Monday, March 31, 2008

SWFs to the Rescue? Maybe Not....

The WSJ economics blog has an interesting entry on the SWF assets. They may not be as much as they seem:

If sovereign wealth funds really have $3 trillion in assets why haven’t they bought even more of the U.S. and Europe?

Christopher Balding, an analyst at the Milken Instititue, a Santa Monica, Calif., think tank, gives an intriguing answer: maybe their wallets aren’t as bulging as people think.

If the estimates of total SWF size were true, he says in a forthcoming paper, “SWFs could currently purchase all national investment brokerages and money center banks listed on U.S. exchanges and still have more than $1.2 trillion left to spend.”

Look at the Middle Eastern SWFs, which are powered by oil revenue. He says some estimates put the combined assets of the SWFs in the United Arab Emirates, Saudi Arabia and Kuwait at $1.9 trillion. That would mean they have assets “nearly 50% greater than all of the foreign reserves in China for a population 2.5% as large,” he says.

Then, Mr. Balding combs through the data. According to the U.S. Treasury, all Middle Eastern oil exporting countries held $300 billion in debt and equities in the U.S. in 2007. The three countries’ foreign reserves were less than $100 billion as of June 2007. Big numbers, but nowhere near $1.9 trillion.

Of course, estimates of assets of SWF vary widely. Some put the assets of the funds from the three nations at about $1.4 trillion. But Mr. Balding’s main point is still interesting. Where’s the rest of the money?

The only way to get to the vastly larger numbers, he says, is to count the domestic assets that the funds have a piece of, which includes national oil companies.

Counting those holdings make the SWFs look immense, he says, but distorts the amount of money the funds actually have to invest overseas. (Abu Dhabi isn’t going to sell its oil company and use the proceeds to buy, say, Exxon Mobil.) Using the same logic, he argues, one could say that France has a $280 billion SWF because of all France’s state owned companies. “Estimates of SWF capital fail to accurately contextualize the numbers by excluding other countries with similar state owned assets,” he writes.

In other words, SWFs may not have nearly as much cash to spend as popular lore suggests. –Bob Davis

1 comment:

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