What do Norway, Saudi Arabia and Russia have in common? They are all players in the oil industry, perhaps? None of them have ever won the World Cup, or are ever likely to? Maybe true, but the answer I was looking for is that they all have massive sovereign wealth funds (SWFs).Rewind a few years and these state-owned investment funds were all the rage. Huge amounts of capital from mostly oil-rich countries were being accumulated.
By last year they had an estimated $7trn under their control, and were becoming some of the most influential players in the capitalmarkets. But now, with commodityprices under huge pressure, so tooare the SWFs. Many of them have hadto start selling off assets. If the sell-off accelerates, that could spell big trouble for the world economy.
Even in this country, the idea of SWFs has picked up some support, although it is questionable whether we really have much wealth to set aside. Ukip has proposed setting one up for our shale gas resources. SWFs appeal to people who instinctively like big state solutions to every problem. The trouble is, the funds are now in retreat. Norway, Saudi Arabia and Russia have all tapped their funds this year to cover budget shortfalls.
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Norway will be taking out $450m, while Russia is reported to have taken out a far more significant $14.5bn. And those are only the ones we know about. The big Gulf funds, much like their governments, are not exactly famousfor their openness and transparency. If they have started selling off assets, then we may never know about it.
The wealth of most SWFs is based on energy or commodities and so, with oil and commodities prices so weak, those countries are now under huge financial pressure. There are budget and trade deficits to cover and the money has to be found from somewhere. That could change if the oil price recovers. But with plenty of shale gas and cheaper solar power still coming on stream, and ever improving fuel efficiencies, that mightnot happen for a long time. That means we should expect the SWF sell-offto accelerate.
Libya's fund became famous for its losses and poor decisions and was involved in endless legal battles before the regime in that country fell.In truth, running any kind of investment fund successfully is very difficult. When you have all the pressures of dealing with a government, as well as a huge sum of money to deploy, it becomes virtually impossible.
Most of the time that might matteronly to the SWFs themselves. But the funds have accumulated such vast holdings that, if they start selling en masse, it will lead to big drops inprices. Even worse, some of themmay turn into forced sellers. That is unlikely to happen to Norway, butcould easily happen to Russia, wherethe economy is in recession and facing huge financial pressure, and to many of the Gulf states as well the finances of Saudi Arabia, with its large, young and unemployed population, look increasingly precarious. Faced with a choice between liquidating their funds at a loss andlosing power, most governments will choose the former.
That may prove to be most critical in areas such as private equity, where SWFs have been huge investors, pouring money into funds and also buying up many assets directly. But if it becomes more widespread, that will spill into the banking system and then the widerequity markets.
The next crisis
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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