The Rise of Sovereign Wealth Funds

• Author: Simon Johnson
• Position: Economic Counsellor and Director of the IMF's Research Department
• Pages: 56-57

Page 56

We don't know much about these major state-owned players

SOVEREIGN wealth funds are a fairly new name for something that's been around for quite a while: assets held by governments in another country's currency. All countries have foreign exchange reserves (these days, they're typically in dollars, euros, or yen). When a country, by running a current account surplus, accumulates more reserves than it feels it needs for immediate purposes, it can create a sovereign fund to manage those "extra" resources.

Sovereign funds have existed at least since the 1950s, but their total size worldwide has increased dramatically over the past 10-15 years. In 1990, sovereign funds probably held, at most, $500 billion; the current total is an estimated $2-3 trillion and, based on the likely trajectory of current accounts, could reach $10 trillion by 2012.

Currently, more than 20 countries have these funds, and half a dozen more have expressed an interest in establishing one. Still, the holdings remain quite concentrated, with the top five funds accounting for about 70 percent of total assets. Over half of these assets are in the hands of countries that export significant amounts of oil and gas. Norway has a large sovereign fund, as do places as disparate as Alaska, Canada, Russia, and trinidad and tobago. About one-third of total assets are held by Asian and Pacific countries, including Australia, China, and Singapore.

Is $3 trillion a lot of money? It depends on the comparison. U.S. GDP is $12 trillion, the total value of traded securities (debt and equity) denominated in U.S. dollars is estimated to be more than $50 trillion, and the global value of traded securities is about $165 trillion. In that context, $3 trillion is significant but not huge.

It is, however, large relative to the size of some emerging markets. The total value of traded securities in Africa, the Middle east, and emerging europe combined is about $4 trillion; this is also roughly the size of these markets in all of Latin America. And total assets under management by private hedge funds-a broad category of private investment funds that seek high returns and, as a consequence, often take on considerable risks-are estimated to be around $2 trillion. So, perhaps not surprisingly, a debate about the potential risks and opportunities of sovereign wealth funds, similar to the ongoing debate about hedge funds, is now developing.

A...