Emerging country funds hold ‘opaque’ market keys: OECD

By Hugh Dent, AFP

PARIS — Emerging countries, notably oil producers but also China, are using ever-greater inflows of foreign currency to buy businesses in industrialized economies arousing suspicions that their motives are political, the OECD says. And, suggesting last week a code of conduct for “opaque” state sovereign wealth funds (SWFs), it also foresaw that they would move some of their money out of top-rank bonds thereby pushing up long-term interest rates, and into stocks, pushing up share prices. “Some SWFs are becoming large players in financial markets and their importance is set to go on increasing rapidly as a significant part of global reserve accumulation (currently around one trillion dollars annually) is likely to be deployed into such funds.” “Altogether SWFs are thought to already manage combined assets of US$1.5-2.5 trillion,” the Organization for Economic Cooperation and Development says in its latest review of the world economy. The OECD argues for transparency in the strategies of SWFs which, it said, some suspect of being fronts for political purposes. And it sees a rise in defensive measures in the old industrialized economies against the purchase of businesses in their increasingly privatized economies by state investment vehicles. The largest of these funds by far is operated by the United Arab Emirates, followed by funds in Norway and probably Singapore. “The more recent Chinese SWF will manage assets of US$200 billion but two-thirds of this amount will be placed in investments designed to recapitalize Chinese banks, leaving around US$67 billion to be invested in world markets.”

Until now, countries with large inflows of foreign currency had invested mainly in high-quality, fixed-income paper, thereby putting downward pressure on long-term interest rates.

Any shift away from such assets would “tend to push up long-term interest rates.” The OECD also estimates that “SWFs are likely to invest a fair share of their portfolio in equities, which may have some impact on equity prices.” They could also have a “quite noticeable impact” on the valuation of assets in emerging markets. The OECD warned that although it was right and good for the global economy that countries with big holdings of foreign assets manage them efficiently, the way they functioned across borders was out of step with general expectations that decision-makers acted on a rational commercial basis. “Indeed, with most OECD countries having undertaken massive efforts to reduce state ownership of commercial entities over the past two decades, a de-facto partial re-nationalization of enterprises by foreign sovereigns (SWFs) is often eyed with suspicion.” Such concern was heightened by uncertainty about the amount of assets held by SWFs, their investment strategy and holdings. “Many SWFs are viewed as opaque and secretive, with the Norwegian and, to a lesser degree, the Kuwaiti ones being the major exceptions. “Lacking sufficient disclosure, funds are sometimes suspected of hiding strategic objectives, with the pursuit of financial returns and political objectives often becoming indistinguishable.” The OECD says that “this secrecy is at odds with standards applied in global financial markets” and that given that many SWFs are now big enough to move markets “there is a case for making them liable to the same transparency requirements.” It would therefore appear to be in the general interest “that countries develop certain codes of conduct for their SWFs (as Norway, for example, has already done), which clarify their objectives, investment strategy and governance model, while guaranteeing sufficient transparency for their activity.” The OECD always warns that investment for non-financial purposes was a concern in any case since it could disrupt “the proper functioning of markets in the recipient country.”