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Unit 4 Macro: Sovereign Wealth Funds
4th March 2012
A sovereign wealth fund is a government or state run investment fund usually created by super-normal profits from natural resources such as oil, gas or minerals. Here is some brief background on them:
Investment funds run by foreign governments, also called ‘sovereign wealth funds’ have been in existence since the 1950’s. As a result of high commodity prices and the success of export-oriented economies, China, Singapore, Dubai, Norway, Libya, Qatar and Abu Dhabi have all built up a sizeable surplus of domestic savings over investment.
Now some other countries with large reserves of oil and gas are considering setting up their own funds – in August 2012, Tanzania announced it is to set up a sovereign wealth fund. Not all have been successful. Nigeria’s has operated an Excess Crude Account the surpluses from which have been largely used to pay off existing international debts.
China established its official sovereign wealth fund China Investment Corp (CIC) five years ago with the aim of earning high returns by investing abroad the dollars China earns from its exports. In January 2012, CIC’s $410bn sovereign wealth fund, bought an 8.68 per cent stake in Thames Water, the water network that serves London. It also has investment stakes in France’s GDF Suez, Canada’s Sunshine Oil sands and Trinidad and Tobago’s Atlantic Liquid Natural Gas Company.
Sovereign wealth funds are already having an important effect on the UK economy. Singapore's Temasek owns stakes in Barclays and Standard Chartered, while Qatar and Dubai between them own about a third of the London Stock Exchange. The government of Singapore has also built up a 3 per cent stake in British Land. Dubai's sovereign wealth fund, Dubai International Capital (DIC) has invested money in building stakes in UK companies, including Travelodge and the London Eye.
o Many sovereign wealth funds have provided an injection of fresh capital for the UK banking system in the wake of the losses sustained from the sub-prime crisis and the credit crunch. The banks have needed to re-capitalize to repair their balance sheets and improve their chances of survival.
Qatar looks to diversify away from gas
Newsnight on the rise of sovereign wealth funds
Financial Times looks at the Qatari sovereign wealth fund (July 2013)
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.