The COVID-19 pandemic has accelerated the crisis in oil-rich nations. Governments of all stripes are tapping sovereign wealth and foreign exchange reserves. The future of sovereign wealth funds (SWFs) is at risk.
Sovereign Wealth Funds (SWFs) are widely recognized as emerging key players in global finance. Boasting assets worth $6trn and impressive concentration of wealth, these new financial powerhouses can foster long-term investment and stabilize markets thanks to their limited, or non-existent, liabilities. The COVID-19 shock has shaken this conventional wisdom.
SWF mandates have been already tested in the past, including during the severe commodity price shock in 2014-2015 and throughout the deceleration of global trade for Asian funds specifically. The outbreak of the COVID-19 crisis may represent a definitively pivot in the identity and strength and success of all SWFs alike.
How resilient will resource-rich countries be in the face of the COVID-19 crisis? More specifically, how strong are oil producing nations’ buffers in terms of pledge able sovereign assets, resource diversification, and institutional capital? And finally, will SWFs remain relevant players in a new scenario accelerated by COVID- 19 and characterized by declining hydrocarbon revenues?
Estimating the losses on SWF portfolios of invested assets during the crisis is challenging. The extreme volatility of worldwide financial markets makes estimates obsolete before the ink dries up. JPMorgan estimated aggregate losses for SWFs of over $1 trillion, on a basis of $8.4 trillion, or approximately a 12% loss. No SWF has been spared: media reports have estimated conservative losses of $23.5 billion for Singapore’s Temasek.
The best example of a SWF fulfilling an implicit ‘rainy day’ mandate is perhaps Singapore’s Temasek. Other funds, like those based in Norway, Iran, Kuwait, and Nigeria, are facing withdrawals or increased dividend distributions to fund their respective governments. Norway, for example, has announced plans to withdraw a record $13 billion from its SWF in the spring; at the time of writing, media reports indicate that the planned withdrawal has since grown to $37 billion.
Saudi Arabia’s Public Investment Fund (PIF) has made $2 billion worth of acquisitions. PIF has focused on energy, which could appear counterintuitive at first glance. The strategy of the fund appears constantlyevolving, as PIF claims to be aiming for allocating 75% of its assets to the domestic market. The investments are not limited to Western, developed, markets, with PIF investing in Jio Platforms.
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