New Economics of Sovereign Wealth Funds

MASSIMILIANO CASTELLI, PhD, is Head of Global Strategy in the department advising central banks and Sovereign Wealth Funds at UBS Global Asset Management. In this role, he analyzes the market trends affecting the investment behaviour of sovereign institutions and works closely with investment specialists in providing investment advice and developing tailored investment solutions for this client segment. Since the political debate surrounding SWFs has appeared on the international policy agenda, he established himself as a global thought leader on the macroeconomic, financial and political trends in sovereign wealth management. He has often been called in by leading institutions and think tanks as an expert on global economic and financial matters, he regularly writes articles and essays on these topics and is often invited as a speaker at international conferences. In his fifteen year long international professional career, he has been Head of Public Policy for UBS in Europe, Middle East and Africa, Senior Economist for the Middle East region at UBS and an economic consultant advising governments and corporates in emerging markets on behalf of international institutions. He holds a PhD in Economics from the University of Rome where he lectured and an MSc in Economics from the University of London. FABIO SCACCIAVILLANI, a PhD in Economics from the University of Chicago, is the Chief Economist and member of the Investment Committee of the Oman Investment Fund, which manages the Omani government’s oil revenues for the benefit of future generations. In this role, he develops economic forecasts, conducts analyses on global trends, evaluates asset class returns, and contributes to strategic decision-making. He is one of the world’s leading experts on the activity of Sovereign Wealth Funds, their influence on financial markets, and their investment strategies. He has written extensively on the political sensitivities that SWFs stirred in Western countries and the emergence of a multipolar world. In his distinguished career he served as Director of Macroeconomics and Statistics at the Dubai International Financial Centre, Executive Director at Goldman Sachs, Senior Economist and Adviser at the European Central Bank and worked in several departments of the International Monetary Fund. He has an extensive scholarly publication record and is frequently interviewed and quoted on international media.

• Foreword xiList of Tables and Figures xiiiList of Abbreviations xvAcknowledgements xviiIntroduction 1A few stylized facts 2SWFs under the spotlight 4Defining SWFs 9Misplaced fears 10The plan of the book 131 The Macroeconomic Dynamics Behind SWFs 171.1 Persistent current account surpluses translate into accumulation of foreign assets 181.2 Absorption constraints: the rationale for establishing SWFs and FWFs 211.3 The management of natural resources windfall 241.4 Commodities demand and the super‐cycle theory 291.5 SWFs as alternative to an income tax system: what if Norway becomes like Saudi Arabia? 332 Size and Growth of SWFs Assets 372.1 Size and clusters of SWFs 382.2 Drivers of SWFs asset growth 432.3 The optimal level of foreign exchange reserves 452.4 Future growth in FX reserves: commodity- versus noncommodity-exporting countries 472.5 Size of SWFs by 2016 49Appendix: How big could SWFs be by 2016? 543 SWFs as Investors in Global Markets 713.1 Clustering SWFs by objectives and investment profiles 743.2 SWFs as strategic investors in domestic and global markets 833.3 Geographical and sector distribution of SWF strategic investments: the 2007–2008 surge of investments in Western financials 863.4 Investment performance of SWFs and the impact of the financial crisis 943.5 Explicit and implicit liabilities of SWFs 973.6 Long-term investments: SWFs as the ultimate risk bearers 994 Risk Management for SWFs 1054.1 The crisis in retrospect 1084.2 The complex qualitative nature of risk: uncertainty, chaos, black swans and fat tails 1114.3 Banking regulation, herd behaviour and contagion 1134.4 The evolution of the regulatory framework 1184.5 Sketches of risk management for SWFs 1214.6 An unconventional dimension of risk management: shareholders vs stakeholders 1295 SWFs in the Geopolitics of the Twenty-first Century 1315.1 The shift to the East of the global economy: the New Silk Route 1375.2 The law of unintended consequences? China’s influence through financial muscle 1415.3 SWFs investing in the less developed economies: Africa as the last investment frontier 1455.4 The new financial geography: the emerging multipolar financial architecture 1475.5 The dominance of the US$ in global financial markets: SWFs as US$ diversifiers 1495.6 SWFs and the new regulatory environment for financial institutions: the upcoming ‘war for capital’ 1526 The Politics of SWFs Engagement 1556.1 National responses to the growing role of SWFs 1566.2 International response to the growing role of SWFs 1596.3 SWFs’ response to international pressure 1616.4 Santiago Principles: rationale, implementation and reality 1636.5 A digression on public versus private role in the economy 1687 Wrapping Up 1737.1 Towards a multipolar world 1757.2 Governments’ activism in economic and financial affairs 1767.3 Barbarian at the gates or welcome partners? 1777.4 The end of the savings gluts and the coming era of capital scarcity 1797.5 Towards a multicurrency regime 1807.6 A proposal to allay fears over transparency 1857.7 The new responsibilities on the global scene 186Bibliography 189Index 199