Sovereign Funds Can Improve a State’s Economic Status
Posted on 05/11/2012
Sovereign wealth funds (SWF) are a major topic of discussion for a myriad of countries, states, and provinces. These funds may also be labeled legacy funds, stabilization funds, or permanent funds. Sovereign funds can improve a state’s economy in several unique ways. It can also cause economic malaise in a country if not structured properly. Sovereign wealth funds can influence a nation’s economic growth, exchange rate, credit rating, and inflation rate. In addition, sovereign wealth funds can be an economic stabilization tool during times of crises.
Every sovereign wealth fund is unique, each will have specialized goals, objectives, and stakeholders. Some sovereign funds may not always invest purely for commercial returns. Sovereign funds can spur economic growth within a country. Strategic development sovereign wealth funds (SDSWF) assist by luring overseas companies to invest in the home country and allocate capital to local industries.
Sovereign wealth funds can be a blessing for a country’s credit rating.
The majority of global sovereign funds are saving money for future generations. It is an asset on the national balance sheet. If a country creates a sovereign fund with ample savings over time, it can increase the country’s credit rating, thus lowering the nation’s borrowing costs. This is another reason why sovereign funds are a factor in helping nations expand their economies.
To prevent Dutch Disease, oil-dominated countries have created sovereign funds. Inflation is a major concern especially for resource rich nations with low levels of economic diversification.
