Western governments reeling from the financial markets slump should welcome the code of conduct for Sovereign Wealth Funds (SWFs) to be published today, according to a leading authority on the sector.
Ted Truman, senior fellow at the Peterson Institute for International Economics, said yesterday that Western markets should not deter potential investors at a time when banks were crying out for new capital.
“There are some aspects that will not be to everyone’s liking, but I would expect finance ministers and central bank governors to be positive,” he told Emerging Markets.
SWFs, mostly run by governments in the fast-growing Middle East and Asian regions, as well as Russia, control an estimated $3 trillion of assets – at a time when wealthy nations are struggling to find ways to attract capital into their financial institutions.
“I suspect that SWFs in one form or another will be part of the mopping up operation once things [in the West] turn the corner,” Truman said. “They will be looking for opportunities to make a profit.”
The code, known as the Generally Accepted Principles and Practices (GAPP), will be published by the International Working Group of 26 SWFs. It will be debated by the International Monetary and Financial Committee of the IMF, which has previously praised SWFs for contributing to financial stability by taking stakes in troubled US and European banks.
It seeks to allay mounting concerns among rich nations that SWFs are simply the instruments of state policy of the governments that own them, rather than genuine investment vehicles.
The aim is to ensure industrialized countries, especially the US and Europe, do not erect protectionist barriers. The GAPP rules have been drawn up in parallel with an OECD code for how recipient countries should deal with SWFs.
It is understood they will cover legal, institutional, and macroeconomic framework of each SWF, its governance and accountability arrangements, and investment policies and risk management.
Joaquin Almunia, the European Union’s economy and monetary affairs commissioner, told Emerging Markets he was happy with the GAPP principles. He declined to reveal their content.
Almunia expects Western countries will react positively to the rules. “Everyone is looking for capital. These principles are welcome and a very positive step forward,” he said. He hoped that “the recipient countries will react in a coordinated way” during talks.
Truman said the slump in both financial markets and economic growth had changed the West’s attitude to SWFs. “I would be surprised if any government official from any of the industrialized countries is anything but positive or gives any negative comments,” he said.
However SWFs that are nursing heavy losses on some of their investments in financial institutions are less willing to invest in the US and Europe. “They are licking their wounds,” Truman said.
Figures published this week by Monitor Group, a US consultancy, showed that SWFs had shifted investments away from the US and Europe and into the Middle East and Asia.