Wednesday, 20 July 2016

With Romer back to a US-inspired World Bank? (extended)

Paul M. Romer, mostly known for his seminal contribution to endogenous growth theory and defender of special zones (´Charter Cities´), will be the next chief economist of the World Bank. His nomination last Monday was greeted with overwhelming enthusiasm[1], especially by academic peers.
With Romer, the World Bank can strengthen her profile as knowledge bank. That should help to differentiate the multilateral fauna of development banking. It was Paul Romer who enriched growth theory by endogenizing ideas and Know How, rather than treat human capital as an exogenous residual. From his pioneering work it would follow that open economies grow faster in the longer run if they foster institutions and a social model that help create and disseminate know how. From there to Romer´s idea of  “Charter Cities”, new cities in poor countries, is a quick link[2] as urban agglomerations tend to breed the generation and dissemination of ideas.

Romer´s “Charter Cities” are supposed to foster development within poor countries via the creation of new special zones that are free from corruption and where property rights are respected. Europe knows what Romer discovered and re-packaged already since the Middle Ages: Stadtluft macht frei[3]. Serfs could flee the feudal lands and gain freedom in this way, making cities a territory outside the feudal system to a certain extent, similar to “Charter Cities”.
The developmental role of “Charter Cities” is derived from the experiences of the former British crown colony Hong Kong and the Chinese special economic zone Shenzhen. Not only the historical origin of Romer´s concept has a neo-colonial smell, but also the fact that the poor-country government has largely to give up control to foreign investors. Honduras tried the concept in 2011 by modifying the constitution to allow judiciary, police, economics and finance to be removed from central government in new ´special development zones´. Critics have pointed to Honduras´ past as a “banana republic” under US corporate dominance.  Rather than becoming prosperous development poles, special zones or model cities can easily turn into heavens for tax evasion, money laundering, corruption and sweatshops, warned the Neue Zürcher Zeitung already in 2012[4].
I regret that the World Bank reverses the newly-established tradition to select her chief economist from an emerging country. With the former and the current chief economists, the World Bank brought the Chinese and Indian development economists Justin Yifu Lin and Kaushik Basu to DC. To my knowledge, Professor Lin was the first chief economist at the bank who did not come from a North American university[5]. Especially the nomination of Lin had reflected Shifting Wealth, the recalibration of the world toward the East; not just economic or political, but also paradigmatic.
I venture the hypothesis that the choice of a US economist can be explained by multilateral fragmentation, compatible with Hirschman´s exit-voice dichotomy[6]. The US could not prevent establishment of the AIIB, China´s successful attempt to exit the US-led multilateral banking system. Capital-rich China is hard to compete with for the US on the basis of funding alone; but the World Bank may counter the decline in its relative importance on the basis of Know How. Whatever the official rhetoric, the choice of Romer will perhaps help restore the old world of paradigmatic US dominance in development banking.

[1] For a rare criticism, see Norbert Häring, The World Bank on the way back to the Washington Consensus – with Chicago Boy Paul Romer, 19. Juli 2016. Häring equates the poster city Hong Kong with an neocolonial inclination of the future World Bank chief economist.
[2] The Economist, “The World Bank hires a famous contrarian”, 18th July 2016.
[3] For history and English explanation, see
[4] Peter Gaupp, “Honduras: Entwicklungspol oder Steueroase?”, Neue Zürcher Zeitung, 4th October 2012.
[5] François Bourguignon came from the Paris School of Economics but had started his academic career in Ontario, Canada.
[6] Helmut Reisen, “Will the AIIB and the NDB Help Reform Multilateral Development Banking?”, Global Policy, Volume 6Issue 3pages 297–304, September 2015.

Tuesday, 14 June 2016

Vorsprung durch Technik: Dealing with China´s Acquisitions

China´s quest to climb up further the value-added chain by acquiring leading-edge technology firms has made Germany a favorite M&A target in the recent past years. Audi´s slogan “Vorsprung durch Technik” (lead by tech), that´s what the Chinese are currently after: producers of high-end machines (Krauss Maffei, Putzmeister), fork-lift trucks (Kion),   LED chip plants (Aixtron), graphic electrodes (SGL Carbon) and now industrial roboters (Kuka). Early 2016, the Chinese conglomerate ChemChina offered to purchase the Swiss agribusiness Syngenta for $43 billion, the biggest deal so far. A storm of protectionist sentiment is greeting these Chinese acquisitions, not only by politicians (EU competition tsar Oettinger, German Economic Minister Gabriel) but also by academics, such as former IFO president Hans-Werner Sinn and Merics (Mercator Institute for China Studies) director Sebastian Heilmann [1].

