INTERNATIONAL: Sovereign Wealth Funds Adopt Draft IMF Guidelines for Investments

Wednesday September 3 2008

After a two-day meeting in Santiago-Chile, the International Monetary Fund (IMF) has facilitated a preliminary agreement with 26 countries on a common set of Generally Accepted Principles and Practices for Sovereign Wealth Funds (GAPP), a voluntary framework that would guide the appropriate governance and accountability arrangements, as well as the conduct of appropriate investment practices by SWFs.

The IMF’s International Working Group of Sovereign Wealth Funds (IWG) said it would present the guidelines to the International Monetary Fund’s policy-setting committee by mid-October when the IMF holds its annual meeting.

The guidelines that include a set of 24 principles cover macroeconomic, legal and institutional issues, along with accountability, risk management, governance and investment strategies.

The members of the IWG 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.

In recognition of the need to carry forward the work relating to the GAPP, The IWG members have also decided to explore the establishment of a standing group of SWFs in order to facilitate dialogue with official institutions and recipient countries on developments that impact SWF operations.

It is estimated that SWF’s control about $ 3 Trillion and that figure could grow to $ 12 Trillion by 2012. Many of these government run funds have their roots in their home nations’ natural resource wealth, especially oil exports.

Some countries where the funds invest are worried that these giant funds seen controlling assets worth trillions between them could be a destabilising factor in international markets with their large-scale investments.

Germany has recently unveiled law to protect domestic industries from unwanted foreign takeovers, a move principally directed against state-controlled sovereign wealth funds , amid fears that they could be used to take over strategic German industries, such as in the energy, telecoms or banking sectors.

Upon receiving parliamentary backing, the law would empower the German federal government with the right to veto any non European Union or European Free Trade Association investment seeking to control 25% or more of a company’s stakes if it deems that national security is at risk.

On a separate instance, The European Parliament has approved a resolution in which it proposes greater transparency in the operation of the sovereign wealth funds (SWF). It wants to see a global code of conduct and for the Commission to examine what measures might be taken under EU law to ensure a proper understanding of their structures and motives.