The 46 countries that have at least one sovereign wealth fund have largely set them up for a rainy day. Now that day has come for most of them: Commodity prices are so depressed that governments need to unseal their piggy banks and with profitable investment opportunities scarce there is little incentive not to. This could end up putting downward pressure on global financial markets.
Of the top 30 sovereign funds (20 shown here), 18 are filled with revenues from oil and gas:
The largest of the funds, set up in 1990 to safeguard Norway’s oil wealth for future generations, posted its biggest loss in four years last week. It shed $32 billion in the third quarter, all in the stock market, which accounts for 60 percent of its investments. The bursting of the Chinese stock bubble and the general malaise in emerging markets were the principal reasons for the rout. The fund is barely making any profit on its bond holdings as yields on the more reliable debt instruments head toward, or enter, negative territory. Only the fund’s small real estate portfolio yielded a 3 percent profit in the quarter.
At the same time, the inflow of oil money into the fund is drying up, and the Norwegian government is planning to withdraw $440 million from it next year to cover its fiscal deficit — something it had not intended to do until at least the next decade. The original idea was to keep the cash cushion for future generations as Norway’s population ages, but now the current generation needs it.
Norway, of course, is unique in that its fund is so huge — large enough to cover the country’s entire government spending for more than eight years. Its managers say they won’t be forced to divest, even with the losses, the lack of new capital inflow and the government’s financing needs. Other countries’ sovereign funds are not as safe.
In a recent report on Middle Eastern and North African economies, the International Monetary Fund calculated that if oil prices stay at current levels, Saudi Arabia will exhaust its “fiscal buffers” in about five years, and so will Algeria. Bahrain, Libya and Oman have even less time.