| May 11, 2023
What are sovereign wealth funds, and which nations have the largest in the world?
Photo credit: Shutterstock / T. Schneider
Sovereign wealth funds (SWF) are often associated with well-to-do countries. But an SWF or lack thereof is not necessarily the sign of a wealthy nation. There are plenty of prosperous countries that do not have an SWF and a few not-so-prosperous ones that do.
SWFs serve a purpose in certain economic architecture, and are needed when governments have to deal with the welcome challenge of surplus income.
This may sound like a made-up problem, but handling surplus income is not as easy as it sounds.
Indeed, if handled badly, surplus income can turn into a curse rather than a blessing for a government.
First, let us think about how sovereign governments earn and spend money, and how on earth a government can end up with extra money which it has—seemingly—no use for…
The government of a sovereign state is not only a political machine, but also a massive economic entity. The federal government of the United States, for example, spent over USD6.25 trillion in the financial year 2022.
This money must come from somewhere. In the case of most Western-style economies, government revenue comes almost exclusively from taxes paid by the citizens and the private sector: income tax, corporate tax, and value-added tax, among others.
The tax revenue is spent by the state to run the country, which makes almost all capitalist governments zero-profit economic entities.
Some countries, however, find themselves in the possession of an unexpected source of revenue, usually through the export of natural resources such as petroleum if such resources are discovered.
Countries with a large public sector and a multitude of state-owned businesses may also enjoy surplus government revenues.
France, for instance is the only country in the Eurozone with a sizable SWF (3rd largest in the world), which holds some USD1.67 trillion. This is due to the unique structure of the French economy which encompasses such huge and profitable state-owned enterprises as Bpifrance and Caisse des Dépôts et Consignations (CDC).
A good question here may be “so, what do SWFs actually do?”
Well, there is no better way to explain than by showing some examples.
Kuwait Investment Authority (KIA)
The Middle East is home to the most notable SWFs of our time. The Kuwait Investment Authority (KIA) was launched as the world’s first modern SWF in the 1950s to safeguard the Gulf nation’s surplus income from crude oil exports.
The fund currently manages just under USD740 billion worth of assets. Between 15-30% of Kuwait’s annual oil revenues are absorbed by the KIA each year. The fund operates following strict guidelines under the watch of a board of director’s headed by the serving minister of finance.
The KIA also manages the Kuwait Future Generations Fund (KFGF)—a fund which as the name suggests saves a part of the nation’s fortune for future generations.
Qatar Investment Authority (QIA)
This is yet another major SWF in the Gulf region. QIA has experienced rapid growth since its inception in 2005, acquiring USD450 billion worth of diversified assets across the world.
The QIA is also under strict control not only by its board members but also the Emir and the Prime Minister when it comes to major spending decisions.
QIA is famously keen on UK-based assets, although in recent years it has also focused on continental Europe. Acquiring the French Ligue 1 club Paris Saint-Germain was not only another European acquisition, but also an attempt at rebranding.
Public Investment Fund (PIF) of Saudi Arabia
Saudi Arabia’s SWF was launched by royal decree in the fateful year of 1971, when oil prices jumped several folds. The PIF is currently managing an asset portfolio of USD1 trillion.
The PIF’s mandate is to financially support the kingdoms strategic projects. The most recent examples of such enterprises are over 15 mega projects announced by Saudi Arabia since 2016, including NEOM, the Red Sea Project, The Line, and—most recently—the Mukaab.
The PIF also owns minority stakes in overseas companies such as the aircraft manufacturer, Boeing, the tech giant, Meta Platforms, and the financier Citigroup.
Emirates Investment Authority (EIA)
The EIA has been functioning as the UAE’s only federal SWF since 2007, though it works alongside each emirate’s local investment fund, such as the Abu Dhabi Investment Authority (ADIA).
The UAE’s wealth funds collectively oversee a portfolio of over USD1.35 trillion, which makes the UAE the Middle East’s leading economy in terms of sovereign wealth. The EIA’s activities are monitored by a board which is currently chaired by the Emirati royal and cabinet minister Mansour bin Zayed Al Nahyan.
The EIA has a diversified asset portfolio, including majority stakes in the Abu Dhabi telecom giant, Etisalat.
All that said, SWFs are not limited to the Middle East. France was mentioned earlier as one of the few Western nations with an SWF due to its large public sector economy. Norway is yet another example, although unlike France its USD1.4 trillion SWF is filled with petrodollars.
And, of course, we have China: the quintessential state-run economy with an SWF worth USD1.8 trillion.