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Sovereign Wealth Funds - Essay Example

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Sovereign Wealth Funds

This process has resulted in a well recognized trend in monetary trade, foreign currency policy, and new international finance strategies. But, much debate subsists on the legitimacy of these policies and their ethical parameters. There are considerable economic and social issues associated to fairness of competition and possible political non-commercial hidden agenda, which come to the surface seriously. Various institutions are starting to feel greatly concerned by the issue of SWFs especially because these investments are taking considerable proportions.
While many countries are facing important turnabouts and recession in their economy others are continuously sustaining their considerable economic rise. ...
It is universally recognized thus, that the subsequent rise in SWFs is a result of large global macroeconomic impairment and imbalances.
These major discrepancies have resulted in some countries possessing high relative ratio of foreign currency reserve which has boosted considerably the event sovereign wealth funds. Major states involved in SWFs are Kuwait, Singapore, Saudi Arabia and Norway among others and are termed as surplus countries. "The estimated combined assets of the world's 14 largest SWFs now constitute nearly half the size of the world's total official foreign exchange reserves"(Hildebrand, 2007, p.5)
The largest sovereign wealth funds thus,seeks at broadening their economic base by investing in usually very risky business which logically yield in higher return on investment whether in short or long term. These states usually absorb foreign currency in large quantity on domestic market which in parallel stabilizes the local currency.


Also, by implementing sovereign funds government seeks at decreasing costs associated to reserve holding although the persistent discussion on the optimal reserve level remains unanswered.
The implications of SWFs: Broadened Market and diversification of wealth
Some major implications of SWFs the opportunity for investing state to diversify their economic base and taking advantage upon the subsequent profit made on the bond or securities bought from foreign country. The ideal case is to have a major currency evaluation during the period and earn maximum revenue at maturity of bond. But, the risks associated to these bonds are numerous. The SWFs have broadened economic bases for many countries like South Africa as government-controlled foreign investment provides funding to countries which ...Show more

Summary

Sovereign Wealth Fund or SWFs is a well known and not so recent international financial strategy which involves the investment of national foreign currency reserve on foreign markets with little or no regard to where the currency originates. The IMF's October 2007 Global Financial Stability Report states that there are five major types of SWFs namely; the stabilization funds, savings funds for future generations, reserve investment corporations, development funds and contingent pension reserve funds, where each serve a distinctive and well defined purpose…
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