The oil-rich state of Kuwait has posted a historical budget surplus of 13.2 billion Kuwaiti Dinars (US$ 47.5 billion) for fiscal year 2011 to 2012. The fiscal year ended March 31, 2012. Increases in the global price of oil, coupled with greater output contributed to the fiscal surplus. The price of a barrel of oil is a major factor in the probability of a fiscal surplus for Kuwait. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Sovereign and Public Investor Topics: Asset Allocation and Policy
Alternatives - Hedge Funds and Private Equity
Real Estate and Infrastructure |
Central Banks and Monetary Authorities
Peru’s southern neighbor Chile has two sovereign wealth funds, one is a stabilization fund. Currently, Peru only has a fiscal stabilization fund.
Government officials are debating the requirements for establishing a sovereign wealth fund in Peru. The proposed fund could be US$ 10 billion in size. Peru’s Minister of Economy and Finance Luis Miguel Castilla wants to see stabilization in the global commodity markets before they can finalize plans. Like other commodity-based sovereign funds, proceeds from mineral exports would be deposited into the sovereign wealth fund. The sovereign fund would invest the money overseas. Peru’s international reserves have doubled since the onslaught of the global financial crisis to around US$ 60 billion.
Since 2002, Peru has been able to pay down public debt. Peru’s Fiscal Responsibility and Transparency Law (FRTL) also called Ley de Responsabilidad y Transparencia Fiscal has been effective in helping the country reduce its debt. Public sector gross debt was reduced from 44% of GDP in 2004 to 24% of GDP in 2010.
Peru’s Fiscal Stabilization Fund
Peru has a fiscal stabilization fund (FEF). [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
After lengthy debates, the Singapore Ministry of Finance moved forward to jump start the creation of a project finance company. Established in 2012, the company is named Clifford Capital and it will be managed as a commercially-run organization. In fact, its shareholders include Temasek Holdings, Development Bank of Singapore, Sumitomo Mitsui Banking Corporation, Prudential Assurance Company Singapore, John Hancock Life Insurance Company, and Standard Chartered Bank.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Russian Deputy Finance Minister Sergei Storchak noted that “the agency will be able to buy shares, and the process of very careful entry into stocks will begin.”
On another note, Russian President Vladimir Putin made comments in an annual address to Russian parliament noting that Russia can think about investing a portion of the National Welfare Fund in Eastern Siberia and the Russian Far East.
A delegation of global governmental executives involved in investing have come together to join the Institute Council of Investors. Types of council members include: sovereign wealth funds, public pension funds, central banks, government investment authorities and other governmental entities. Initial members include some of the most senior names in the public investor industry.
The Institute Council of Investors is a neutral body of members that represent participants in the global governmental investor community. The general purpose of the council is to serve its council members engaged in the global governmental investor community through the sponsorship of interactive forums designed for the purpose of education, research initiatives, and member interaction.
Sovereign Wealth Fund Institute President Michael Maduell stated that, “the Institute Council of Investors provides a unique channel for public investors to meet and discuss timely and relevant issues. Collaborating among public investors needs to be conducted on a global basis.”
The concept of the Institute Council of Investors is the brainchild of executives at the Sovereign Wealth Fund Institute and received input from leading figures in the worldwide public investor community. The Sovereign Wealth Fund Institute hosts exclusive summits and has attracted leaders from sovereign wealth funds, public pension funds, central banks, and other governmental investors. On October 24, 2011, in Montreux, Switzerland at the SWF Forum, the framework of the council was introduced to public investors that attended. The formal launch occurred on April 16, 2012 at the Institute Fund Summit 2012 in Dana Point, California. Brian Gibson, Senior Vice President of Equities from the Alberta Investment Management Corporation chaired the first session which included public investor executives from six continents.
“It is paramount to have a diverse range of public institutional investors who have different opinions, to prevent one-sided moves among investors,” added Mr. Maduell.
Institute Council of Investors Website: www.institutecouncil.org
About the Sovereign Wealth Fund Institute
The Sovereign Wealth Fund Institute (SWFI) is a global organization designed to study sovereign wealth funds and other long-term governmental investors in the areas of investing, asset allocation, risk, governance, economics, policy, trade, and other relevant issues. We provide specialized services such as research and consulting to various corporations, funds, and governments. The Sovereign Wealth Fund Institute delivers information and insights on current issues and trends related to sovereign wealth. Our flagship publication, the sovereign wealth quarterly is the premier publication on sovereign wealth. In addition, the Sovereign Wealth Fund Institute facilitates sovereign fund events around the world. We have helped shape the sovereign wealth market and have defined concepts and terms like the Linaburg-Maduell Transparency Index and Sovereign Wealth Enterprise.
Egypt’s borrowing costs have soared since foreign investors discarded $7.5 billion of government debt that followed the protests and revolution.
