by: Haseeb Chowdhry
With the $140 billion plan President George W. Bush calls “a short in the arm to keep a fundamentally strong economy healthy,” Fed Chairman Ben Bernanke hopes US housing and consumer spending can rebound from a dismal fourth quarter filled with massive write-downs and slowing economic growth. Coupled with the heavy influx of funding via sovereign wealth funds from the Middle East and Asia, the world’s economic makeup is increasing global interdependency. Two major effects of increased interdependency are the advent of sovereign wealth funds and similar downturns in emerging markets resulting from slower growth in developed markets.
Investment banks are receiving capital influxes from international sovereign wealth funds, or asset-based funds managed by governments in Middle East and Asia stemming from capital account surpluses. Of the estimated $2.9 trillion invested in sovereign wealth funds today, with approximately $2.1 trillion attributed to oil derived revenues, which means that most of the capital account surpluses are a result of oil profits in the Middle East. Before January 15, UBS had raised $11.9 billion from the Government of Singapore Investment Corporation and Middle Eastern investors, Citigroup raised $7.5 billion from the Abu Dhabi Investment Authority, Morgan Stanley raised $5 billion from China Investment Corporation and Barclays raised $5 billion from China Development Bank and Singapore’s Temasek Holdings. As if we thought it couldn’t get any worse, January 15th proved otherwise. As Citigroup reported a $9.83 billion fourth-quarter loss with $18bn in subprime-related credit write-downs and remaining exposure of $37bn to subprime mortgages, it received $14.5 billion from the Government of Singapore Investment Corporation, the Kuwait Investment Authority, Saudi Prince Alwaleed bin Talal, former Citigroup CEO Sandy Weill, and the New Jersey investment division. Merrill Lynch raised $6.6 billion by issuing convertible preferred stock in private placements to investors, which primarily consisted of the Korean Investment Corp., Kuwait Investment Authority, and Mizuho Corporate. Analysts predict that sovereign wealth funds will be the wave of the future for investing. As previously mentioned, these funds currently hold approximately $2.9 trillion in monetary assets under management, surpassing private equity and hedge funds. Simon Johnson, the IMF's chief economist, estimates sovereign-wealth funds will be worth $10 trillion by 2012. Overall, the advent of sovereign wealth funds is increasing
To limit their losses, investors have put their money in emerging markets such as India, China, and Brazil. However, with recent shaky economic fundamentals in the US and UK, emerging financial markets are facing similar downturns. Since January 1, benchmark indexes in Brazil, Korea, Thailand and Turkey have dropped by at least 8%. Moreover, the Morgan Stanley International Emerging Markets Index has decreased by 4% since January 15. While there is ample potential for growth, the emerging markets must sustain their economic relationships with developed nations such as the US and UK. Since the last US recession, high-growth emerging markets established greater links with developed markets. According to the Asian Development Bank, exports accounted for 55% of Asia’s economic output in 2005. Developed market consumers purchase goods manufactured in China, Taiwan, and Malaysia. Inherently, these economies depend on consumers in developed markets to maintain their spending to maintain the demand for goods. Overall, the world’s economic landscape is inevitably leaning towards increased international interdependence.
From an international perspective, economic and financial markets are integrating on a level playing field. International interdependence is an inevitable necessity resulting in increased liberalization in economic and financial markets. The challenges now arise for developed economies such as the US and UK, which are facing increased current account deficits and possible capital account deficits in the long run. In the short-run, the capital injection by the Fed will boost the US economy, but these continued inflow will increase its economic deficits. With financial markets increasingly receiving international investment, the potential for growth in developed markets may decrease. Overall, the changing make-up of the international economic and financial landscapes provides ample food for thought.
The Invasion of Sovereign Wealth Funds. (London: The Economist, January 17, 2008)
Sovereign Wealth Funds: Asset-backed Insecurity. (London: The Economist, January 17, 2008)
White, Ben. Citigroup falls into loss on $18bn Write-down. (New York: The Financial Times, January 15, 2008)
White, Ben. Foreign funds lead $21bn US bank rescue. (New York: The Financial Times, January 15, 2008)
Larsen, Peter Thal. Sovereign funds with beneficial deal terms. (London: The Financial Times, January 15, 2008)