GIC urges nations to open markets to sovereign funds

Netty Ismail & Shamim Adam

Government of Singapore Investment Corp., manager of more than $100 billion of the city-state’s foreign reserves, said governments should keep their capital markets open to sovereign wealth funds, because protectionist measures could hurt the global economic recovery.

“The biggest danger facing the world economy in the coming years, which could derail the economic recovery, is the growth of protectionist sentiments possibly arising out of high unemployment rates, putting pressure on politicians,” said Tony Tan, deputy chairman of Singapore’s sovereign wealth fund. “This could manifest itself in the form of protectionist measures, not only in world trade, but also in financial markets, the free flow of funds.”

Top officials from some of the biggest sovereign wealth funds, including Norges Bank Investment Management and China Investment Corp., sought to assure governments today that their investments aren’t politically motivated. The funds, which have injected about $90 billion in financial institutions, have been the “soft target of politicians,” said Bader Al-Saad, managing director of Kuwait Investment Authority.

“If governments close their capital markets to sovereign wealth funds, recipient countries will face higher capital costs, while sovereign wealth funds will see their opportunity set decrease,” Tan said today at the Asia-Pacific Economic Cooperation meeting in Singapore. “Sovereign wealth funds can play a constructive role in the global economy as they are long- term, commercially oriented suppliers of capital.”

‘Patient investors’

Last year’s global financial crisis hit the portfolios of sovereign wealth funds. Their total assets fell by almost 17 percent to $3 trillion from the end of 2007 to this year, Deutsche Bank AG said in a report in July. Total assets to be managed by the funds are likely to more than double to $7 trillion in 10 years, according to the report.

The funds are “patient investors” that seek “reasonable” returns, said Jin Liqun, chairman of CIC’s supervisory board. China’s sovereign wealth fund held almost $300 billion in assets at the end of last year.

With their long-term investment horizon, they will become “important suppliers of global capital,” as economic, political and market risks are going to be higher over the next decade than during the 20 years leading up to the financial crisis, Tan said.

While the economic recovery that will extend into next year could “surprise on the upside,” in the short-term the global economic and financial environment has changed, increasing uncertainty and the “potential for volatility,” Tan said.

Risks ahead

It could take several years for “major over-leveraged developed countries,” including the U.S. and U.K., to fully recover from the crisis, Tan said. “They will emerge with much higher and more worrying public debt levels,” he said.

While economies with larger domestic markets such as China, Brazil and India will grow at a faster pace than other emerging economies, the rise of these countries, together with competition for limited natural resources, will lead to “higher geopolitical risks,” he said.

The global economic recovery will be a “long and gradual process, with risks down the road,” said CIC’s Jin. The Chinese wealth fund is willing to invest in any country or company that welcomes it, Jin said.

Sovereign wealth funds can invest in areas that need capital, including infrastructure assets and new technology to address climate change, the officials said.

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