Thursday 02 Apr 2020 | 20:29 | SYDNEY
Thursday 02 Apr 2020 | 20:29 | SYDNEY

Shrinking sovereign wealth funds


Mark Thirlwell

26 November 2008 10:46

Towards the end of last year, The Interpreter hosted a series of posts on the topic of Sovereign Wealth Funds (SWFs). Norway’s Government Pension Fund – Global, the world’s second largest SWF, has just reported that it has suffered its biggest quarterly decline since the fund’s inception in 1996. 

In this context, Brad Setser has a thoughtful post up on his very useful blog at the Council For Foreign Relation’s Center for Geoeconomic Studies. In line with the Norwegian results, Setser notes that the financial crisis is likely to have produced a significant decline in the value of assets managed by SWFs.

He then suggests four reasons to believe that ‘the sovereign wealth fund moment has passed — at least for the time being’. These are: the poor performance of the markets that SWFs were established in to invest in; the impact of lower oil prices on the flow of funds into some SWFs; the pressure for SWFs to use their resources to fund domestic bailouts; and finally, the way in which the crisis has emphasized the relative attractiveness of more traditional – and more liquid – foreign exchange reserves. 

For my part, I have argued for a while that some of the focus on SWFs was a bit misplaced, since the rise (and if Setser is right, fall) of SWFs is just one part of a bigger story. That story is the growing role of state-controlled capital flows in the world economy, regardless of whether this comes in the form of investments by SWFs, state-owned enterprises, state-owned banks or foreign exchange reserves. That story still has a fair way to run.