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Sovereign wealth funds and the economy

Apr 23,2024 - Last updated at Apr 23,2024

Sovereign funds were established to preserve and enhance national wealth, diversify income sources and achieve long-term financial sustainability. These funds are investment funds owned by governments and aimed at professionally managing and investing the state’s sovereign wealth and financial assets. They are formed from various state revenues, including proceeds from government asset sales, external loans, or other sources. Sovereign funds mission lies in investing in a diversified portfolio of assets such as stocks, bonds, real estate, infrastructure projects and leveraging global investment opportunities across different economic sectors to achieve long-term returns. These funds, with assets under management of $11.1 trillion according to the Global SWFs report, seek to achieve financial returns and various economic objectives such as enhancing the state’s competitiveness and provide future income sources for upcoming generations.

Sovereign funds play a critical role in global and national economies, contributing to financial stability, economic growth, and encouraging bilateral and international cooperation by leveraging their activities for strategic purposes, such as financing major government projects, supporting local and foreign companies, and enhancing international economic relations. On the other hand, sovereign funds impact on the national economy emerges in several areas, including increasing national wealth by investing surplus revenues into long-term investments, diversifying the national investment portfolio to mitigate exposure to global economic fluctuations, and supporting local investments in vital sectors and strategic economic projects. Furthermore, sovereign fund activities can serve as a major driver for financial markets if deployed properly. Finally, sovereign funds can provide additional financing sources for the state in urgent situations or financial crises. However, we should notice that appraising the success of sovereign funds on the economy depends on various benchmarks, i,e financial returns, investment diversification, geographic distribution of investments, financial governance, and the economic and social impact of the activities.

With respect to the trends in sovereign fund activities, they include diversifying investment portfolios, investing in strategic sectors and enhancing international cooperation and cross-border investments. Usually, sovereign funds create strategic partnerships with each other and international financial institutions to achieve their goals. However, the assets of global sovereign funds exceed $11.1 trillion worldwide. In the Arab world, Arab sovereign fund assets represent around 39 per cent of global sovereign investment fund assets, with an expected increase of 6 per cent in 2024, as per S&P Global. According to the Sovereign Wealth Fund Institute Report, Arab sovereign wealth fund assets reached approximately $4.5 trillion in 2023. The most prominent global sovereign wealth funds include:

1. China Investment Corporation (CIC): Emerging as one of the fastest-growing sovereign wealth funds, CIC focuses on enhancing China’s economic power and diversifying investment portfolios. The value of Chinese sovereign funds reached $2.2444 trillion.

2. Government Pension Fund Global (Norway): The second-largest sovereign wealth fund globally, it utilises revenues from oil and gas exports for global investments. Known for its diversified investment portfolio and long-term strategy, its assets reached $1.648 trillion in 2023.

3. Abu Dhabi Investment Authority (ADIA): One of the largest sovereign funds globally in terms of asset value, managing assets worth $993 billion. ADIA’s investment portfolio is diversified across various assets and sectors, aiming for balanced investment returns.

4. Public Investment Fund (Saudi Arabia): The second-largest Arab sovereign fund with assets totalling $980.6 billion. It is currently the most active sovereign fund globally, according to the Global SWFs report, with its assets growing in 2023 after transferring 8 per cent of Saudi Aramco shares to funds owned by the fund.

5. Government of Singapore Investment Corp (GIC): One of the oldest and most diversified sovereign wealth funds in its investments, focusing on achieving sustainable long-term returns. Its assets amount to $900 billion.

Despite the importance of sovereign funds to the global and local economy, they face potential challenges and risks, such as market volatility, political influence on investment operations, transparency, and procedures. Another challenge lies in using sovereign wealth funds for local investment, which may lead to operational risks such as corruption, lack of transparency, market impact, and control over corporate activities. Hence, countries impose tough regulatory framework and strict administrative controls on sovereign fund performance to maintain and protect their assets and ensure transparency and accountability. 

In conclusion, in Jordan, it is hoped to see a clear structural framework for a sovereign fund rooted in government shareholding assets company, state lands valued in billions, contributions from banks and financial institutions to form the core of a Jordanian sovereign fund that grows over time to be a source of security for future generations and contributes to supporting the Jordanian economy.

 

Haider Al Majali is an economist and investment expert. [email protected]

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