The Impact of SWFs

Ashby Monk

With so many new sovereign funds popping up around the world, I think it’s fair and opportune to ask a simple question: What benefit(s) do sponsoring countries receive from their SWFs? I’ve had a few thoughts on this topic (see here, here and here for some examples), but a new report by PwC is really quite insightful in this regard. The report — entitled ‘The impact of Sovereign Wealth Funds on economic success‘ —  catalogues the effects that a SWF has on the economy of the sponsoring country. Here’s a blurb:

“To understand whether a Fund has a material impact on the host economy…we analysed the historic performance of 51 countries over 30 years. The countries selected either had a Sovereign Wealth Fund, or had the potential to have a fund, thanks to significant commodity income or trade surpluses over the period. Comparing the two groups enabled us to see how their relative performance had varied over time and helped us isolate the fund’s impact.”

And what do they find? Here are the key findings lifted from the report:

  • “Setting up a Sovereign Wealth Fund may help to reduce inflation – the presence of a fund is linked to lower inflation, even when we account for a number of other factors likely to affect inflation, such as monetary policy stance, the state of the labour market and the current account balance. This result is stronger for commodity rich countries than for those with a non-commodity based trade surplus.
  • Exchange rate appreciation may be lessened by a Sovereign Wealth Fund – in countries with floating exchange rates we found a relationship between the presence of a Sovereign Wealth Fund and a weaker exchange rate. The effect was equally strong for countries with and without commodity wealth. This may occur because monies can be held in foreign currencies (often in US dollars), so not bidding up the value of the local currency.
  • Sovereign Wealth Funds may help improve transparency in an economy– our analysis found levels of transparency to be correlated with measures of economic development such as GDP per capita and the depth of financial markets. Even when these factors are taken into account, however, we see lower levels of perceived corruption in countries where a Fund is present. The effect appears slightly stronger in countries with non-commodity based trade surpluses.”

In short, a SWF helps to control inflation, manage exchange rates, improve transparency, and minimize corruption. I find that fascinating.

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About

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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