As summarised in Table 1, China´s old growth model, embracing trade integration with a fairly closed capital account, has come to an end ten years ago. Since then, China´s global inward FDI has first boomed from 2005 to 2010 but since then stagnated as rising dollar wages have reduced its appeal for investment in the manufacturing sector. Meanwhile, China´s outward FDI has been booming and increasingly targeted advanced countries rather than resource-rich developing countries. 

Table 1: China´s FDI flows and FDI Restrictiveness

Inward FDI, $billion
Outward FDI, $billion
FDI Restrictions (0 to 1)

Following (what is now mainstream) economic policy advice, capital-account liberalisation has been gradual but continuous. It is noteworthy that China has received far more inward FDI than it invested abroad, despite being relatively closed as measured by the OECD restrictiveness index. This index, running from 0 (very open) to 1 (closed) indicates a composite of equity restrictions; screening and approval requirements; restrictions on foreign key personnel; and operational restrictions such as on land acquisition and capital repatriation. Despite all the noise from Western industry lobbies and politicians, China has steadily liberalised its capital account, from an index score of 0.56 in 2005 to 0.38 in 2015. Importantly, however, China still allows joint ventures only.
China’s state-guided outbound industrial and technology policies, aimed at technological leapfrogging through acquisitions pose more industrial, competition, and security concerns than acquisitions by SWFs that seek higher risk-adjusted returns and diversification via passive investments[2]. Some of these policy concerns have been thoroughly discussed by Hanemann and Huotari (2015)[3]. The most relevant, in my mind, are:
·         Asymmetry in market access. Between Germany (as part of the EU) and China, there is no level playing field. Germany belongs to the most open economies (the OECD restrictiveness index score is 0.023 since 2010) while high (> 60%) Chinese local content requirements (“Made in China 2025”) hit German companies in sectors where Germany is very competitive: power equipment, new energy, medical technology, industrial robots, large tractors, and IT for connected cars.
·         Subsidies and non-market advantages. Many of China´s globally operating companies are receiving preferential treatment from local or central governments. These subsidies are a source of unfair competition leading, e.g., to distorted bidding processes in global markets.
·         Technology transfer and industrial hollowing out. It is feared that Chinese state-controlled owners will end up absorbing key technologies and know-how, leading to a hollowing out of the industrial base of their Western competitors. As quipped in a comment to Heilmann´s FT article: “Those takeovers are like the giant bug in the movie Starship Troopers. It punches a hole in the head and sucks out the brain, leaving a dead shell.” The erosion of network externalities - strong in the case of Germany´s car upstream suppliers – can punctuate and ultimately destroy an entire industry as well as industrial region.
·         National security threats. Concerns relate to the erosion of national defence industries, the creation of new channels for infiltration, surveillance and sabotage. To be sure, the German AWG (Aussenwirtschaftsgesetz, or Foreign trade & Payments Law)) or CFIUS, the Committee on Foreign Investment in the United States, provide sufficient tools to restrict Chinese FDI.
In the absence of a multilateral agreement on foreign direct investment, these policy concerns, however valid, give easily rise to distortive and discriminatory policy response. It needs strong independent minds to not follow Professor Heilmann´s FT (op.cit.) fatal ad-hoc recommendations such as to combat state-driven Chinese companies through state aid or to build discriminating rules based on the nationality of acquirers. Let´s hope that Angela Merkel did not fall prey to such bad advice on her recent China trip. Given China´s market size, policymakers should be aware of costly retaliation measures.
From an economic (rather than from an industry-lobby) perspective, most of China´s FDI acquisitions provide no reason for policy intervention. An important yardstick to gauge the broad welfare effect of China high-tech acquisitions from a trade theory perspective is how it impacts on Germany´s terms of trade[4]. Welfare gains from international trade are unaffected by China´s acquisitions as long as they don´t move Germany´s terms of trade, present and future. China´s inward FDI and the ensuing technology transfer can even improve Germany´s welfare if it falls on industry branches with a competitive disadvantage (net import position): Germany´s terms of trade improve, as net imports become cheaper. The reverse holds if China acquires high-tech in areas where Germany is a net exporter as its competitive advantage will suffer from lower premium prices; in that case, China´s FDI will likely worsen Germany´s terms of trade. The Kuka acquisition may be such case. Trade theory provides economic food for thought to reset the examination of Chinese FDI.

