by Simon Roughneen and Diana Ionescu
As Western financial sectors reeled during 2007 and 2008, Asian and Middle Eastern sovereign wealth funds (SWFs) offered some succor, administering exotic medicine to banks poisoned by subprime toxins.
These White Knights cast a dark shadow, however, as questions — and fears — were raised about the political influence that, for instance, a Chinese government presence on the board of Barclays Bank might represent.
The focus has shifted recently. Plummeting oil prices and declining demand for imports by contracting U.S, European and Japanese markets undercut the vast revenue base the SWFs were drawing upon. Now SWFs are writing off untold billions in debt and meeting liquidity needs in domestic markets, while seeking recapitalization from revenue-hungry governments. They might no longer be able or willing to invest in Western financial institutions.
As Tang Tjun, partner and managing director at Boston Consulting Group and head of its Financial Services Practice (Greater China), told World Politics Review, “Because of heavy pressure from stakeholders at home, SWFs have been less able to take long-term risk, and uncertainty around Western policies toward stabilization and recapitalization means SWFs have been reluctant to conduct any bailouts or investment until there is clarity.”
One case in point is Singapore’s Temasek, which made headlines several weeks ago by bringing in Chip Goodyear as chief executive, replacing Ho Ching, wife of Singapore’s Prime Minister Lee Hsien Loong.
Goodyear’s appointment comes after a very bad year: Temasek’s portfolio lost 31 percent in value — declining from S$185 billion to S$127 billion — by the end of November last year, after its high-profile investments in Merrill Lynch and Barclays. Temasek sunk $5.8 billion into Merrill Lynch, only to see the investment bank’s share price fall 78 percent last year, before being de-listed and eventually taken over by Bank of America.
With Singapore facing the sharpest recession in its post-independence history, the government needed to be seen as proactive, hence Goodyear’s appointment. Goodyear has a strong commodities background, and Temasek, like other SWFs, may refocus its investment strategy on performing commodities.
SWFs are spinning the line that they may be able to take advantage of opportunities created by the slump. Indeed, whether or not the overall picture is bleak depends to a great extent on SWFs’ investment strategies.
Edwin Truman, at the Petersen Institute for International Economics, told WPR that SWFs “have a long-term perspective,” with most wanting to invest excess liquidity and build an optimal portfolio structure. Within the next five years, SWF revenues could rise again. They are therefore likely to ride the storm out until economic conditions improve, and then play a major role — once more — as global investors.
Steffen Kern, from Deutsche Bank Research, was also optimistic. He told WPR that “some SWFs are less exposed than others, with Gulf funds diversified across a global portfolio.” Therefore the impact of the current crisis might vary significantly between funds.
Kern believes that because SWF investments in Western banks caused such a ripple, the decline in comparable transactions has created a false impression that SWFs have withdrawn from international markets. But quite the contrary could happen as soon as equities hit bottom and economic recovery sets in.
But what will SWFs do in the meantime? Waiting it out sounds good on paper, but political exigencies may dictate otherwise, as was evidenced in the Temasek shake-up.
Economic protectionism has begun to rear its ugly head. The EU, busy trying to nix President Barack Obama’s “Buy America” gimmick, itself became embroiled in an internal row when the Czech prime minister and current EU Commission president assailed French stimulus plans as both protectionist and contrary to EU single market rules.
However, the likelihood of SWFs being deployed as part of some investment vehicle to prop up ailing currencies or banks in their countries of origin is difficult to gauge. According to Tang Tjun
“Some SWFs can be limited in their capacity to refocus significantly on domestic investment and currency support, if a portion of their assets is in foreign exchange holdings, as this carries exchange rate implications. However it is difficult to generalize, as quantifying the balance between domestic versus foreign assets in any SWF is difficult.”
One avenue for SWF investment may be foreign aid or, more likely, multilateral lending support. The IMF is struggling to find the resources it needs to fulfill its mandate as the global downturn spreads. Japan has finalized a $100 billion loan to the fund, but as British Prime Minister Gordon Brown indicated last week, the G-20 meeting on April 2 will be used to cajole oil-rich Gulf states and Asian SWFs to inject some cash into the international financial institutions (IFIs).
“I see a big argument about how the IMF and the World Bank are to be financed for the future, one that will require us to talk about the reserves in different countries, talk about what sort of loan or bond facility we can develop, perhaps with the Arab states, perhaps even with sovereign wealth funds,” Brown said.
April 2 could see the de facto emergence of the G-20 as the replacement for the effectively moribund G-8, as SWF strongholds and petro-states seek recompense for any IFI cash infusion in the form of institutional recognition — at the G-Summits, in the IFIs, and possibly at the U.N. Security Council. The geopolitical implications of what could be a profound rebalancing of the world economy have only begun to emerge.
The White Knights could ride again, but this time they may set a higher price.
Diana Ionescu is a post-graduate economics student at the Vienna University of Economics and Business, writing her thesis on SWFs.Show