ShiftingWealth: 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

SWF	2014	2015	Change
China*	1,861	1,948	+87
UAE**	933	1,066	+133
Norway	893	824	-69
Saudi	757	632	-125
Kuwait	548	592	+44
Singapore***	497	538	+41
Qatar	256	256	0

* 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

Source: swfinstitute.org

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

Country	2014 (avg $/b 99.9)	2015 (avg $/b 53.6)	2016 (avg. $/b 42.5)
UAE	80.5	69.4	62.3
Saudi	107.0	100.4	77.6
Kuwait	51.2	49.3	47.2
Qatar	43.9	49.3	54.9
Memo: Nigeria	124.7	88.9	85.4

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.