[1] Sebastian Heilmann (2016), “Europe needs tougher response to China’s state-led investments”, FT 9th June.
[2] Helmut Reisen (2008), “How to spend it: Sovereign wealth funds and the wealth of nations”, Voxeu, 5th June.
[3] Thilo Hanemann and Mikko Huotari (2015), “Chinese FDI in Europe and Germany: Preparing for a New Era of Chinese Capital”, Merics/Rhodium Group, Berlin, June.
[4] See Henning Klodt (2008), „Müssen wir uns vor Staatsfonds schützen?“, Wirtschaftsdienst, Vol. 88, Iss. 3, pp. 175-180, for excellent analysis (in German).

Saturday, 21 May 2016

How a Rebalanced China Will Affect Africa

2015 has been a challenging year for much of Africa. Average growth of African economies weakened slightly in 2015 to 3.6% (down from annual 5% enjoyed since 2000). Total financial flows have decreased 12.8% to USD 188.8 billion (using UNCTAD rather than IMF estimates for FDI). Africa´s tax-GDP ratio tumbled to 17.9%, down from 18.7% in 2014. China´s slowdown produced rough headwinds for Africa where the gravity of growth is shifting from the resource rich West to the East. [Today, on 23rd May 2016, the African Economic Outlook (AEO) 2016 will be launched in Lusaka, Zambia. I have been asked to contribute, joint with Robert Kappel and Birte Pfeiffer. This post is a copy of one of our contributions. Please follow the launch event and access the study on from 9h CET.] 

The slowing of output growth in major emerging economies has been associated with lower commodity prices. Next to supply factors, the marked decline in investment and (rebalanced) growth in China is depressing commodity prices, particularly in metals and energy. Three key factors have underpinned Africa’s good economic performance since the turn of the century: high commodity prices, high external financial flows, and improved policies and institutions. Macroeconomic headwinds for Africa’s net commodity exporters may imply that Africa’s second pillar of past performance – external financial inflows – will suffer as well.

While lower commodity prices are providing significant headwinds to Africa’s commodity exporters, the rebalancing of China may also provide backwinds, albeit gradually. The relocation of low-end manufacturing from China might reinforce positive income effects of lower commodity prices in oil-importing countries. The backwinds can be expected to stimulate FDI inflows into Africa. Benefits from reduced fiscal pressures in countries with high fuel shares in imports (Egypt, Ethiopia, Kenya, Mozambique and Tanzania) mirror significant challenges for energy exporters (Angola, Chad, Congo, Gabon and Nigeria) and other commodity exporters (Ghana, South Africa and Zambia) arising from depressed commodity prices.

Lower commodity prices could shift Africa’s centre of economic gravity from west to east, towards less commodity-dependent economies (Schaffnit-Chatterjee and Burgess, 2015). Investment finance could follow, reinforced by the peripheral outreach of China’s One Belt One Road initiative (OBOR), which includes East Africa for infrastructure finance. China’s new Silk Road Fund is targeting the economies along Africa’s east coast. This suggests a shift away from a traditional focus on securing natural resources towards a more exploratory focus on opportunities for a manufacturing hub in the African region.

China’s slowdown could affect African development finance through several channels:
• Growth linkage: the slowdown lowers global growth in general and low-income country growth in particular, especially for commodity exporters.
• Trade: the slowdown translates into reduced African export earnings and lower corporate savings and trade credits.
• Prices: the negative income effect in commodity-exporting countries of lower terms of trade associated with lower metal and mineral prices reduces household, corporate and public savings.
• Liquidity supply: lower official foreign-exchange reserves and sovereign-wealth fund assets may translate into lower credit supply to Africa.

