IO – The Government economic team has failed to understand what “Sovereign Wealth Funds” (“SWF”) actually means. Look at this recent (25/01/2021) report on an online media:
“Minister of Finance Sri Mulyani Indrawati states that SWF is established with a different purpose: source of funds, entity, and investor characteristics. A type of SWF considered to be similar to Indonesia’s recently formed Investment Management Agency (Lembaga Pengelola Investasi – “LPI”) is India’s National Investment and Infrastructure Fund (“NIIF”).”
Very well, so our new Investment Management Agency (LPI) is said to resemble the NIIF in India. The question is, “Is NIIF an SWF?”
NIIF’s official webpage states that “The National Investment and Infrastructure Fund Limited (“NIIFL”) is a collaborative investment platform for international and Indian investors, anchored by the Government of India.”
There is no mention of Sovereign Wealth Funds (“SWF”) anywhere. It only said that NIIF is a “collaborative investment platform”.
Very well, let’s try another source. Let’s check the very database of SWF worldwide, the SWF Institute. A quick peek into the organization’s profile webpage for the Asian region shows us a list of 24 SWFs found in the region. However, NIIF is not listed there – even though it was established in 2015.
An economic media source of India admits that “These funds are known as SWF and invests in assets as stocks, bonds, real estate, commodities etc. The NIIF is not such an entity and hence can’t be called as an SWF in the pure sense.” Yes, you read it right, NIIF cannot be called an “SWF”. Therefore, it is also improper for LPI, which is said to resemble NIIF, to be called an “SWF” in its turn.
What is an SWF anyway? What is the history of this entity? And why is LPI is not an SWF if it resembles NIIF? Let’s look at it more deeply.
In 2008, members of the International Working Group (“IWG”) on SWF agreed on the Generally Accepted Principles and Practices (“GAPP”) on this definition of SWF: “Sovereign wealth fund (SWF) is a specific-purpose investment fund owned by the Government. Created by the Government for macroeconomic purposes, SWF stores, regulates, or administers assets in order to achieve financial purposes, and implements a set of investment strategies, including investing in foreign financial assets.” (IWG 2008, p. 3)
A Brief History of SWF
The first SWF established after World War II was the Kuwait Investment Authority (“KIA”). It was established by the Government of Kuwait in 1953, eight years before this Gulf country won its independence in 1961. Since then, 127 SWFs have been established globally.
Most of the first SWFs were established by petroleum commodity exporters who reserved part of their income from this commodity. Their purpose is to avoid contracting what is called the “Dutch Disease”.
The “Dutch Disease” is an economic phenomenon experienced by countries that rely on the export of natural resources (especially petroleum), but who ended up suffering from economic downgrading due to the dissolution of their domestic manufacturing sector. The chain of events in this phenomenon is as follows:
- Increased petroleum exports from that country increases the amount of amount of foreign currency it has.
- Increased foreign currency reserves will strengthen the country’s domestic currency. Strengthened domestic currency leads to increased import costs.
- Increased import costs suppress manufacturing sectors of the country that depend on imported materials.
- The decline of the manufacturing sector starves economic growth.
Therefore, the best solution for the victims of the “Dutch Disease” is by properly managing the excess foreign currency income from their petroleum exports. The foreign currency earned by these countries should be re-invested abroad by purchasing shares in multinational companies dealing in fields such as finance, automotive, hostelry, telecommunications, mining, transport, or by purchasing the Government bonds of developed countries, in order to obtain profitable long-term returns. In a crisis arising from the fall of petroleum prices or other types of financial crises, SWF funds can also be withdrawn in order to save the country’s economy. This is the actual function of the SWF.
Non-petroleum exporting countries, such as China, Singapore, Australia, Japan, Hong Kong, and South Korea also establish SWFs because they too earned excess foreign currency from their exports, increased income from a boom of the property sector, and also huge tax income, all of which lead to their State’s budget surplus. In China’s case, the flood of foreign currency has caused their own currency, the Yuan, to appreciate so strongly that it’s actually bad for their exports and imports.
The four biggest SWFs in the world that manage the biggest asset values are:1) Norway Government Pension Fund Global, Norway (USD 1.1 trillion); 2) China Investment Corporation, China (USD 1 trillion); 3) Abu Dhabi Investment Authority, UAE (USD 579 billion); and 4) Hong Kong Monetary Authority Investment Portfolio, Hong Kong (USD 576 billion).
Therefore, in conclusion:
1. If Indonesia’s Investment Management Agency (LPI) really refers to India’s NIIF, it cannot be categorized as an SWF because it is not fully owned by the Government. It would be more proper to categorize LPI as a “fund manager” initiated by the Government in collaboration with foreign partners. Furthermore, if it meant to function as an SWF, the LPI should not issue Government bonds to obtain equity. This is contrary to the original purpose of establishing an SWF, which is to reduce the amount of excess foreign reserves by obtaining the bonds of developed countries (rating AAA) and reduce domestic debt liabilities (example: Australia).
2. Successful SWFs were established by countries who underwent various “booms” – whether from excess selling of petroleum, property, or anything else. What matters is that they have excess foreign currency, surplus budget, and high economic growth. SWFs cannot be established during a recession and extreme budget deficit as currently being suffered by Indonesia. Remember, India established NIIF in 2015, when their economic growth rate was extremely high at 7.9% p.a. In any case, it is this track record of extremely high growth rate that attracts investors to an NIIF.