Sunday, June 10, 2018

Out Now: Santiago Principles on SWF Governance

I am absolutely gobsmacked that Technorati indicates no one has yet linked to this webpage on the IMF site concerning informal principles arrived at by the International Working Group of Sovereign Wealth Funds (SWFs). My surprise is great considering that there are entire blogs dedicated to SWFs and others who cover the topic far more intensively than I do. Anyway, the group's membership is composed of developed countries and LDCs, the latter to which most SWFs belong to with the notable exception of Norway. Ostensibly, this group was convened to develop guidelines on how SWFs can be responsible players in global economic governance via independence, transparency, and accountability.

Being cynical old me, these are mostly code words for Western intervention in the affairs of LDCs in another guise. Given the massive size of some of these entities, many industrialized countries are justifiably concerned about how these can be used to achieve geopolitical objectives which may have little to do with investing in the sense SWFs were originally intended for--preserving and enhancing sovereign wealth. From my upcoming guide, "SWFs for Dummies":

Independence - us Westerners don't like you foreigners using SWFs to further your national objectives by buying our firms in the defense, transportation, energy, and natural resource sectors. Your financial interests in them may diminish our "national security," although we don't feel the need to define these considerations too specifically;
Transparency - insofar as us Westerners cannot really regulate the activities of your SWFs, we would at least appreciate it if you could tell us what they're investing in so we can take action if necessary (nevermind that we don't demand similar levels of transparency from our hedge funds);
Accountability - us Westerners know that you authoritarian regimes can pretty much use your SWFs to invest in whatever you please. Maybe you should be more "democratic" so that the populace can have greater discretion about where their sovereign wealth is invested in.

Unsurprisingly, the wording of the final document is noncommittal given the parties involved in its writing. It was non-binding from the outset to ensure that LDCs would participate. This makes me wonder what the whole point of the exercise was other than to get the point across that the West was vigilant about SWFs. In any event, my argument does not and will not change: the laissez-faire agenda of free trade and free capital flows which the IMF has studiously espoused appears to stop at the water's edge for LDCs. Sure it's fine for LDCs to accumulate industrialized countries' sovereign debt, but when it comes to buying equity and possibly ownership stakes in Western firms, it's a different story.

Ah well...read the PDF document for yourselves and see if it's as pointless as I make it to be. Pay special attention to the Generally Accepted Principles and Practices (GAPPs) on pp. 7-9. Certainly, it doesn't help reduce the perceptions of many that the IMF plays with a stacked deck when it comes to these matters. As a teaser, here are the stated objectives and purposes of the Santiago principles:
Sovereign wealth funds (SWFs) are special-purpose investment funds or arrangements that are owned by the general government. Created by the general government for macro-economic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies that include investing in foreign financial assets. SWFs have diverse legal, institutional, and governance structures. They are a heterogeneous group, comprising fiscal stabilization funds, savings funds, reserve investment corporations, development funds, and pension reserve funds without explicit pension liabilities. Appendix I discusses the definition of an SWF in more detail, and Appendix III contains short descriptions of SWFs in the International Working Group of Sovereign Wealth Funds (IWG).

As well-established institutional investors, SWFs have been undertaking cross-border investing for many years. Their investments have helped promote growth, prosperity, and economic development in capital-exporting and -receiving countries. In their home countries, SWFs are institutions of central importance in helping to improve the management of public finances and achieve macroeconomic stability, and in supporting high-quality growth. SWFs also bring substantial benefits to the global markets. Their ability in many circumstances to take a long-term view in their investments and ride out business cycles brings important diversity to the global financial markets, which can be extremely beneficial, particularly during periods of financial turmoil or macroeconomic stress.

Recently the rapid accumulation of foreign assets in some countries has resulted in the growing number and size of SWFs. Various projections suggest that their presence in international capital markets is set to increase further. As a result of the SWFs’ increasing level of assets invested in public and private equity holdings, they are exercising greater influence on corporate governance practices.

The IWG recognizes that SWF investments are both beneficial and critical to international markets. For that purpose, it will be important to continue to demonstrate—to home and recipient countries, and the international financial markets—that the SWF arrangements are properly set up and investments are made on an economic and financial basis. The generally accepted principles and practices (GAPP), therefore, is underpinned by the following guiding objectives for SWFs:

i. To help maintain a stable global financial system and free flow of capital and investment;
ii. To comply with all applicable regulatory and disclosure requirements in the countries in which they invest;
iii. To invest on the basis of economic and financial risk and return-related considerations; and
iv. To have in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability

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