Washington, DC (WiredPRNews.com) Sovereign wealth funds (SWFs) in their new guise of established market players can contribute to the economic recovery strategies of the developed economies, considers Dr. Alexander Mirtchev.
Soaring debt, anemic growth, intransigent unemployment, social unrest…these are the fundamental challenges that America could be facing as Congress gears up to consider President Obama’s new jobs plan. One proposal that is unlikely to surface during the debate is a greater openness to sovereign wealth funds. Why? Among others, SWFs’ past ‘trophy asset’ sprees have not played well in the U.S., reinforcing concerns about the balance between their political and economic objectives. SWFs are, after all, the investment arms of resource-rich or export-oriented countries and if they choose to use these funds more to achieve political goals rather than for pure business purposes, they are seen in some quarters as undermining confidence and distorting global capital flows.
However, according to Dr. Alexander Mirtchev, President of the Royal United Services Institute for Defence and Security Studies (RUSI) International, and a Member of the Board of the Atlantic Council, recent trends indicate that SWFs are rechanneling their resources towards production and asset-based investments reflecting more tangible profit-driven and productivity-oriented strategies. There is also evidence that they are increasingly engaging in joint project development which will help diminish concerns regarding the political motives of individual SWFs. This, combined with their ability to be a source of liquidity for companies facing distress, is making them a more desired and systemically important investor, in particular in the context of post-crisis global economic security.
With approximately US$ 4.7 trillion in cash at their disposal, they are already a growing force in U.S. and European markets. Over the past couple of years, SWFs have made large equity investments in Citigroup, Morgan Stanley and Merrill Lynch. Smaller, but still notable investments have also been made in AIG Inc., Apple Inc., Advance Micro Devices, and News Corp., just to name a few. And only a few weeks ago, Qatar’s SWF invested where others are reluctant to tread – cash-strapped and credibility-hungry Greece, where it decided to inject half a billion Euros in the merger of the country’s second and third largest banks.
Without advocating a laissez-faire approach to SWF investments, what emerges from these transactions is a picture of SWFs as flexible investors able to execute transactions across a wide range of industries. They have an ability to move quickly in very large amounts and have a high tolerance for risk. Perhaps more importantly, with the traditional global engines of growth (the U.S., Germany, UK, France, etc) hamstrung by sovereign debt issues and unable to sustain their economic rebounds, and private corporations hoarding cash due to continued uncertainty, Mirtchev considers that SWFs are positioned to play a new, and significant role in the global economy.
The ability of SWFs to take a longer-term outlook and their stabilizing influence should still be balanced against the potential for states to take advantage of the opportunity for enhancing their geo-economic presence and geopolitical power via the mechanisms SWFs provide. In this regard, while underscoring the importance of U.S. openness to investment, including SWF investment; this openness should not negate the U.S. government’s commitment to closely scrutinize foreign investment that might threaten national security or undermine critical industries.
Indeed, the intense scrutiny that has resulted from their growing significance has in turn driven SWFs to increase the level of transparency and accountability that surrounds their investment and operational activities. The possibility of becoming part of the economic recovery process, such as, for example, the mooted plans for a new U.S. infrastructure bank, is yet another incentive for SWFs to improve their transparency and heed due diligence and reporting requirements. At the same time, the regulatory and supervisory bodies should adjust their approaches and practices to the resulting new and more transparent modus operandi of SWFs. Alexander Mirtchev considers that this is likely to benefit regional and even global economic security.
So, as Congress and President Obama reach into their policy tool-kits in search of a means to jump start growth, support consumption and stimulate the economy, they might want to consider that SWFs are positioning themselves more and more as legitimate partners in the implementation of recovery strategies. Whether helping to shore up struggling sovereign balance sheets or investing in new business ventures, SWFs can be leading market players and potentially market-makers. Investments focused on production capacities and productive industrial sectors, in turn, could boost the pace of recovery in the markets where they are made.