Expanding sovereign wealth funds are looking to emerging and developing countries, argues JAVIER SANTISO.
Sovereign wealth funds have been grabbing newspaper headlines around the world. The debate about their potential global financial impact and their investment policies is raging on. Strangely, the development dimension is missing from the debates.
This is a striking omission, as sovereign wealth funds are arising precisely from emerging and developing countries. Beyond their spectacular emergence, however, lies promising news for the wealth of (developing) nations: sovereign wealth funds are - or could be - major actors of development finance, not only in their homelands but also abroad, in other emerging countries. In this perspective, we may have to rename them using more appropriate terminology: sovereign wealth funds are, above all, sovereign development funds.
Firstly, sovereign wealth funds are the by-products of a major economic and financial rebalancing of global power. Their emergence is controversial because of the fear of politically-induced investments, lack of transparency and other arguments relying more or less on sophisticated conspiracy theories.
More importantly, however, they are causing unease in the West because they symbolise a much deeper and bigger phenomenom that is reshaping the world's economy and finance: emerging markets are taking an unusual lead, becoming massive creditors to industrialised countries in particular.
Since the early 2000s, the emerging world as a whole is, for the first time, running current account surpluses and exporting capital to the rest of the world. Emerging countries are now key engines and actors of the world economy.
When the OECD was created five decades ago, its 20 members accounted for nearly 75 per cent of world GDP. Now, with 30 members, it represents a meagre 55 per cent. In 2007, the engines of growth were located in emerging countries.
We have also witnessed, for the first time, major outward foreign direct investment coming from emerging countries.
The emergence of sovereign wealth funds should, therefore, be put in a broader perspective; for the first time, financial actors from developing countries are playing with other OECD financial giants as equals.
The novelty is that the new global financial players are no longer headquartered in the city of London or in New York's financial district - rather, in more "exotic" places like Beijing, Singapore and Dubai.
They already represent sizeable global financial players. The largest sovereign wealth funds - from the United Arab Emirates, Kuwait and China - have reached a scale in line with the largest global asset managers or the biggest hedge funds and private equity firms.
By the end of 2007, these new power brokers altogether had amassed more than €2 trillion, according to Morgan Stanley.
This amount is already equivalent to the total value of traded securities in Africa, the Middle East, and emerging Europe, which is, combined, about €2.6 trillion.
This is also roughly the size of these markets in all of Latin America. If their growth trends maintain their current pace, they could reach €10.1 trillion over the next decade, topping more than 5 per cent of the total global financial wealth.
Secondly, and most interestingly, sovereign wealth funds are not only major new financial institutions arising from emerging countries - but are, above all, becoming major players of development in other emerging countries.
Their recent spectacular stakes in big western banks may have dominated newspaper headlines. Their bailouts of traditional western financial institutions are rather impressive, totalling €23 billion by the end of 2007.
But no less interesting are their bets on emerging economies. Some of their biggest investments are already located in developing countries in Asia, Africa or Latin America - and the sums might continue to increase in the future.
Some sovereign wealth funds like, for example, Temasek of Singapore, a veteran institution established in 1974, already have large stakes and investments in Asian companies, contributing to the development of these countries. Asia (excluding Japan and including Singapore) already accounts for 40 per cent of its portfolio, which is more than its total holdings in Singapore (38 per cent) and double those realised in OECD countries (20 per cent).
These financial engagements are already paying: Kuwait Investment Authority's (KIA) €140 billion Middle Eastern sovereign wealth fund, has already made juicy profits on its stake in the Industrial and Commercial Bank of China.
Both the Qatar Investment Authority and Dubai International Capital are pursuing important investments in the Middle East and north Africa.
One of the blue chip investments of ADIA (Abu Dhabi Investment Authority) is the Egyptian investment bank EFG Hermes (where it holds a stake of 8 per cent). It also has stakes in north African companies like Tunisia Telecom (17.5 per cent).
The future will bring more investment towards emerging and developing economies. KIA is already cutting the portion of its portfolio invested in Europe and in the United States to less than 70 per cent from about 90 per cent.
Emerging markets in Asia (and other regions) are attracting more and more attention - why bother investing in low-growth OECD economies when you can access nearly double-digit growth rates in emerging countries?
Dubai International Capital is willing to pursue its moves towards emerging Asia, a region where it intends to raise its portfolio to reach levels of 30 per cent of the total. For the moment, its portfolio is still concentrated in Europe (70 per cent), with the remainder in the Middle East.
All of this is good news for developing countries. Sovereign wealth funds - or, pardon me, sovereign development funds - will contribute boosting equity investments, injecting capital into local companies' and emerging countries' projects.
They are building long-term portfolios - and will therefore contribute to reducing volatility.
Javier Santiso is director of the OECD Development Centre.
