Typical street scene in Santa Ana, El Salvador. (Photo: iStock)
IMF Survey: Wealth Funds' Long-Term View May Help Stabilize Markets
October 16, 2008
- Wealth funds expected to publicly endorse Santiago Principles
- Some wealth funds using third parties to monitor principles compliance
- Permanent body to be contact point between funds, host countries
The International Working Group of Sovereign Wealth Funds (IWG) published October 11 a set of 24 voluntary principles—dubbed the Santiago Principles—designed to ensure an open international investment environment.
Al Suwaidi: "By their very nature, sovereign wealth funds have a big stake in stable global financial markets" (IMF photo)
HAMAD AL SUWAIDI
The IWG also started examining the creation of a permanent international body to represent sovereign wealth funds. IMF Survey online's Simon Willson caught up with IWG co-Chair Hamad Al Suwaidi during the 2008 IMF-World Bank Annual Meetings in Washington, D.C.
IMF Survey online: What is different, now that the Santiago Principles have been published, from the situation beforehand?
Al Suwaidi: Publication of the Santiago Principles in itself is going to enhance understanding of the way in which SWFs (sovereign wealth funds) operate. Also, given the voluntary commitment of the SWFs and the effort they have shown to come and draft these commitments, I expect that the participants will publicly endorse the principles.
IMF Survey online: Is there any mechanism for the IWG to monitor its members' compliance with the Santiago Principles?
Al Suwaidi: Now that the principles are a public document, nonimplementation or noncompliance will become clear in a short period of time, especially as some of the principles call for certain information to be disclosed. In addition, we are considering the establishment of a permanent representative body for SWFs and, although we don't yet know what the body's constitution will look like, part of it would be discussion of implementation of the principles. Some SWFs have decided to use independent third parties to confirm compliance with the Santiago Principles.
IMF Survey online: SWFs are seen by some commentators as shock-absorbers in volatile markets, because wealth funds typically take a long-term view on their investments. Does this make SWFs potential contributors to market stability during the current global turmoil?
Al Suwaidi: Yes, I agree with that. One of the main principles of SWFs is to invest on an economic and financial risk-and-return basis. By law these funds will not be able to get involved in noncommercial activity. The crisis that we are going through now is presenting excellent investment opportunities and, given the long-term nature of these funds, some have taken advantage of these opportunities. Because of their long-term approach, they could find investment options that would indeed add to the stability of markets. By their very nature, SWFs have a big stake in stable global financial markets.
IMF Survey online: If the Santiago Principles have been drafted to guide SWFs, do the wealth funds now expect some similar document to emerge to guide host countries in the same way?
Al Suwaidi: We aware of the work in this direction by the OECD (Organization for Economic Cooperation and Development), which has synchronized its activities with those of the IWG. We and the OECD are two sides of the same coin on this issue. We see the principles as building trust further between host countries and SWFs, and we look forward to a positive reaction to the Santiago Principles from host countries. The new permanent body for SWFs would be a focal point of contact between wealth funds and recipient countries.
IMF Survey online: The IWG is now exploring the creation of a standing group for SWFs—the proposed permanent international body for wealth funds. Would this new entity replace the IWG?
Al Suwaidi: The IWG was established to meet the request from the IMFC at its 2008 Spring meeting that a set of principles be drafted, so that task ends with the publication of the Santiago Principles. Going forward, given the importance and the commitment of the SWFs to enhance the understanding between recipient countries and SWFs, the group decided to establish a formation committee to consider the establishment of a standing group of SWFs that could meet to review the principles and consider other issues.
Yes, we will be monitoring the appropriateness of the principles going forward, and making adjustments where necessary, but the standing group's purpose is to be defined by the formation committee. When the terms of reference are set, we will meet and it will be more a forum for interaction than just a body editing the principles.
Comments on this article should be sent to imfsurvey@imf.org