Sovereign-wealth funds may be blossoming elsewhere in Asia, but India's plans to create its own investment fund aren't likely to become a reality soon.
Commanding Asia's third-largest foreign-currency war chest and the world's second-fastest-growing major economy, India could be an ideal candidate for such a fund.
But plans so far to take advantage of the credit crunch in the West and soaring foreign-exchange reserves at home could be bogged down by political disputes and volatility in the country's foreign capital inflows, some analysts say.
The Prime Minister's Council on Trade and Investment, which is made up of key government ministers and industry leaders, has recently suggested the government should explore ways to establish a sovereign-wealth fund to buy energy assets abroad, a senior government official said.
“There is a proposal (to set up a sovereign-wealth fund), but it's at a very nascent stage,” the official said. According to the official, the fund would most likely invest in coal mines and oil blocks, key resources for the country to fuel its economic growth.
Driven by a constant deluge of investment money, India's foreign-exchange reserves have swollen by more than $100 billion in the past year to a total of $294.61 billion as of Feb. 22.
Meanwhile, the traditional avenue for these reserves — U.S. Treasury bonds — is becoming less lucrative by the day, as U.S. interest rates head downhill and the dollar weakens.
And with foreign assets becoming easier for India to acquire as a result of the current U.S. economic downturn and the fallout of the subprime-mortgage crisis, it doesn't come as a surprise that India wants to join the club of Asian sovereign-wealth funds that are regularly hogging the headlines of late.
When China Investment Corp. executive Jianxi (Jesse) Wang popped in to the National People's Congress in Beijing this month, he got an earful from top Communist Party officials. They wanted to know what was happening with CIC's investments, particularly its money-losing $3bn bet on U.S. private equity firm Blackstone and the $5bn it ploughed into investment bank Morgan Stanley.
Wang is not alone among the sovereign wealth fund (SWF) brigade in having to fend off local critics, including fellow bureaucrats, politicians and an increasingly critical domestic press. Thousands of miles away in Kuwait City, Bader Al Saad is bracing to defend investments made in Merrill Lynch and Citigroup by the Kuwait Investment Authority., the $200bn-plus fund that he looks after, when the country elects a new parliament later this spring.
SWFs like CIC and KIA are no longer particularly worried about xenophobic American or European politicians. Sure, they kicked up a fuss and demanded restrictions when funds linked to Asian and Middle Eastern governments rushed to the aid of Western banks. And the International Monetary Fund set about drafting voluntary investment guidelines for SWFs. But the more stinging censure has come from domestic critics who are concerned that SWFs may be squandering their nations' treasure on ill-timed shopping trips abroad.
It's easy to see why. Since the credit-crisis unfolded in earnest late last year, these funds – and others from Singapore, Korea, Abu Dhabi and elsewhere – have provided more than $50bn of fresh capital to US banks as well as to Barclays and UBS in Europe. So far, these have made terrible investments. The weighted average of the share prices of the big banks the SWFs invested in is down by some 30% since they bought in.
Yet how these funds handle domestic criticism could provide clarity on the real nature of their mandates. Most sovereign wealth funds say they are passive investors. Their stated primary aim is to maximise returns on their governments' surplus capital – generated by the sale of oil or the export of manufactured goods.
If that is their objective, it follows that there should be ramifications if the investments turned out poorly. Would the Chinese government seek a change in the way CIC is run if Blackstone – whose shares have halved in value since CIC bought its 9.9% stake last May – continues to slump? Would Kuwait's ruling Al Sabah family shake up the KIA. if its bets on Citigroup and Merrill fail to pay off?
It may be too early to ask such questions. For one thing, the recent investments in Wall Street firms are just pieces of larger portfolios. The KIA, for example, has a wide range of investments, including in manufacturers like Daimler. And CIC is dedicating about $130bn of its $200bn fund to four Chinese banks, with most of the rest allocated to third-party fund managers.
Moreover, some investments have been structured to offer protection from short-term stock price dips. The KIA, for example, gets a 7% dividend on its Citigroup convertible preferred stock while it waits for the stock to rise to a level where a conversion into equity would be profitable.
These nuances may be lost on domestic politicians, party officials and, indeed, the press. So as the credit crunch continues, the managers of sovereign wealth funds may need to prepare for intensified scrutiny at home.
That is, unless returns aren't the most important factor. Some governments almost certainly do have other objectives. By recycling their dollars into the US and shoring up its banking system, they may help ensure a stable market for the oil they produce and the goods they manufacture. Making that argument would earn an “I told you so” from sceptical foreigners. But it just might persuade their constituents to go easier on them.
Source: WSJ & Breaking Views