Rating Agencies Driving SWF Growth Globally?

Ashby Monk

I often get asked why so many countries and states are setting up new SWFs. It’s a great question, as more sovereign funds have been set up in the past five years or so than in all the years prior. In general, I respond by saying that governments are setting up SWFs to insure against (or even prevent altogether) some financial or economic crises that can lead to a loss of political autonomy.

So the decision to set up a fund has less to do with sovereign wealth than it has to do with risk management. Commodity funds insure against commodity price volatility and help to prevent the resource curse. Reserve investment corporations help to insure against 1997-style financial crises. Pension reserve funds exist to prevent a pension crisis due to an aging population. You get the point.

But it seems that there is more to the story than just risk management. While risk management may be the core reason why governments are setting up SWFs, the rating agencies are the real catalyst. Indeed, over the past few months I’ve had multiple conversations with individuals who said the reason they set up (or were planning to set up) a sovereign fund type vehicle was to placate rating agencies over macro risks. In other words, the rating agencies (and not the governments) may be the inspiration for many of the new SWFs in the world today.

I’ve heard from politicians that the rating agencies have been recommending placing at least 10 percent (and preferably 15 percent) of government revenues in a buffer fund of some sort. However, these demands can lead to some bizarre behavior by governments. For example, one fund I talked to recently said that the policymakers in charge of the fund would “never, ever” use the assets in the fund for anything. These assets were in the fund for the rating agencies alone. My retort: ‘You could still use those assets in case of an emergency.’ This individual’s response: ‘Actually, no, [the policymakers] wouldn’t. They would go to the debt markets, and, hopefully, borrow at a lower cost. Trust me, this fund will never be tapped.’

And herein lies the key point: Since credit ratings directly affect borrowing costs, these governments have a large economic incentive to do what the rating agencies want them to do (i.e. set up SWFs). In a way, then, accumulating sovereign wealth is a roundabout way of accumulating sovereign debt at lower cost!

There’s definitely a paper to be written on the role of rating agencies in the rise of SWFs. Interesting stuff.

3 Responses to “Rating Agencies Driving SWF Growth Globally?”


  1. 1 Eric C Anderson October 3, 2011 at 10:10 am

    Sad statement on the wisdom of political sensitivities if this is indeed the case…one would hope the policymakers debating a SWF would be considering a greater return on public money than the paltry 3-4% offered by T-notes…this certainly was the logic behind China’s moves…

    • 2 Ashby Monk October 3, 2011 at 11:01 am

      Thanks for the comment, Eric. I think the idea is that the size of the borrowing far outstrips the size of the buffer fund, which means (it is argued at least) that the government saves money in aggregate with the lower borrowing costs. I prefer the notion of “intergenerational savings” better…

  2. 3 rachel October 3, 2011 at 10:33 am

    Russia had a vision for having a fund of 10% of GDP back in 2008… now its a lot smaller. Though the country (or rather its financial and non-financial corporates) borrowed relatively cheaply on the back of the sovereign balance sheet.


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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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