Dr. Mahmoud Mohieldin writes: Sovereign funds are in a very changing world


Published in :
Wednesday 20 May 2020 – 9:23 PM
| Last updated :
Wednesday 20 May 2020 – 9:23 PM

The international economic scene has changed in what the sovereign wealth funds did not witness since its first establishment in the fifties of the last century. The crises accompanying the Corona epidemic, with its mechanisms that reveal weaknesses and strengths, changed data that stabilized in the methods of work, production and investment. Economic, social and political developments around the world and other highlights. Not only did these crises increase the degrees of risk, but they also exacerbated the uncertainty that surrounded the world since previous years since the invasion of the epidemic throughout the world, and the crisis in trust between international powers that it witnessed. The traditional and the ascending, and between each other, as the world before “Corona” was economically fragile, politically tense, and unprepared to deal with sudden confusion, which is witnessed by cases of confusion and chaos in dealing with the health crisis caused by the virus, and its dire effects on society and the economy.

With the increasing cost of coping with the current crises and their burdens on the budgets of countries that have not recovered from the effects of the global financial crisis that erupted in 2008, and their consequences from a decrease in the rates of economic growth, and a decline in levels of trade and investment that have never returned to the pre-financial averages, funds are now seen Sovereign as a supporter of urgent support, according to data from the Institute of Sovereign Wealth Funds, released in March, there are 89 sovereign funds around the world that currently account for more than $ 8.5 trillion of financial and investment assets, close to 10 percent of total GDP Global.

The term sovereign wealth funds was launched by an investment expert, Andrew Rosanov, in a 2005 article on “Who Keeps the Wealth of Nations”, distinguishing it from the role of central banks in managing foreign exchange reserves. The objectives of these funds vary between accumulating savings and increasing investments, and differ in their strategies In the management of its portfolios and the extent of their translation of political trends in accordance with their governance systems and the countries to which they belong. The first of these funds was established in 1953 in the State of Kuwait, then it has increased in recent decades to embrace 51 countries funded by its accumulated surpluses in the balance of international trade from the export of primary commodities such as oil Or financial surpluses of foreign exchange realized in the current balance of the balance of payments, should not be confused with the sovereign funds and institutions of local asset management, and Tzmt in its name, each of its objectives and its funding sources and priorities of his work.

These funds invest their funds in a variety of financial and investment assets, such as shares of companies and government bonds. They have also become an important tributary of foreign direct investment and long-term institutional investment, as relied upon by the document on financing for sustainable development issued in July 2015 by the United Nations to finance development programs. Sustainable, by allocating a percentage of their portfolios to long-term financing in infrastructure projects.

Countries have previously resorted to their sovereign funds in times of volatile commodity prices, as is happening now, with low oil prices, to help state budgets to meet the needs of urgent public spending, according to Fortune magazine, Norway, for example, announced the withdrawal of 37 billion dollars from its fund Sovereign, the largest fund in the world, as its assets exceed one trillion dollars, and this procedure is to withdraw through the process of liquidating assets to support the requirements of dealing with the health crisis violations that coincided with a sharp drop in the price of oil, causing a decline in the state’s cash flows, exceeding 60 percent Returns on investment in p Deposits and other revenues of the sovereign state, such as taxes, in filling its gap.

At the same time, you find other sovereign funds that take advantage of the low prices of some companies ’shares, due to the current crisis, and invest in them, based on their assessments and the potential they have in their sectors, as well as the excellence of their products and the efficiency of their management and their ability to grow and expand in the future, in light of the possible changes; Companies do not buy their shares by virtue of the consideration they had, but rather with what is expected to have them.

I do not think that the sovereign funds, despite the professionalism and competence of those responsible for most of them, are taking an easy path today, as their sources of financing from surpluses, whether from primary commodities or others, were subjected to severe shocks, and part of their assets decreased its market assessments, and their prices fluctuated greatly due to the current crises, The low global economic growth rates hamper the opportunities for cross-border sectoral investment. With this sharp decline in economic activity, and the lack of control over the spread of the Coruna virus, global economic growth rates will inevitably be less than negative 3 percent, which is the number estimated by the International Monetary Fund in its last report issued in April.

In my estimation, there are 5 major determinants of the future SWF business lines …
Firstly; The increasing role of the state in direct economic activity, beyond its role as a legislator and watchdog; As these funds are one of the state’s arms, this will increase their importance in this regard, but the current atmosphere indicates a high level of sensitivity to external investment due to geopolitical considerations, including some of these funds will be forced to track their tracks in the global investment map, according to indicators that are overweight in risk considerations and political considerations .

Secondly; With recourse to redrawing global production and supply lines, in light of tensions and previous trade wars against Corona, and protectionist tendencies have increased in the path of trade movement afterwards, with the escalation of calls for measures to go inward, even at the expense of cost and efficiency considerations, in response to populist trends, or In order to secure major commodities produced locally or by allied countries, the relative weight of locally allocated investment resources will increase with higher concentrations risks and lower foreign exchange earnings.

Third; There are very high expectations that investments will adhere to social and environmental impacts considerations and governance controls, with greater weight for health regulations and considerations, as well as climate changes, beyond the traditional cost-benefit rules. This will distinguish between one investment fund and another and the extent of its societal and regulatory acceptance, according to transparent reports.

Fourthly; With high unemployment and severe recession, these funds are expected to demonstrate their developmental impact in the areas of investment on growth, the creation of decent work opportunities, the commitment to the minimum wage, the safe working environment, and contractual guarantees for workers.

Fifthly; With sovereign funds increasingly accessing international debt markets, both lenders and borrowers, the problems of debt management globally and its challenges, whether borne by countries or companies, must be taken into account, especially with increased risk of default and rescheduling, in light of the consequences of the health crisis and recession.

These five determinants, the extent to which sovereign funds can deal with them, will demonstrate their future paths and investments, in an era when nations, and not only their wealth, are exposed to unprecedented challenges.

Quoted from the Middle East.

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