And now, as the coronavirus pandemic has rocked the world's financial markets, these economic superheroes are at it again. Amid the stock market turmoil, by early April 2020, Saudi Arabia's PIF had spent well over $7 billion to pick up stakes in the battered oil majors of Europe, ENI, Equinor, and Royal Dutch Shell as well as others. The moves provoked a tightening of foreign investment restrictions in Italy, Germany, and Spain, exacerbating the tensions explored in Chapters 8 and 9 (hugely different from the “white knight” cheers received during the previous global crisis).
Figure 1.1 SIFs to the Rescue of Citibank
Interestingly, PIF also laid out nearly $370 million to scoop over 8% of Carnival Cruises after the company's shares had plummeted over 75% due to the coronavirus pandemic and then over $500 million on a nearly 6% stake in similarly depressed live entertainment giant, LiveNation. Filling its pandemic shopping cart, PIF abandoned a £300 million purchase of English football club Newcastle United. As we will see in later chapters, PIF is instrumental in weaning the Kingdom's economy from its dependence on oil, with tourism as a focus. What looks like an opportunistic (or, from another viewpoint, perhaps even altruistic) move, is just as likely a move to serve the economic transformation.
Meanwhile, in the US, the economic dislocation has positioned the US to enact a $2 trillion stimulus package in 2020 known as the CARES Act. The legislation contemplates the US government owning shares in companies as a result of its bailout cash injections, a switch from its loan-based bailouts of the global financial crisis. Apparently anticipating voter demands that the taxpayers enjoy the potential corporate upside of the $2 trillion stimulus package, the Act mandates that, this time, loans include warrants, equity or participating senior debt. Only seen to a limited extent in the past (for example in the bailout of the US auto industry), the equity requirement is across all sectors and could result in the US government creating what is, in effect, a sovereign wealth fund.
Alaska already enjoys a SIF. In the pandemic, it is expected to disburse from its oil-funded coffers $3.1 billion, about 5% of its assets.
In addition, in a parallel to sovereign funds in many nations, the Federal Reserve, the US central bank, has been given a role as equity investor of last resort. The CARES Act provides for $454 billion fund for investment by the Federal Reserve. Within that fund is a facility specifically authorizing the Fed to purchase new security issuances in its efforts to maintain liquidity in markets. In this new age, Congress has not limited the facility to purchases of debt obligations. Yet, Janet Yellen, former Chair of the Federal Reserve, has argued for increasing the role of the Federal Reserve in capital markets even more, citing examples of other central banks like Japan that have broader authority to buy equity securities in the open market. When the world is facing down a global pandemic, the utility of sovereign investment funds becomes evident to the most seasoned observers.
Dutch Disease
The Dutch Disease was first diagnosed by The Economist in 1977, in reference to the economic conditions burdening the Netherlands after the discovery of large offshore natural gas deposits in the 1950s which were blamed for loss of competitiveness.
In connection with natural resource windfalls, currency appreciation can distort the local production economy, as exports become less competitive and labor shifts into the extractive industry. In the case of the Netherlands, unemployment soared from 1.1% to over 5% in the 1970s and investment moved abroad while gas exports surged.
Studies have since examined the other detrimental effects of commodity dependence and ways to mitigate its effects. Moving the commodity cash to a sovereign investment fund is one approach, which may save some of the natural resource wealth for the benefit of future generations while promoting a diverse and sustainable economy after the resources are exhausted. By investing strategically in the domestic economy, a sovereign investment fund can encourage a more diversified export sector.
Sovereign wealth funds have also long been deployed to fight more metaphorical health risks. By investing overseas, savings funds in commodity-rich countries can also help prevent Dutch Disease, whereby a surge in commodity exports leads to a sharp rise in foreign exchange inflows, generating inflationary pressures and damaging the competitiveness of other economic sectors (see Box: Dutch Disease). With natural gas reserves dwarfing those of the Netherlands and a much smaller economy, Qatar has followed this approach and invests its massive surpluses abroad.
In 2019, the Qatar Investment Authority (QIA) reportedly acquired the stately St. Regis Hotel, steps from the Trump Tower on New York City's Fifth Avenue, one in a string of trophy hotel properties snapped up with funds from abundant natural gas exports of the lightly populated sheikdom. This is clearly a move that fits well within the accepted paradigm: a prime property in a global city functioning as a store of wealth for a small country in an unstable region. It also demonstrates that being a global investor when a pandemic hits may have its downside. Unlike the more recent move by PIF on Carnival Cruises, however, the timing of the move into hospitality could have been better. But a long-term investor will not worry. In fact, Qatar has reportedly borrowed £10 billion in anticipation of pursuing foreign assets at bargain prices.
Another source of savings in trade-based economies like China, is foreign exchange reserves accumulated from import and export. The “made in China” companies sell their goods overseas – shoes and jeans, or assembled iPhones and laptops – to American and European buyers, bringing back dollars or other foreign currencies. Then the central bank intervenes by printing local currency and buying the dollars for cash from the exporting companies. Traditionally, the central bank, through its investment arm SAFE (State Administration of Foreign Exchange), mostly invested the dollars in the US government treasuries for safety and liquidity. As China's reserve reached trillions of dollars (at its peak, an astounding $4 trillion), the second sovereign fund, China Investment Corp (CIC), was established in 2007 to seek better risk-adjusted returns.
Second, fiscal stabilization funds. SWFs in this category aim to facilitate the fiscal stability of their country's economy, as well as stabilize its exchange rate in certain cases, in the event of an external shock. Often, commodity-rich nations create these funds to manage revenue streams; when commodity prices are high, money goes in, and when commodity prices are low, money goes out – to stabilize the budget. By helping to smooth out commodity revenues, stabilization funds can help governments avoid extreme peaks and troughs in the cycle. These funds are also used to help stabilize the value of the country's currency during macroeconomic shocks.
To fulfil this objective, these funds have short investment time-horizons and tend to hold a large proportion of their assets in liquid investments (and fewer private market investments). This largely limits them to fixed income products, as high exposure to equities and alternatives investments could result in more volatility and less liquidity, putting their ability to intervene on behalf of their economy at risk. The Economic and Social Stabilization Fund (ESSF) of Chile, the copper-rich country in Latin America, is the classic example. Founded in 2007 to repay public debt and fund fiscal deficits, ESSF is not a return-oriented fund, and it has kept its original objective over the years.
This can be seen in action in the 2020 coronavirus pandemic. One of the functions that the oil funds of the Middle East have come to provide is budget stabilization, and they are called back from their day jobs to sustain their home economies. Suffering the double whammy of record low oil prices and the economic shock of the coronavirus, the Gulf states are expected to draw down from their enormous funds to cover government deficits and to fund stimulus spending.
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