Sovereign Wealth Fund: A new foreign policy tool

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China’s sovereign wealth fund (SWF) has sold its stake in United States private equity group Blackstone, at a time when tensions are mounting between Washington and Beijing over international economic policy.

Financial matters with Tinashe Kaduwo

SWFs have become increasingly important investors in the global economy with more and more countries introducing or planning to establish them. Zimbabwe, for instance, in 2011, coinciding with booming mineral commodity prices and increased mining activity at Chiadzwa, the government expressed its intention of establishing a SWF which was to be funded from mineral resources proceeds. Although plans are still on, the country is lagging behind its peers.

Globally, SWFs are not only a source of capital but also instruments of foreign policy. The move by China’s SWF, China Investment Corp, to give up its ownership stake in Blackstone highlights how SWFs can be used to direct foreign policy. Washington and Beijing are in a serious economic war with the White House citing China’s export and trade policy as threats to America’s economic future. Blackstone’s chief executive, Stephen Schwarzman, has served as an informal adviser to US President Donald Trump and there is speculation that China might be using its SWF to direct international economic policy.

For Zimbabwe, cooperation with such funds can be beneficial. There might be realisation of an investment, such as infrastructure, as well as development of deeper capital markets. Nevertheless, some challenges related to these funds must be considered, such as the frequent lack of transparency. Currently, there is ongoing debate on whether Zimbabwe should set up its own SWF. Although still on the cards, implementation and setting up of the fund has been slow, highlighting to some extent lack of political intent or low confidence in the ability to successfully manage the fund. However, the fund, if created, can be used for investing abroad and attracting other funds for much-needed infrastructure projects in country.

SWF is a special purpose investment fund or arrangement, owned by the general government and created for macro-economic purposes. SWF holds, manages, or administers financial assets to achieve financial objectives, and employ a set of investment strategies, which include investing in foreign financial assets. SWFs manage assets funded by a country’s capital reserves, accumulated from, for example, sales of raw natural resources such as oil, gas and diamonds, a trade or budget surplus, as well as profits from privatisation.

Norway owns the world’s largest fund which is now worth over US$1 trillion. The Scandinavian country’s SWF is now also used to fight climate change. Recently, its ethics watchdog announced that it may blacklist more companies that produce too much greenhouse gas by scrutinising more industry sectors, including shipping and power. Norway’s SWF was created from the proceeds of its oil industry and operates under ethical guidelines set by parliament. It owns shares in 9 100 companies, 1,4% of the world’s listed equity, so its decisions to drop or reinstate companies from its investments carry considerable weight among investors.

Zimbabwe, due to its slower pace in implementing a SWF, is losing out in terms of global positioning. Government control of a SWF means it can be used as an instrument of foreign policy and might be used in various other ways. They can invest in specific countries as a reward for favourable actions. For example, the Chinese fund State Administration of Foreign Exchange, committed to buy government bonds from Costa Rica, which contributed to that country’s decision to cancel diplomatic relations with Taiwan. A SWF’s investment strategy can support a country’s policy in a specific area.

The government’s move to establish a SWF is noble but there is need for clarity on the sources of capital, the long-term approach and means of transparency. However, the SWF may go a long way in attracting other SWFs to invest in the country and therefore drive economic activity.

Kaduwo is an economist at Econometer Global Capital. — tkaduwo@econometerglobalcapital.com or kaduwot@gmail.com.

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