Egypt has sold 10-year bonds for the first time since the start of the revolution. It sold them at an average yield of 17.03%. The auction was not much in terms of size, 1 billion Egyptian pounds, but proved that Egypt wants to get back on track. Under difficult political circumstances, Egypt is on the brink of securing foreign aid.
The sale of government bonds represented new issuances. Egypt is resorting to selling shorter term bonds to avoid paying higher yields.
China is deploying more reserves to the CIC to increase financial returns. After the Chinese New Year holiday, the China Investment Corporation received an undisclosed amount from the People’s Bank of China. Before the injection, the fund was around US$ 410 billion. The CIC has been seeking capital to expand its investment portfolio and generate higher returns.
Mexico is a country that is economically dependent on its petroleum industry. Revenue volatility from one budget to the next, as business cycles tend to coincide with oil cycles, and the proficient use of oil revenues increases remain significant challenges for Mexico. Also, Mexico must deal with the scenario of decreased oil revenues as production is in steady decline and proven reserves are shrinking. The Government of Mexico has purchased put options at the US$ 85 a barrel level. This is to protect Mexico’s finances in case of a potential drop in the average price. The put options may be exercised in the event Mexico’s basket of export crude treads below an average of US$ 85 a barrel. This is nothing new as comparable hedging strategies have been used in the past to protect against oil price volatility.
The oil coverage program is applied through Mexico’s Oil Revenues Stabilization Fund.
In 2010, the Government of Mexico hedged at US$ 57 a barrel at a cost of over US$ 1 billion. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
As of November 30, 2011, Japan’s reserve assets total US$ 1.305 trillion. This is a US$ 94.88 billion increase since the end of October. In November, Japanese authorities intervened in currency markets to prevent the yen from growing too strong. A strong yen negatively affects Japanese exporters by making their products more expensive overseas.
Japan holds US$ 42.96 billion in gold.
According to Japan’s Ministry of Finance, official reserve assets rose to US$ 1.209 trillion at the end of October. This is an increase of US$ 9.289 billion from September.
In addition, Japan is trying to increase private consumption and investment.
Central Huijin Investment Co, the sovereign wealth enterprise of the China Investment Corporation is purchasing more shares in two of China’s major banking institutions. On Monday, Central Huijin Investment Co. purchased 39.1 million shares of the Agricultural Bank of China. They also purchased 14.6 million shares of the Industrial and Commercial Bank of China.
This is a clear indication that Beijing is looking to stabilize equity markets and promote confidence. This isn’t the first time Central Huijin stepped in; they did so during the financial crisis.
The Bank of Thailand and Thailand Ministry of Finance have agreed to not use the country’s foreign reserves to create a sovereign wealth fund. There was a significant internal debate among Thailand’s governmental financial bodies on if it was feasible to create a sovereign wealth fund. Including Thailand, the majority of Asian countries intervene to lower the value of their currency. By practicing currency intervention, Thailand and other countries that follow a similar activity, usually hastily accumulate international reserves.
Central banks are known to be conservative “investors” and usually invest in assets with low default risk and high liquidity, thus yielding very low returns. This negative carry has been pushing some central banks into yearly losses.
Left and right, Thailand observes its Asian peers creating sovereign wealth funds to deal with excess foreign reserves.
Thailand Finance Minister Thirachai Phuvanatnaranubala wanted to see if it was possible to invest around US$ 180 billion in foreign reserves in higher-yielding assets. The big concern was government interference or meddling in the central bank over the excess foreign exchange assets.
According to the Report of the Comptroller and Auditor General, “the National Pension Reserve Fund (NPRF) was valued at €22.7 billion at the end of 2010.
Up to the end of 2010, the NPRF had invested, pursuant to directions from the Minister for Finance, an aggregate of €11.35 billion in Ireland’s two main banks, Allied Irish Banks plc and Bank of Ireland. This included reinvestment of €0.53 billion of dividends received in the form of ordinary shares.
At the end of 2010, as a result of an impairment loss of €3.7 billion, the value of these directed investments had fallen to €7.6 billion.
In 2011, the value of the directed investments has been further impaired. By the end of July 2011, the value of ordinary shares held as part of the investments had fallen from the end-December 2010 values by 67% (Allied Irish Banks plc) and 72% (Bank of Ireland).
In 2011, the NPRF has reinvested a €288 million dividend received in the form of ordinary shares from Allied Irish Banks plc and has liquidated €10 billion of assets in its discretionary portfolio. The NPRF deposited this cash in Irish commercial banks pending further direction from the Minister for Finance.
In July 2011, the Minister for Finance directed that the €10 billion be invested in Allied Irish Banks plc and Bank of Ireland and that the NPRF sell shares to the value of €1.05 billion in Bank of Ireland to a group of institutional investors.”
