By Santhosh V Perumal
Sovereign wealth funds (SWFs), which have increasingly assumed key roles in their domestic economies and global financial markets, should provide for real delegation to an independent operational manager within overall limits on risk and/or asset allocation, according to an International Monetary Fund (IMF) working paper.
“The assets under management by SWFs have grown rapidly over the last few years, driven by balance of payment surpluses and commodity prices,” IMF said in the paper.
Upper-end estimates indicate total SWF assets of around $5tn. This figure may double count some sovereign assets, by including central bank assets that are already captured in official reserves, the paper said.
Based on the country-specific circumstances, the policy objectives of SWFs vary on the broad macro-fiscal objectives, therefore, warranting close co-ordination with macroeconomic policies and the management of other assets and liabilities in the public sector, it said.
The investment strategies of commodity-based SWFs are frequently designed to fit closely the respective country‘s policy framework by minimising the distortions that large and volatile commodity flows might cause to the fiscal accounts, inflation, and the exchange rate and addressing possible sovereign explicit contingent liabilities, it said.
Finding that in particular, the SWF‘s investment strategies can help alleviate the ‘Dutch Disease’ phenomenon and ensure external stability, the report said in resource-based economies, upward swings in commodity prices tend to result in a boom in aggregate domestic demand, inflationary pressures, and thus an appreciation of the real exchange rate vis-à-vis trading partners.
By augmenting the country‘s net external asset position in a way consistent with economic structure and fundamentals, an SWF would help maintain external stability over the long term, according to the working paper.
Furthermore, the accumulation of foreign assets in tandem with changes in the hydrocarbon exports would help mitigate macroeconomic— and social—risks associated with the appreciation of the real exchange rate, especially under the fixed exchange rate regime and loss of competitiveness in non-hydrocarbon sectors of the economy, it said.
Terming that the institutional arrangements for a SWF should be appropriate and commensurate with its objectives and the nature of its investments, the IMF paper said an SWF‘s organisational structure should establish a clear separation of responsibilities and authority.
“A well-defined structure creates a decision making hierarchy that limits risks by ensuring the integrity of, and effective control over SWF management activities,” it said, adding the governance structure should thus provide for real delegation to an independent operational manager within overall limits on risk and/or asset allocation set by the owner.