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IMFSurvey Magazine: In the News

Sovereign Funds Set Up Permanent Representative Forum

Over half of sovereign wealth fund assets are in hands of countries that export significant amounts of crude oil, natural gas (photo: Lowell Georgia/Corbis)

SOVEREIGN WEALTH FUNDS

Sovereign Funds Set Up Permanent Representative Forum

By Jukka Pihlman
IMF Monetary and Capital Markets Department

May 6, 2009

  • Forum aims to exchange views, promote understanding of sovereign funds
  • Inaugural meeting of Forum will be held in Baku, Azerbaijan in October 2009
  • Sovereign wealth funds continue to face difficult investment environment

Sovereign wealth funds (SWFs) that control billions of dollars in investments around the world last month established a standing global forum to discuss issues central to sovereign funds and the broader international financial community.

The International Forum of Sovereign Wealth Funds will also keep under review issues relating to the Santiago Principles, designed to ensure an open international investment environment.

The International Working Group of Sovereign Wealth Funds (IWG) representing 23 countries with sovereign wealth funds, held its fourth meeting in Kuwait City on April 5–6, 2009. The Kuwait Declaration, issued at the end of the two-day meeting hosted by the Kuwait Investment Authority and the State of Kuwait, set up the Forum and promised to maintain an agenda of SWF issues.

The Forum, which is a voluntary group, intends to meet at least once a year to exchange views on issues of common interest and promote understanding of the Santiago Principles and SWFs’ activities. The Santiago Principles, which aim to help maintain a stable global financial system and free flow of capital and investment, were agreed in 2008.The inaugural meeting of the Forum will be held in Baku, Azerbaijan in October 2009.

The Forum will initially comprise IWG members (see box) but membership is open to SWFs that meet the Santiago Principles definition of an SWF and endorse the Principles. SWFs are defined as special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies that include investing in foreign financial assets. These exclude, among other elements, foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes, state-owned enterprises in the traditional sense, government-employee pension funds, or assets managed for the benefit of individuals.

Cross-border capital flow

Following the Santiago Principles objectives, the Forum will contribute to the development and maintenance of an open and stable investment environment, and facilitate communication among SWFs, as well as with recipient country officials, representatives of multilateral organizations such as the European Commission and the Organization for Economic Cooperation and Development, and the private sector.

IWG member countries

Australia, Azerbaijan, Bahrain, Botswana, Canada, Chile, China, Equatorial Guinea, Iran, Ireland, South Korea, Kuwait, Libya, Mexico, New Zealand, Norway, Qatar, Russia, Singapore, Timor-Leste, Trinidad and Tobago, United Arab Emirates, United States

The Forum will also help members exchange views on SWF activities, risk management, investment regimes, market and institutional conditions affecting investment operations, and interactions with the economic and financial stability framework.

Work plan under way

David Murray, Chairman of Australia’s Future Fund Board of Guardians, was elected Chair of the Forum. China Investment Corporation Board of Supervisors Chairman Jin Liqun and Kuwait Investment Authority Managing Director Bader Mohammad Al-Sa’ad were elected Deputy Chairs.

The Forum will have a professional secretariat. Recognizing IMF staff’s contribution to the work of the IWG and its experience in multilateral work, the Forum asked IMF staff to initially undertake the role of Forum secretariat.

Sovereign funds Forum Chair David Murray (c) with Deputy Chairs Jin Liqun (l) and Bader Mohammad Al-Sa’ad at Kuwait meeting (IMF photo)

The Forum also established three subcommittees to carry out its work plan. These panels will work on experiences in application of the Santiago Principles; investment and risk management practices; and the international investment environment and recipient country relationships, including cross-border investment regime issues.

Long-term investors

SWFs have not been spared the effects of the global financial crisis and the sharp downturn in asset prices since early 2008. With the benchmark S&P 500 U.S. share index down 38 per cent and MSCI World Equity index plummeting 42 per cent in 2008, many SWFs also suffered losses.

While they are largely unrealized, as many SWFs are long-term investors and have not needed to liquidate positions, communicating these losses to stakeholders such as the government and the public at large has become a major task for SWFs. The Forum could help SWFs learn from one another how to deal with this and related policy and operational issues.

Sovereign funds Forum Chair Murray (c) with Deputy Chair Liqun (r) and IMF’s Udaibir Das at Kuwait meeting’s press conference (IMF photo)

At an April 6 press conference, Forum Chair David Murray described the changes in the global financial landscape as extraordinary in scope and reach. “At this critical time, the importance of establishing a standing group of SWFs to have an ongoing dialogue on matters of shared interest between themselves and other interested parties such as investment recipient countries has taken on increased relevance," Murray stated.

Many SWFs also remain concerned about reemerging protectionist sentiment, which has dominated the SWF agenda in the past couple of years. The Forum welcomed the communiqué issued by the Group of Twenty industrialized and emerging market countries last month, and stressed the need for a new global consensus on key values and principles that will promote sustainable economic activity.

The Forum noted, in particular, the pledge to do whatever is necessary to promote global trade and investment and reject protectionism, to underpin prosperity. In a speech to the IWG meeting, Kuwait’s Deputy Prime Minister and Minister of Foreign Affairs Mohammed Sabah Al-Salem Al-Sabah said he was optimistic that the decisions taken in Kuwait by members of the Forum would contribute to a recovery of global capital flows and the investment environment.

Comments on this article should be sent to imfsurvey@imf.org


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