Page last updated at 11:04 GMT, Wednesday, 3 September 2008 12:04 UK

IMF deal on foreign wealth funds

Norway oil platform
Norway is investing the proceeds of its oil and gas operations in its fund.

The International Monetary Fund (IMF) has agreed a voluntary code of conduct with sovereign wealth funds (SWF).

The deal with 26 countries who run investment funds will be put to the IMF members at its October meeting.

The new guidance will cover issues like transparency, governance and accountability of these huge funds.

Sovereign wealth funds control assets worth an estimated $2 - $3 trillion, which is expected to increase to around $10 - $12 trillion by 2012.

Many rich countries, including the US and Germany, have expressed unease that SWFs may be investing in their economies for political purposes.

Middle East funds

The largest funds are owned by Middle Eastern countries, other oil producers like Norway, and big Asian exporters like China and Singapore.

KEY SOVEREIGN WEALTH FUNDS
Abu Dhabi $800bn
Norway $400bn
Singapore $330bn
China $300bn
Kuwait $200bn
Source: OECD June 2008 estimates

Some of the high-profile moves by SWFs, such as the acquisition of P&O's US port operations by Dubai, have been blocked by politicians, while others - such as the investment in some of the major banking groups hit by the credit crunch - have resulted in the funds incurring substantial losses.

The lack of transparency of these funds - which in the past have operated in a secretive way - have exacerbated these concerns.

The co-chair of the International Working Group of Sovereign Wealth Funds (IWG), Hamad al Suwaidi, of the Abu Dhabi Investment Authority, said that the new deal "will promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system".

Trust

The head of Australia's sovereign wealth fund, David Murray, said there was a balance that had to be struck between full disclosure - which might make it difficult for SWFs to operate in the market - and the need for public responsibility.

He said that "disclosure is important but as with any other institutional investor, there must be a limit which protects the confidentiality of dealings with counterparties".

Mr Murray said that by making the SWFs spell out their policies on investment and risk management in detail, they would show that the funds are driven by commercial and not political concerns.

However, analysts said the new voluntary rules may not fully meet Western concerns.

"A voluntary set of principles and practices goes a long way to help de-mystify the methodology of sovereign wealth funds and how they invest, said Debbie Fuller of law firm Eversheds.

"However, a voluntary code will not satisfy certain governments who were hoping for some form of compulsory transparency rules."

Economic benefits

Many economists believe that the world will benefit from the growth of sovereign wealth funds, which recycle the trade surpluses earned by oil producers and manufacturing exporters like China back into the world economy.

The OECD has said that any moves against sovereign wealth funds would be hypocritical, since Western governments have long urged other countries to open their markets to foreign investment.

It is working on a parallel code of conduct for rich countries who are on the receiving end of SWF investment.

The full details of the 24 principles agreed at the two-day meeting in Santiago, Chile will not be disclosed until October.

The rise of sovereign wealth funds is one sign of the shift in the balance of power in the world economy from Western industrialised countries to new emerging market giants like China and the oil-rich Middle East.

How the issue is handled will be a crucial test of the way international institutions are responding to these challenges.

The 26 members of the International Working Group of Sovereign Wealth Funds are Australia, Azerbaijan, Bahrain, Botswana, Canada, Chile, China, Equatorial Guinea, Iran, Ireland, South Korea, Kuwait, Libya, Mexico, New Zealand, Norway, Qatar, Russia, Singapore, Timor-Leste, Trinidad & Tobago, the United Arab Emirates, and the United States. Oman, Saudi Arabia, Vietnam, the OECD, and the World Bank, participate as permanent observers.




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