Figure 1: Contribution to global growth, 1991-2015, by areas (%)

China’s high growth has boosted global growth in recent years (Figure 1). From 2011 to 2015, China’s relative contribution to global growth was on a par with advanced countries, despite stagnating at a high level for a decade. India’s contribution to global growth has also risen since the early 2000s. However, China has contributed almost 30% to global growth in recent years, approximately 20 percentage points more than India. As India is more closed and still considerably poorer than China, it cannot yet offset the impact of China’s slowdown on global growth and trade.

A recent World Bank (2015) study uses a general equilibrium model to quantify how lower and more balanced growth in China might affect sub Saharan Africa’s (SSA) future growth (Figure 2).  The model simulated the effects of a slowdown, a rebalancing and the combined effect of both. The combined effect of China’s lower growth and its rebalancing on sub-Saharan Africa is positive, as the positive effect from the more balanced growth outweighs the negative effect from lower growth. According to the simulation, by 2030, China’s transition will increase the level of GDP in sub-Saharan Africa by 4.7% relative to the baseline. Countries best placed to export consumer goods to China, including agricultural products, will benefit most from China’s lower but more balanced growth. According to this analysis, Zambia, a main copper exporter, is the only country that will not gain from China’s switch to a more consumption-based growth model. However, this simulation does not consider possible growth effects in Africa from additional Chinese direct investment. To the extent that rising wages in China lead to higher unit labour cost, China’s external competitiveness in low end manufactures will be eroded. China could thus expand its current presence in Africa’s special economic zones, or encourage the creation of new ones. Such positive growth effects from foreign direct investment (FDI) would increase as African countries reduce bottlenecks in infrastructure and energy supply.

Figure 2: Impact of China’s transition to lower and more balanced growth on SSA growth

Trade linkages impact on financial flows via trade credits and indirectly via corporate profits.
China’s trade engagement with Africa has risen markedly since 2000. China has crowded out other trade partners in relative terms, except for India, which tripled in Africa’s export share (Table 1). In absolute terms, the trade dynamic of emerging partners was crucial in quadrupling African exports from USD 142.4 billion in 2000 to USD 566.6 billion in 2014. As a bloc, the group of emerging partners now buys more African exports than advanced countries. Only 15 years earlier, their share represented one fifth of total African exports. In terms of trade dynamics and trade shares, China and India now account for a sizeable portion of Africa’s export earnings.

Table 1: Shares of selected trade partners in Africa’s exports and imports, 2000 and 2014 (%)

The drop in commodity prices can undermine Africa’s resource mobilisation. The price channel, by which the EME slowdown impacts Africa’s financing, reinforces the effects of the trade channel. From the perspective of finance, the impact of changes in commodity prices is unlikely to be symmetric or a zero-sum game. The recycling of large surpluses in the current account of oil exporters (including African) that has benefited African financing will not be paralleled by corresponding surpluses of oil importers.

Tax revenues may also be negatively affected in a number of ways. Many countries in Africa rely on trade taxes (tariffs) to sustain government revenues, so collapsing commodity exports will worsen fiscal positions. Unlike in non-resource-rich Africa, resource rents accounted for more than 80% of total tax collection in 2013 and 20% of GDP in oil-rich Algeria, Angola, Congo, Equatorial Guinea and Libya (AfDB/OECD/UNDP, 2015). Conversely, non-resource-rich countries broadened their tax base and raised tax collection through direct and indirect taxes. A generalized slump that affects consumption will lower tax revenues also in those countries.

Financial flows to Africa may be harmed by depleted EME reserves. The liquidity-supply channel has turned markedly since mid-2014. From a total of USD 1.8 trillion in 2000, global foreign exchange reserves reached a peak of USD 12 trillion in mid-2014. The fast accumulation of global economic imbalances over the 2000s brought about a significant shift in the world’s wealth in favour of  EMEs running surpluses (OECD, 2010). China alone stockpiled reserves from USD 170 billion in 2000 to USD 4 trillion in August 2014, in order to contain appreciation pressures. Since mid-2014, both foreign exchange reserves and sovereign wealth fund (SWF) assets in emerging economies have dropped as a result of lower commodity prices and lower gross capital inflows. Net sales of foreign reserves by China, the Russian Federation and Saudi Arabia accounted for most of the drop. From their peak, these three countries alone have lowered foreign exchange reserves by USD 1.5 trillion. These countries have been prominent emerging investors in Africa in the past (AfDB/OECD/UNDP, 2011).

