?What are sovereign wealth funds ?
Sovereign wealth funds are investment funds started by governments.
Why are they formed?
They are formed when a government has a budgetary surplus i. e when the government earns more than it plans to spend , mostly in oil exporting countries due to high demand and prices of oil there is an excess that has to be used somewhere and using it for the immediate consumption is not required(Immediate means short term) or can be catastrophic to the economy.
So to convert this excess liquidity, Sovereign Wealth Funds (SWFs) are formed.
How do they function ?
They convert the excess liquidity and invest in SDRs or XDRs , assets like gold,shares of domestic or international companies, hedge funds, etc.
Based on its type, whether it is a stabilization fund or savings fund its investments may vary like for stabilization safe and quick investments like foreign reserves or xdrs, also overnight interest swaps( overnight interest swap means that a country or in this case a fund pays certain money based on a fixed rate of interest to another party which shall pay back based on an floating rate i.e ever changing rate)
Savings on the other hand invest in long term projects and diversify their investment portfolio to decrease the risks due to any default or losses.
In simple words they are like banks they take our money and invest it somewhere else with promise that we will get our money back whenever needed with extra interest.
How and why were they formed ?
The earliest funds date to early 19th century when the Republic of Texas started a fund called Permanent School Fund with an appropriation of $2,000,000 from the state government. The modern Sovereign wealth fund in 1953, was started by the government of Kuwait called Kuwait investment board( to invest its oil based revenues in other sectors such as real estate bonds etc, at the same time kiribati also started a fund which was based on its phosphate earnings and whose aim was to curtail any risk generated from phosphate export ban of the british. All the three funds are still running strong and are worth millions if not billions of dollars.
Historical fact, during gulf war kia holded excess currency then that was required to safeguard the kuwaiti economy from going into hyperinflation.
Current situation ?
Many countries started the funds in early 2000’s when the term was coined by Andrew Rozanov in an article entitled, “Who holds the wealth of nations?” in the Central Banking Journal in 2005. Many funds got losses due to investments in banks like Citi group, Morgan Stanley that fell due to mismanagement and the subprime mortgage crisis. This also brought in forward a problem that due excessive investments SWFs may endanger the nation’s economy and also cause a widespread crisis in various asset classes when one of their investment fails miserably although these are worse case scenarios as many SWFs own only small stakes. After 2010 there has being rise of new funds in the developed countries and also India which is prime location for gulf and other south Asian SWFs to invest, started its own fund called National Investment and Infrastructure Fund (NIIF) which will invest in India and also bring investment from the gulf which is trying to reduce its dependence on oil and gas exports.
Some rankings
According Sovereign Funds Institute a leading institute the top 15 SWFs are as follows
*In wikipedia and by amount Kuwait should be ranked 4 but due to some reason Saudi Arabia is given Rank 4 except of 5 on the official site
Well this Data is enough to say that the richest countries in world are the oil producing countries well except China and Singapore
By Aviraj Mehta.