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WASHINGTON: The governments of Singapore, Abu Dhabi and the US have come to an agreement over how sovereign wealth funds (SWF) should be used.
SWFs represent government-owned investment vehicles, funded by items like foreign exchange assets and commodity export receipts. These are in turn invested internationally for financial objectives such as stabilisation and inter-generational savings.
Investments by such funds from Singapore and Abu Dhabi, especially in US banks, have sparked concerns in the West that foreign governments may be investing for political rather than financial gain.
In January, Singapore's Government Investment Corporation (GIC) pumped in nearly US$7 billion into US-based Citigroup, one of the world's largest banks.
And last year, Temasek Holdings bought a US$4.4 billion stake in Merrill Lynch, with an option to buy another US$600 million by 28 March this year.
So the latest three-country agreement is designed to address how these investments should be conducted to build greater trust amongst countries and reduce market uncertainty.
The agreement emerged from a meeting in Washington, attended by Singapore's Finance Minister Tharman Shanmugaratnam and GIC Deputy Chairman Tony Tan, Secretary of the US Treasury Henry Paulson and Member of Abu Dhabi Executive Council, Hamad al Hurr al Suwaidi.
Singapore and Abu Dhabi are major players in the world of sovereign wealth funds. As a nation on the receiving end of such foreign investment, the United States is trying to address concerns at home about the funds' dizzying growth.
What has emerged is a set of policy principles to guide both sides.
The first principle for the funds is that investment decisions should be based solely on commercial grounds, rather than advancing the geopolitical goals of the controlling government.
Top of the list for recipient nations is the principle that countries receiving SWF investment should not erect protectionist barriers.
Recent headlines have fuelled concerns about a possible protectionist backlash, and a spate of high profile, overseas investments in the troubled US financial sector has drawn attention to the issue.
Among those concerned about this is Edwin Truman, a former US Treasury Department official who is now a senior fellow at the Peterson Institute for International Economics.
"Why is it good for a foreign government to have 10 percent of the stock of Citigroup when we don't want to have the United States government have 10 percent? At least the United States government would be responsible to US taxpayers," he said.
Others, though, welcome the foreign investment as long as it does not threaten US national security.
James Dorn, Cato Institute, said: "The United States is a free country. We have open capital markets. If US investors want to make deals with the Chinese or anybody else, they should be allowed to do so... as long as it doesn't provide a credible threat."
The sensitivity of the security issue was illustrated in 2006 when a political firestorm forced a Dubai-owned company to sell its American port operations.
The US Treasury is trying to address all the concerns, while simultaneously stressing that America welcomes commercially motivated foreign investment.
Officials are trying to head off a backlash among lawmakers on Capitol Hill, where protectionist sentiment is on the rise in this election year.
With oil profits and other revenues pouring into the already bulging coffers of the biggest state investment funds, their influence is expected to increase.
The International Monetary Fund expects sovereign wealth funds to grow from their current size of around US$2 trillion-US$3 trillion to US$6 trillion-US$10 trillion within five years.
- CNA/so/ir
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