While Brazil is the latest one to join the new class of Sover- eign Wealth Funds, Japan and India are expected to follow suit. The Bank of Thailand is also conducting a feasibility study about setting up a Sovereign Wealth Fund (SWF) and the list goes on. Soaring commodity prices have created fertile ground for state-controlled funds in the recent past. Though they have divergent goals, their purpose is simple: find appropriate investment opportunities abroad that could bring in greater revenues in American dollars, because it is the currency in which most exports are denominated. The more a country converts dollars, the more foreign exchange value will it obtain against its rivals. Jan Randolph of Global Insight, global leader in economic and financial analysis, says "It's almost become a de rigueur fashion accessory to have an SWF. Governments are looking around and saying: `Others have SWF; why aren't we doing this?"'
Cash-rich countries such as UAE, Qatar, Kuwait, Singapore and China have created SWF as they have current-account surpluses due to the high prices of their main export commodities. These countries need to invest abroad to control the ensuing inflation threat, and at the same time, they want to reduce the holdings of the US currency. Of late, the greenback is constantly declining rampantly, especially after the subprime crisis against euro along with many other leading currencies. Currency analysts with clients in the Middle East say, "As SWFs abound, investors have a generally graying view of the buck, besides their interest in riskier strategies with greater returns several decades, mostly in the oil-exporting Middle East and the cheaper production centers of Asia." According to Global Insight, these countries have state-administered pools of an estimated $3.5 tn in assets, excluding central bank reserves, with another $4.5 tn held in more traditional sovereign wealth. Whenever SWF fund managers shift reserves out of dollars into other currencies, foreign exchange markets shift in anticipation. |
