Sovereign Wealth Funds-Impact, Concerns and Laws

Abstract

There are various definitions of “Sovereign Wealth Funds”. The U.S. Treasury Department for instance (of importance) defines “Sovereign Wealth Funds” (SWFs) as government investment vehicles funded by foreign exchange assets, which manages those assets separately from the official reserves. [3] In generality SWF signifies a state-owned or influenced fund that obtains it’s funding from foreign currency reserves or commodity export revenues, government budget surplus and pension surplus. Commonly, anytime a government aggressively invests a large amount of its official reserves abroad it could be classified as a SWF. These pools of government money are said to be invested more aggressively than traditional government because they are intended to generate large returns.This broad definition encompasses several different types of sovereign entities with different sources for and mandates for investing their assets, including (i) central banks, (ii) stabilization funds, (iii) public pension funds, (iv) government investment companies and (v) state-owned enterprises. [4] The impact of overseas investments by SWFs is increasingly causing alarm in destination countries. Many western governments show great concern with SWFs investing in some of their strategic economic sectors, such as energy or high technologies. Consequently, many of these governments have issued new domestic rules to control and even cancel investments operated by SWFs, or about to do so.This paper intends to discuss sovereign wealth funds, its impact on the global economy, why governments are concerned about its growth, laws and other measures including the OECD Investment committee’s code and the IMFs Generally Accepted Principles and Practice (Santiago Principles) put in place to assuage the concerns.