Regardless of having a budget surplus or deficit, a number of countries in Sub-Saharan Africa are developing or have developed sovereign wealth funds including Nigeria, Ghana, Botswana, Zimbabwe, and now Uganda. Uganda is in midst of creating a commodity-based sovereign fund to manage potential excess oil revenues. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
The African country Zimbabwe is continuing on the path to establishing a sovereign wealth fund. The Indigenisation and Economic Empowerment Act is allowing the Zimbabwean Government the ability to acquire stakes in foreign-owned companies. At least 51% of shares of every public company operating in Zimbabwe and any other businesses are mandated to be owned by indigenous Zimbabweans.
The rumored name of the new state-owned investment entity is the Zimbabwe Investment Corporation (ZIC). The proposed ZIC will hold equity shares in various foreign entities acquired by the Zimbabwean Government and in addition, receive revenue from a tax on mineral production.
In recent news, Australian Treasurer Wayne Swan views that in the country’s current situation there is no need for a commodity-based sovereign wealth fund.
There are proponents in Australia that want a commodity-based sovereign fund. They feel that Australia is in a mining boom and a mining tax would discourage excess investment from occurring so quickly. Mining tax revenues could fill the coffers of the proposed sovereign investment entity to invest overseas.
Sovereign investors and other governmental funds have been loaning money to emerging markets for quite some time. In some cases the loan facilities are secured by collateral such as future oil shipments. Ghana is a sub-Saharan country that is becoming a real player in both the oil and natural gas global markets. With regards to oil production, Ghana’s Western region possesses most of the offshore oil fields. This West African nation has already been exporting oil to the world. Petroleum reserves are expected to reach 5 billion barrels in five years as production ramps up.
China Development Bank Ownership
- China – Ministry of Finance – 51.3%
- Central Huijin Investment Ltd (SWE of CIC) – 48.7%
Source: Annual Report
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According to Reuters, “China Investment Corp (CIC), the country’s $300 billion sovereign wealth fund, has cut by half, to $100 billion, the amount of new funding it is seeking from the government, according to domestic media.
An earlier proposal by CIC to the finance ministry for $200 billion in additional funding was not approved, the China Business News said, citing an unnamed source.
Media reports early this year and late last year said that CIC was seeking an additional $200 billion in cash to manage. The fund completed most of its investments for its initial funding in 2009, leaving relatively little cash on hand, but whether it would receive new funding was up to the central government to decide, Executive Vice President Jesse Wang said last month.”
read more: Reuters
It states: “The Chilean government unveiled an ambitious countercyclical fiscal strategy to stimulate employment and growth in 2009. The plan involves over US$4 billion, equivalent to 2.8% of GDP. The stimulus plan announced by President Michelle Bachelet aims at securing economic growth between 2 and 3% in 2009 and encouraging employment. The government estimates that the plan could create over 100 thousand jobs. The package involves direct support for low-income families, additional public investment in infrastructure, tax cuts and other incentives for private investment, enhanced access to financing by small and medium companies, additional funds for labor retraining and a new hiring incentive, among other initiatives. The changes will be contained in a bill to be sent to Congress this week, and in several administrative measures that do not require congressional approval.
The plan contemplates an increase in public sector outlays of 1% of GDP (US$1,485 million), so that the 2009 real increase in public expenditure will reach 10,7%. The fiscal spending increase has as a counterpart an increase in structural fiscal income (owing to the depreciation of the Chilean peso, which raises the value of fiscal income denominated in dollars) and a temporary reduction in 2009 of the structural fiscal surplus to 0% of GDP from 0.5%. The plan also involves a temporary reduction in tax revenues of US$1,455 million, or 1% of GDP in 2009. Because they are transitory, the tax reductions do not affect structural, long term, fiscal revenues. Additionally, the government will allocate resources to capitalize Codelco and to fund CORFO financing initiatives. These items do not constitute additional spending, but rather below-the-line acquisitions of financial assets.
This fiscal strategy will imply an effective fiscal deficit of 2.9% of GDP in 2009. The government reaffirmed its strict adherence to the structural fiscal balance approach, which has strengthened public finances and allowed for the application of a strongly counter-cyclical fiscal policy. The plan will be financed with resources from the Economic and Social Stabilization Fund and the issuance of bonds authorized by the 2009 Budget Law.”
read more: Chile – Ministry of Finance
Reuters reports that, “Japanese Finance Minister Fukushiro Nukaga said on Friday that he has no plans to set up a government investment fund, or sovereign wealth fund, to manage foreign reserves, given risks of generating losses by managing foreign reserves aggressively. ‘At this moment I don’t think we will have a sovereign wealth fund,’ Nukaga told a news conference after a cabinet meeting.”