Abu Dhabi, UAEWednesday 21 November 2018

Sovereign Wealth Funds - a new race begins...

Some Western governments are seriously considering creating Sovereign Wealth Funds to match those from developing countries.
After President Nicholas Sarkozy said that some foreign SWFs were "extremely aggressive," the French economy minister called the idea of one for France "seductive."
After President Nicholas Sarkozy said that some foreign SWFs were "extremely aggressive," the French economy minister called the idea of one for France "seductive."

Very quietly, some Western governments are seriously considering creating Sovereign Wealth Funds (SWFs) to match those from developing countries and appease some growing concerns about the activities of these funds in their backyards. The French economy minister called the idea of setting up a French SWF "seductive", coming on the heels of a warning by the president Nicholas Sarkozy that some foreign SWFs were "extremely aggressive". If the French decide to go ahead, then other European countries, who have so far adopted a more benign approach to SWF activities, might be tempted to reconsider their position. Even the mild mannered EU joined the act, with Jose Barroso, the EU president, saying that Brussels could not allow non-European funds to be run in "an opaque manner or used as an implement of geopolitical strategy". That worry was most probably directed at Russia's growing oil and gas revenue clout, rather than Middle East SWFs.

The French move to establish a national SWF is rather an unusual one. Recent high-profile SWF acquisitions have avoided France up to now, focusing more on the UK and US. The French economy is still one of the most protectionist of the major European economies and is one of the most difficult to crack open for foreign companies. The establishment of a French SWF could, in fact, assist the French government in acting more forcefully to intervene and protect French companies both domestically and internationally.

The history of French state intervention to protect strategic national assets is not new. In 2006 the state played a major role in the merger of the two utility companies, Gaz de France and Suez, as a way to defend against the undesirable bid for Suez from the Italian company Enel. Even Danone, the French yoghurt conglomerate, was protected from a takeover from the US's Pepsi company, as Danone was also deemed a "strategic industry".

However, it is not only the French who are adopting an obstructionist stand against unwelcome takeovers of such "national strategic industries". India has restricted purchases of Chinese telecom equipment, and Germany has recently strengthened its rules on investments by sovereign funds. Globalisation has directed new surplus funds to manufacturing giants such as China, and to energy producers such as those in the Gulf and Russia. The estimated combined assets of the 29 SWFs are about US$2.8 trillion (Dh10.3tn). Most SWFs are genuinely harmless and add value to beleaguered international assets in times of acute financial need and restructuring, such as was the case with Citigroup, and other financial institutions who want to increase their capital to support international expansion, such as was the case with Barclays. Some $70bn has been poured into US banks by SWFs alone.

The problem, as seen by Western politicians, is that some SWFs are deemed to be secretive and a few are owned by governments that are either competitors or potential competitors of world economic powers, especially the US. For the Americans, China is a particular concern in this respect. Other SWF critics say that such sovereign funds raise additional risks, since the governments that control them may have more in mind than obtaining the highest rate of return. Some countries are now introducing more stringent laws for acquisitions. Last year the US Congress passed the Foreign Investment and Security Act with the new law focusing not only on ownership, but of a more loosely defined concept of "control". This has implications for those thinking of more investment in the US - in the past, transactions involving a passive investment or a minority shareholder would have fallen outside of the scope of the Committee on Foreign Investment (CFIUS), even if the investor exercised de facto control of the company. This could now change.

The future of SWFs remains open - torn between those who believe in globalisation and free market economics and those unhappy with globalisation, re-nationalisation, distrust of markets and fear of terrorist attack. In the final analysis assumptions about SWFs' intent and effect remain unproven. Are SWFs agents of state powers or do they operate as another large investor? The world's economy goes through phases of dominance of one country over others. Just as Japanese investments in the 1980s raised exaggerated concerns then, we seem to be entering another period where free trade and open investment, especially from a resurgent China and Opec members, are being questioned.

For SWFs to succeed in the long term, they certainly need to open up more on their intentions, as those of Singapore and Norway have done. At the same time, those countries that are effectively calling for barriers to be put up against SWFs must realise that from the experience of the past 20 years, countries that have embraced globalisation grew faster than those that kept foreigners out. Of US concerns about SWFs, the Norwegian finance minister said: "It seems you don't like us, but you need our money." Whether some countries like it or not, SWFs are here to stay.

Dr Mohammed Ramady is a former Banker and Associate Professor, Finance and Economics at King Fahd University of Petroleum and Minerals, Saudi Arabia