The Role of Sovereign Wealth Funds in Global Managament of Excess Foreign Exchange Reserves

Abstract

<jats:p>This paper finds evidence that for many countries Sovereign Wealth Funds are the alternative vehicle for management of excess foreign exchange reserves. These funds can be seen as a substitutes for monetary authorities as well as institutional innovations on global financial markets. Sovereign Wealth Funds offer to countries various economic and financial benefits. They facilitate saving intergenerational transfer of proceeds from nonrenewable resources and help reduce cyclical volatility driven by changes in commodity export prices. These state-run funds help to reduce the opportunity cost of reserves holdings due to greater portfolio diversification of reserve-assets and allow countries to accumulate large capital inflow without negative consequences such as exchange rate appreciations, price distortions, liquidity expansion, domestic asset bubbles, financial sector imbalances and inflations. Sovereign Wealth Funds can support domestic economy during the crises as a investors of last resort and stabilize international financial markets by supplying liquidity and reducing market volatility. Sovereign Wealth Funds are likely to continue growing and increase their relative importance in global financial markets.</jats:p>

The impact and implications of SWFs: a systematic review of literature

“…A number of studies empirically investigate whether SWFs can effectively mitigate the so-called "resource curse", which is common among commodity-dependent countries [18] (Table 7). A common finding is that a soundly managed SWF, can in fact absorb excess liquidity during times of high commodity prices and support government expenditure and budgets during periods of low commodity prices, thus insulating the economy from commodity price shocks (Aizenman et al, 2019;Coutinho et al, 2013;Dagher et al, 2012;Kinda et al, 2018;Mohaddes and Raissi, 2017;Rasaki and Malikane, 2018;Shabbir, 2009;Urban, 2011;Van der Ploeg, 2014;Youssef et al, 2018). The fund can also dampen the effects of commodity price volatility on exchange rates, and therefore, insulate the balance of payments as well (Aizenman and Riera-Crichton, 2014;Rasaki and Malikane, 2018;Raymond et al, 2017;Shehabi, 2015;Zeufack et al, 2016).…”

“…A few studies also use anecdotal evidence to examine whether SWFs facilitate better crisis management. Their findings reveal that SWFs can provide crucial support to domestic economies during periods of financial turmoil (El-Kharouf et al, 2010;Urban, 2011). The literature is replete with examples of countries such as Kazakhstan, Kuwait, Saudi Arabia, Qatar, Bahrain, Oman and UAE, which extensively withdrew from their SWFs during the great recession to successfully stabilize their financial systems (Bahgat, 2011), without causing any repercussions for the mean return and volatility of their stock price indices (Raymond, 2010).…”

Investigating the efficiency of foreign exchange reserves using stochastic frontier analysis: Evidence across the globe

“…On the contrary, the present researchers claim contributory research study as for efficiency checking of FER in response to its inputs. However, some of the papers (Park, 2007; Urban, 2011) regarding FER suggest that most countries have excess foreign exchange reserves, and they must be maintained efficiently.…”

Sovereign wealth funds and economic growth

“…It acts as a stabilizer by investing a country’s surplus money in other countries (Butt et al 2008 ). The main purpose of SWFs is to enhance sustainable growth and preserve the welfare of future generations (Aizenman and Glick 2007 ; Beck and Fidora 2008 ; Urban 2011 ). The Permanent School Fund of 1854, followed by the Permanent University Fund of 1876, established by the State of Texas, was the first SWF designed to use excess oil revenues to fund educational institutions in an attempt to promote human capital formation (Dewenter et al 2010 ).…”