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SINGAPORE : Sovereign wealth funds are grabbing the spotlight recently with some notable multi-billion dollar deals.
The Government of Singapore Investment Corporation (GIC) announced a US$10 billion investment in UBS on Monday, just weeks just after Abu Dhabi Investment Authority (ADIA) pumped in US$7.5 million into Citigroup.
Market watchers said they won't be surprised if more of such funds do some serious cash dropping on firms battered by the US sub-prime woes.
But they added that some rules and regulations might be in order, to act against the growing negative sentiment towards such funds.
Sovereign wealth funds in Singapore - such as GIC and Temasek Holdings - are seen as among the most active ones in the world.
Taking a leaf out from their books, countries like Malaysia and China have also set up their own funds.
"Inevitable" is the word market watchers have used to describe this phenomenon.
"It's inevitable because if you trace the development of the sovereign wealth funds, 5 years ago, we had less than 3. How do these funds come about? For example in the Middle East, it's because of continued high oil prices in the last three years which resulted in a huge amount of foreign reserves. In China, it's because of the booming economy over the last 26 years, where you've seen the foreign reserves climb from less than $100 million to $1.3 trillion in less than 8 years," said Gabriel Yap, Senior Dealing Director, DMG & Partners.
David Cohen, Director at Action Economics agreed: "With the sharp increase in holdings of foreign reserves by many countries across this region in particular, and especially the oil producing countries in the Middle East where traditionally foreign reserves is held more passively in government securities, US Treasury bills is the single biggest outlet to foreign reserves.
"A lot of these countries feel that with the increasing amount of holdings, they'd be more interested in getting a higher return."
Still, with their deep coffers, there are worries that mega-deals will lead to mega-influence.
There are those who disagree, however, citing the good that these funds can do.
Said Yap: "The sub-prime crisis led to key financial institutions like Citigroup, Merrill Lynch and UBS having shakier ground to stand on. With inputs (or investments) from these funds which take a long term view such as 10 to 15 years, that gives a greater foundation. These SWFs (sovereign wealth funds) provide stability; they are there to give anchorage during times of huge waves.
"You could make a distinction that maybe Singapore, with GIC, and the recent injection of Abu Dhabi into Citigroup, these are tiny city states so concerns about political influence would be less relevant. Singapore would be primarily investing as a profit maximiser rather than using it to try to wield political influence," said Cohen.
"I think China would face more of a problem. People would be more nervous about their geopolitical strategic interest and how the investments might be used as a political lever," he added.
And they warned that banning such funds could yield to negative effects such as over-inflation.
"If these funds were not allowed to invest overseas, then what you'll have is this momentum of high oil prices, which will lead to huge inflation with respect to the economies, or result in huge revaluation of the respective countries currencies," said Yap.
Negative backlash might also encourage such funds to go underground.
Analysts said it might be timely now to draw up a set of regulations governing the actions of these funds.
Said Cohen: "It would be helpful to set up some rules. I think the IMF has volunteered to help draft the rules for these investment vehicles. Part of that is (because) the IMF is looking for jobs to do, so that some of their traditional roles is not quite so needed. Many countries in the world have amassed their own hordes of foreign reserves, so they don't need the IMF in times of a crisis.
These rules would include setting up a benchmark for transparency and the assurance of non-political motivations. - CNA /ls
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