AfDB/OECD/UNDP (2011), African Economic Outlook 2011: Africa and its Emerging Partners, OECD Publishing, Paris,
AfDB/OECD/UNDP (2015), African Economic Outlook 2015: Regional Development and Spatial Inclusion, OECD Publishing, Paris,
OECD (2010), Perspectives on Global Development 2010: Shifting Wealth, OECD Publishing, Paris,
Schaffnit-Chatterjee, C. and R. Burgess (2015), “African revival shifts east”, Deutsche Bank Research
Papers, Deutsche Bank, Frankfurt,
World Bank (2015), Africa Pulse: An Analysis of Issues Shaping Africa’s Economic Future, Vol. 12, World Bank Group, Washington, DC, issues-shaping-africas-economic-future-october-2015.
UN Comtrade (2015), UN Commodity Trade Statistics Database,

Wednesday, 30 March 2016

Lies, Damned Lies, and FDI Statistics

The term “Lies, Damned Lies, and Statistics” was popularized by the great US author Mark Twain, who attributed it to the British Prime Minister Benjamin Disraeli. Weak arguments are bolstered by the use of statistics, to the point that the credibility of quantitative economics is often seen to be undermined by datamining.

It would seem that there is an even stronger form: Lies, Damned Lies, and FDI Statistics.

In recent work for the forthcoming African Economic Outlook 2016, my colleagues Birte Pfeiffer, Robert Kappel and I found that the statement applies to FDI inflows to Africa in particular. There are two main official sources for numbers on recent FDI flows: the IMF World Economic Outlook database, and the UNCTAD Global Investment Trends Monitor. Consider the differences provided by these prominent sources:

FDI inflows (USD billion) to Africa
                   - 26.8
                   + 23.5

The lower UNCTAD estimate for investment in Africa in 2015 reflects a sharp drop into Mozambique (-21%), Nigeria (-27%), and South Africa (-74%). FDI inflows form an important part of the roughly USD 200 billion financial flows (including remittances, the most important inflow ahead of ODA) to Africa. The reported differences are so striking that, according to the FDI source chosen, total net financial flows in 2015 to Africa rose by 5.9% (IMF-based), that total inflows dropped by 12.8% (UNCTAD-based) or that inflows dropped by 7.4% if erratic FDI data are ignored altogether.

Choose the Africa narrative you like, the poor quality of FDI data is a convenient element for your more or less fairy tales…

Monday, 7 March 2016

Africa´s Frontier Markets are Cheap Again

Africa ´s equity portfolio flows have experienced consistent volatility during the past two decades. From a net equity outflow recorded for 2009 they jumped to a massive net inflow in 2010, to almost USD 20 billion. Since then, they have levelled off, to a mere USD 1.2 billion recorded for 2015. Volatile portfolio equity flows were reflected in most African equity markets indices that produced negative returns amid a challenging economic environment. While many observers see the beginning of the US Fed’s policy tightening cycle as the culprit for the recent retrenchment, domestic factors also seem to have contributed to reduced investor appetite for EME assets. A slowdown in growth added to investor concerns, particularly against the backdrop of the commodity price slump. 

Figure 1: MSCI Emerging Frontier Markets Africa ex South Africa Index vs MSCI World

Figure 1 compares the MSCI Emerging Frontier Markets Africa ex South Africa Index (blue line) with the MSCI World Index (green). It covers six countries (Egypt, Kenya, Mauritius, Morocco, Nigeria and Tunisia), with 38 constituents. The three largest, by index weight, are Egypt´s Commercial International Bank, Maroc Telecom and Nigerian Breweries. No industrial exporter figures among the ten top constituents, reflecting Africa´s industrial weakness. 

Figure 1 shows that Africa´s frontier markets held up well until early 2015 compared to advanced stock markets. Actually, African stock markets performed better than the emerging markets benchmark index (MSCI EM) in 2015.  The Bourse Regionale des Valeurs Mobiliers (BRVM), the regional stock exchange for the West African Economic and Monetary Union member countries, achieved strong positive returns on the back of stronger economic performance in Côte d’Ivoire. East Africa´s stocks did pretty well, as did their underlying economies. Commodity dependent Africa, by contrast is exemplified by Nigeria where uncertainty related to the presidential elections’ outcome and lower oil price contributed to lower returns.

