How COVID-19 Is Transforming The World’s Sovereign Wealth Funds


18-09-20 12:31:00,

Authored by Oxford Business Group via,

The IMF predicts that the global economy will contract by 4.9% this year, down from growth of 2.9% in 2019, while the World Bank has forecast a fall of 5.2%, the worst contraction since the Second World War.

With national economies suffering from revenue shortages, and populations in need of additional government support to mitigate the impacts of the crisis, SWFs have in many cases seen their roles transformed.

As a result of reduced income, many governments have been tapping SWFs to help balance budgets and provide stimulus to businesses or households.

This development has changed the conventional wisdom surrounding SWFs, which have combined assets estimated of around $6trn globally.

Before the pandemic the funds were seen as having limited – or a total lack of – liabilities. However, Covid-19 has seen SWFs called on to meet the implicit liabilities associated with economic shocks.

Among some SWFs, there is a growing realisation that they are no longer standalone institutions, but rather fiscal policy tools that are fully integrated into the macroeconomic management of their respective countries.

This shift has also brought about significant challenges for SWFs as they adapt to the new economic environment.

For commodity-based funds, many of which are underpinned by significant hydrocarbons exposure, the reduction in economic activity associated with Covid-19 has combined with persistently low oil prices to create twin challenges.

Meanwhile, for funds primarily based on trade surpluses, the deceleration in global trade and subsequent logistical and transport challenges have created similar hurdles.

Asset sell-off

Covid-19 has forced many of the less liquid SWFs to offload assets to generate cash.

The trend is expected to be particularly prevalent in countries with a heavy reliance on oil revenue.

For example, in Norway, where the government expects net cash flows from petroleum activities to fall by 62% this year to the lowest level since 1999, the country is expected to withdraw some $37bn in assets from its SWF, more than four times the previous record of $9.7bn in 2016.

This development is also expected to affect the Middle East,

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