Controversy over the role of sovereign wealth funds escalated yesterday as officials and market representatives clashed over the need to monitor them more closely. Calls for more transparency and accountability in the national funds were met by charges that they face a “witch hunt”.
“You cannot sit around and do nothing” about sovereign wealth funds, former US Treasury assistant secretary Ted Truman told Emerging Markets. The political objectives of some funds are being questioned and they can “no longer fly under the radar”. The idea of a “high degree of government control over real assets” is not “generally embraced” in the US, Truman said at the annual meeting of the Institute of International Finance (IIF) at the weekend.
This echoed concerns voiced earlier this week by EU Economic and Monetary Affairs Commissioner Joaquin Almunia, who told Emerging Markets: “These institutions are investing in important sectors, so we need to ask them to play with a level of transparency, given the fact the owners are governments themselves.”
Truman, a senior fellow at the Peterson Institute for International Economics, said some political forces aim to erect barriers to keep sovereign wealth funds out of the US, while others seek to “respond to legitimate concern” about the funds while welcoming them.
The problem with the funds, Truman argued, is that they are government owned, since states are treated differently in the legal process from privately-owned corporations. “And their motivations may be different.” Nasser Al Shaali, chief executive of the Dubai International Financial Centre rejected the idea that sovereign wealth funds represent a threat. Their operations are “miniscule” in relation to total cross border investment flows, he argued at the IIF meeting.
Controversy over their role is in danger of becoming a “witch hunt” or a “storm in a teacup,” he complained. The total size of sovereign wealth funds amounts only around US$2 trillion, said Al Shaali. He argued that regulators should look at hedge funds, private equity funds, and others involved in cross-border capital flows, rather than zeroing in on sovereign wealth funds.
Former IMF deputy managing director Richard Erb told Emerging Markets that there are two issues: “One: to what extent will countries use these funds to promote political objectives. The other: to what extent countries – particular those that do not rely as strongly on markets as perhaps they should – would use those funds to promote national industries and national enterprises.”
The funds had only become an issue because China, Russia and other countries with substantial assets often “don’t fall within the realm of US influence”, Deepak Gopinath, global markets editor of Trusted Sources research firm, told Emerging Markets. “It’s US fear of China which is dominating the political debate in Washington now.”
Brazil’s projected wealth fund, which ministers have said will invest in financial instruments issued by Brazilian companies overseas, will operate independently of central bank reserves, with its own governance rules, central bank governor Henrique Meirelles said at a closed-door meeting in Washington this weekend.
The dispute on the funds raged after G7 finance ministers pledged on Friday to “strengthen dialogue” with countries that have launched them.
The ministers hosted a special “outreach dinner” for the heads of half a dozen of the leading sovereign wealth funds including those of China and Saudi Arabia. No statement was issued after the meeting but Truman suggested to Emerging Markets that the chief objective was to get these and other funds to agree to a “code of conduct”.