From Spring 2015 to January 2016, however, the MSCI Emerging Frontier Markets Africa ex South Africa Index has almost halved.  With a dividend yield of 4.6% and a P/E ratio of 9.5, the index seems cheap now compared to the MSCI EMF index (3% div yield; 12.6 P/E ratio). In February 2016, the index has started a forceful countertrend rally of 20%, and perhaps even more: a turnaround. 

Thursday, 18 February 2016

Who is Funding Africa´s Infrastructure?

Data on lending sources for bank credit to Africa are hard to come by. Notably the People’s Bank of China, the China Development Bank, and the Export-Import Bank of China (Exim Bank of China), have supported large-scale investments in African infrastructure but do not publish up-to-date information (Pigato and Tang, 2015). For other bilateral and multilateral lenders, ECN (2015) lists the World Bank, African Development Bank, Development Bank of Southern Africa, Export-Import Bank of the United States, African Export-Import Bank, European Investment Bank, Agence Française de développement (AFD), Japan Bank for International Cooperation (JBIC), Islamic Development Bank and Kreditanstalt für Wiederaufbau as largest creditors.

Despite steady growth in private sector funding in the past decade, official development finance backs 80% of infrastructure funding,  with China heading the list of investors, according to a report released late 2015 (ECN, 2015). An important source of foreign finance for Africa stems from official creditors, including export credit agencies. According to the Infrastructure Consortium for Africa Report 2013, grants compose around 30% of the funding extended, while 67% are based on bank credit and export credit flows.
 The Infrastructure Consortium for Africa (ICA) acts as a platform to increase infrastructure financing, help remove policy and technical barriers, facilitate greater cooperation, and increase knowledge through monitoring, reporting and sharing best practices. In its annual reports, it provides some evidence on funding commitments for Africa´s infrastructure in four sectors—energy, transport, water, and information and communication technology (ICT). Table 1 provides data for the biggest creditors with annual commitments above USD 1 billion per year reported. The table gives a hint to the sizeable deleveraging by the various bilateral Chinese lenders already in 2014.

Table1. Funding commitments by origin, USD billion
Europe (incl. EIB)
United States
World Bank
Arab Coordination
South Africa (DBSA)
Source: ICA, various years.

Net official credit flows (disbursements minus amortisation) have declined in 2015, mainly due to a heavy amortisation schedule on bilateral liabilities. Amortisation payments to bilateral official creditors jumped to USD 13 billion in 2015 and are projected at that level also for 2016. This compares to much lower amortisation payments in former years during the 2009–14 period, when amortisation to bilateral s averaged USD 5.4 billion. Northern Africa has seen net official bank credit flows curtailed, as bilateral credit to the region has turned negative from 2014, mostly as a result of Egypt´s heavy amortization schedule over recent years. Main borrowers of bilateral loans in Sub-Saharan Africa were Republic of Congo and Côte d´Ivoire, reflecting bilateral loan agreements with China. While in 2013 bilateral official lending (53.7% of total) to Africa outpaced multilateral lending, it fell back below multilateral lending in 2014.

In terms of net official bank credit inflows to Africa, therefore, multilateral development banks currently provide the most significant volume of bank credit resources to Africa (World Bank, 2016). While net bilateral bank credit flows have dropped since 2014, the rise of net multilateral bank disbursements to Sub-Saharan Africa has continued unabated. New gross multilateral disbursements for African borrowers have risen to record levels, USD 17.3 billion in 2015.  They are projected to rise further in 2016 as AIIB lending to Africa´s east coast will start to contribute.

ECN (2015), Spanning Africa´s Infrastructure Gap: How development capital is transforming Africa’s project build-out, London: The Economist Corporate Network, November.
ICA (2015), Infrastructure Financing Trends in Africa – 2014. Infrastructure Consortium Africa 
Pigato, M. and W. Tang (2015), China and Africa: Expanding Economic Ties in an Evolving Global Context, Washington, DC ; World Bank. 
World Bank (2016), International Debt Statistics.

