty, with the rise of right-wing populist parties and movements in major European economies such as Germany and Italy.
A similar number also plans to cut allocations in 2019, and only 13% of global sovereign investors plan to increase allocations to Europe this year, compared to 40% who will increase their allocations in Asia and 36% in emerging markets.
Sovereign funds at the top of technology sector:
Sovereign funds in the Middle East view technology as a large investment opportunity with a broad base, with 89% of these funds as a group or a technology working team, compared with 48% of global funds.
It worth to be mentioned that the dominance of technology companies in terms of their contribution to equity returns and economic development over the past few years , we will see 75% of respondents from the Middle East attribute enhanced returns on investment as the most important reason to focus on the sector.
As long as Sovereign funds in the Middle East have long been pioneers in using technology investments for their local communities, technology and innovation play an important role in these communities as part of many regional initiatives to build a more sustainable economy.
This is a table according to (Economic Funds Newspaper) for countries that have sovereign funds in the world:
1) Norwegian Government Pension Fund US $ 1074 billion, Norway’s largest pension fund, the largest sovereign fund in the world today, is estimated at more than $ 1 trillion, which alone accounts for 13.2% of the total assets of sovereign funds in the world. 192 thousand dollars per citizen in Norway, which has a population of 5.2 million people.
2) China Investment Fund for investment, US $ 941.4 billion, and Chinese investment has grown rapidly to become the second largest sovereign fund in the world after Norway’s State Pension Fund, a state-owned fund consisting of assets such as land, stocks, bonds and other investment vehicles. .
3) The Abu Dhabi Investment Authority (ADIA) Fund is a US $ 697 billion sovereign investment fund affiliated to the Government of Abu Dhabi, United Arab Emirates. ADIA has not disclosed the total value of its assets. As a result, there is controversy over financial resources at its disposal, but estimates acceptable ranges between $ 650 – $ 875 billion , they are assets.
4) The Kuwaiti sovereign fund, $ 592 billion, is the first sovereign fund in the world, was established by the State of Kuwait under the name of the General Authority for Investment, and the roots of the Authority dates back to the Kuwait Investment Board in the fifties of the last century, and in 1982, the General Authority for Investment was established by law No. 47 as an independent government body responsible for the management of state financial assets.
5) The Hong Kong Foreign Exchange Fund, a Chinese sovereign wealth fund with 522.6 billion US dollars, whose full name is the Hong Kong Monetary Agency Investment Portfolio, administered by the Monetary Authority of the State, the Hong Kong Monetary Authority, is used to support the Hong Kong dollar. Kong.
6) GIC Singapore Fund, US $ 390 billion, established by the Government of Singapore in 1981, to manage Singapore’s foreign reserves, whose mission is to maintain and enhance the international purchasing power of reserves, with the aim of achieving good long-term returns, higher than global inflation over the course of the year. The 20-year investment period, through a network of offices in major financial capitals around the world.
7) China’s National Social Security Fund, designed to help the country’s aging population, owns 295 billion US dollars, as a strategic reserve to support future social security expenditures.
8. SAIF Investment Fund, which owns US $ 441 billion, is a Hong Kong branch of China Foreign Exchange Management, the main purpose of which is to manage China’s huge foreign exchange reserves.
9) Temasek Holdings Fund, US $ 375 billion, is a sovereign fund established by Singapore’s Temasek Holdings and owned by the Government of Singapore.
10) The Saudi Public Investment Fund, SR 50,000 billion, seeks to become one of the largest sovereign funds in the world by building a diversified and leading investment portfolio by investing in attractive local and international investment opportunities.
11) The Qatar Investment Authority (QIA), a $ 320 billion sovereign wealth fund affiliated to Qatar and chaired by Tamim bin Hamad bin Khalifa Al Thani, was established by the Government of Qatar in 2005 to manage oil and natural gas surpluses. Its task to support and development Qatari economy and the economic diversification, and local skills development.
12) The Dubai Investment Corporation Fund, US $ 233.8 billion, seeks to become one of the largest sovereign funds in the world by building a diversified and leading investment portfolio by investing in attractive investment opportunities both domestically and internationally.
13) Mubadala Investment Fund, US $ 226 billion, is implementing development and investment projects around the world, with the aim of moving the UAE economy into a new phase and achieving sustainable benefits for shareholders, partners and the future generation.
14) Korea Investment Corporation Fund, US $ 134.1 billion, is the supreme sovereign wealth fund, which is the cornerstone of South Korea’s economic future, by increasing national wealth and contributing to the development of the Korean financial industry. And it seeks to achieve stable revenues according to the risk, by investing in securities traded on the stock exchange, mostly stocks and bonds.
15) The Australian Future Fund, US $ 103 billion, was established as part of the Future Fund Act.
16) The National Development Fund of Iran, $ 91 billion, is the sovereign wealth fund of Iran and has a separate budget from the government budget, based on Article 84 of the Fifth Five-Year Social and Economic Development Plan (2010-2015).
17) Alberta Investment Management Company of Libya, $ 66 billion, the Libyan Investment Corporation, a government holding company, the sovereign wealth fund of Libya, was established by virtue of Decree No. 208 of the General People’s Committee “former”, and is located at the top of the pyramid of the Board of Trustees formed From the Prime Minister of the Libyan State, the Governor of the Central Bank of Libya and the Ministers of the Ministry of Finance and the Ministry of Planning and Economy, as well as two independent members with experience in the field of international investment, the Fund aims to create and create diverse sources of wealth for the benefit of future generations of Libya Investment across the international level has a sustainable vision of achieving long-term stable financial returns within defined risk criteria, and ultimately the accountability of the LIA is vested in the Libyan people. The mandate of the LIA is to protect, preserve and develop assets and investments, and aims to diversify national investment Dependence on oil and gas production and the tendency to invest abroad based on economic feasibility studies in various fields. Locally and carried out through the meaning of internal investment fund Grow, and in the midst of its management of assets, the Libyan Investment Corporation is keen to promote financial and economic stability and the creation of long-term investment horizons.
18) Kazakh Wealth Fund, SAMA Foreign Assets Fund, US $ 515.6 billion.
19) The Russian National Wealth Fund, the Russian National Welfare Fund (US $ 68.5 billion), was established as a support for the Russian economy during times of crisis and low oil prices, a traditional commodity in Russian exports, and the Welfare Fund is the sovereign wealth fund of Russia, created after the division of the Stabilization Fund In the Russian Federation to two separate investment funds on January 30, 2008, the two funds are the Reserve Fund, which invests abroad in low-yield securities, is used when the oil and gas incomes decline, the Welfare Fund.
20) The Alaska Permanent Support Fund, $ 65.7 billion, is a codified legislative allocation, established under Governor Jay Hammond, to manage the surplus oil revenues that came after the construction of the Trans-Alaska Trans-Alaska Pipeline Network.
Most experts see the emergence of these funds and their global impact as a positive indicator in the world of financial markets.
Economic Studies Unit
Rawabet Center for Research and Strategic Studies