GLOBAL - Making the operation of sovereign wealth funds (SWFs) "more difficult" will not solve political concerns, a paper from the Bank of Finland Institute for Economies in Transition (BOFIT) has claimed. 

Jouko Rautava, an economist at BOFIT, noted concerns about SWFs appear to be growing despite the fact there is "no tangible evidence that SWF investments have caused market disruptions".

Instead, the paper claimed "ultimately the reasons for concerns relating to SWFs are political", and suggested the "blossoming China and to an extent Russia seems to have raised the discussion to an entirely new level".

But Rautava warned: "Making the operation of the funds more difficult will not benefit anyone, since at their best the funds produce wellbeing for everyone concerned. Still, the political concerns are a fact of life and if they escalate, they will pose a threat to the operation of the funds."

The focus paper highlighted the ongoing discussion for a clearer set of rules for the funds, so they can continue operating without the need to establish an "expensive and unnecessary mechanism for their supervision".

However, Rautava claimed the idea of a "specific SWF association" to promote their cause seemed "unnecessary", though the paper admitted there is a "desire to ensure that countries receiving investments do not engage in protectionism or prejudice in their own policies". 

The paper argued at a "general level, sovereign funds, even in their present form, are not a problem, although most of them have considerable room for improvement in terms of transparency".

"The core of the problem is a fear of entangling political and economic decision-making in a manner inconsistent with developed market economy rules of the game. Nevertheless, to prevent the rise of protectionism, we need to tackle the SWF problem," added Rautava.

The paper from BOFIT suggested the key was transparency, as demonstrated by the Norwegian Government Pension Fund - Global, which currently manages assets valued at around €250bn.

However, Kristin Halvorsen, the Norwegian minister of finance, told the '13th Conference of Finance Ministers of the Nordic and Baltic Sea Countries', the "irrational fears in countries receiving investments from such funds have given way to a more nuanced understanding of what are the key issues".

She said: "We have to bear in mind that an open investment climate is in everybody's interest, and misguided regulation and protectionism is detrimental to us all."

In addition, she suggested most financial practitioners "would rank SWFs fairly low on their list of key concerns" at the moment as "we have witnessed a credit and banking crisis exploding in slow motion before our eyes".

Instead of blaming SWFs for the financial problems, she claimed many investors see them as part of the solution, as "with deep pockets, a long investment horizon and a strong risk bearing capacity", SWFs could provide "much needed diversity in the market place".

However, at the same time, Dr Tony Tan Keng Yam, deputy chairman and executive director at the Government of Singapore Investment Corporation (GIC), has warned there is now an increasing likelihood of a "global financial crisis and recession".

He claimed "we are now entering a period of extreme uncertainty in the world economy and the global financial markets" and suggested as banks continue to de-leverage, the "prospects for the US economy and possibly even the world economy are fraught with considerable downside risks".

"We could be facing a recession which is longer, deeper and wider than any recession that we have encountered in the last 30 years," suggested Tan Keng Yam.

But in his speech yesterday, the deputy chairman claimed the Singapore SWF was "well prepared" as it had liquidated a portion of its equity holdings into cash in the third quarter of 2007, which then provided it with the liquidity to invest in UBS and Citigroup in December 2007 and January 2008.

He said: "We regard our investments in UBS and Citicorp as long-term investments which will give us good returns, when markets stabilise and economic conditions return to more normal levels."
     
However, for this to happen Tan Keng Yam claimed policy-makers in the US and other countries needed to "respond strongly and appropriately" to mitigate the economic downturn and enable markets and sentiments to "turn around sharply".

He warned if action is not taken in the next 3-4 months, it would be left to market forces to stabilise the US housing market, which would be a "considerably more painful and long drawn process".

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