Monday, 8 February 2016

SWF divestment, oil prices and Shifting Wealth in reverse

From a total of $ 1.8 trillion in 2000, global foreign exchange reserves reached a peak of $ 12 trillion by mid-2014. China alone stockpiled reserves from $ 170 billion in 2000 to $ 4 trillion in August 2014, in order to contain appreciation pressures. High oil and metal prices, a result of China´s rapid industrialization and urbanization, funded not only the build-up of FX reserves mostly invested in US Treasury bills but also fueled real assets recycled into world equities, property, and collectibles.  So oil-loaded sovereign wealth funds (SWFs) became an alternative to merely accumulating official foreign exchange reserves, with the explicit mandate to invest “excess” reserves in higher-yielding assets (Reisen, 2008)[1].  Surging exports and oil prices produced a significant shift in the world’s net wealth in favour of those emerging economies running surpluses; mostly held by governments, assets were also de-privatised. In 2008, I had dubbed this process ´Shifting Wealth´, a term still popular at the OECD (OECD, 2010)[2].
´Shifting Wealth´ is going into reverse these days. Since mid-2014, both emerging economies´ FX reserves and SWF assets have dropped a result of lower commodity prices and lower gross capital inflows. The slowdown and rebalancing in China and tumbling commodity prices have started to produce a gradual melting of foreign assets being held by the world´s nouveaux riches. China´s FX reserves a now down by $ 800 bn to $3.2 trn, still the world´s largest. Saudi FX reserves have tumbled from $ 2.8 trn to $ 2.3 trn, Russia´s from $ 0.6 trn to $ 0.37 trn. From their peak reached in mid-2014, these three countries alone have lowered FX reserves by $1.5 trn. While everybody worries about a US Fed in tightening mode, it is largely ignored that the shrinking balance sheets of emerging economies´ central banks have tightened global liquidity considerably, especially since mid-2015.
Since then, the broader markets for risk assets have stalled and are nowadays tumbling.  The FT cites asset managers who find that “Sovereign wealth funds drive turbulent trading”, to explain sharply lower stock markets since early 2016: “We know that sovereign wealth funds are under pressure to sell and that is contributing to the market pressure we are seeing”. And “Sovereign wealth funds have become forced sellers”. These statements are in strong contrast to those who have hailed SWFs as ideal long-term investors for infrastructure finance or development banks, not least for their long-term liabilities. SWFs as forced sellers were not conceived to happen. In a 2008 speech, the World Bank president, Robert Zoellick, had called on SWFs from the Middle East and Asia to invest 1 percent of their assets in Africa.

Table 1: SWF assets, end 2014 v end 2015, $bn
* China Investment Corporation, SAFE, HK Monetary Authority, National Social Security Fund
** Abu Dhabi Investment Authority, Investment Corporation Dubai, Abu Dhabi Investment Council
*** Gov´t of Singapore Investment Corporation, Temasek

Table 1 tries to shed some light on the obscure world of SWFs. Except for Saudi Arabia and Norway, there is little evidence for melting SWF assets until end 2015. This finding may be due to incomplete records, dollar movements and hide developments up to and since mid-2015 as only year-end data are available. And the table doesn´t reveal whether SWs have already withdrawn from equities and driven up their cash in the wake of higher risk aversion and tightening global liquidity. Although it seems to confirm the stability of SWF assets despite commodity headwinds, Table 1 hides a big warning for holders of risk assets worldwide: You ain´t seen nothing yet!

Table 2: Fiscal breakeven Brent prices, $/barrel
2014 (avg $/b 99.9)
2015 (avg $/b 53.6)
2016 (avg. $/b 42.5)
Memo: Nigeria
Source: Deutsche Bank Research, Updating fiscal breakevens for EM oil producers, 29 January 2016

Oil dependent governments may start to raid their SWFs to prop up their economies and political survival as tax receipts fall on the back of the fall in the price of oil. An interesting analysis by Deutsche Bank has calculated the fiscal breakeven points for various oil-producing countries. It shows that fiscal adjustments have happened and are expected for the future in those countries. But the fiscal adjustment is just too painful and limited to stem the fiscal breakeven Brent price above the estimated brent price/barrel. Note that the current Brent price hovers around $30/barrel and is thus far below the price that Deutsche Bank estimate for the average of 2016. So beware of those “anti-cyclical” “long-term” investors, the oil-loaded SWFs.