Proposed voluntary principles and practices for sovereign wealth funds (SWFs), along with an Organization for Economic Cooperation and Development investment code on behalf of recipient countries, will help create a global environment that enables more effective cross-border investing, according to John Lipsky, IMF First Deputy Managing Director.
Lipsky was speaking in Santiago, Chile, on September 3 at a seminar organized by Chile’s Ministry of Finance. In a meeting on September 1–2, representatives of 26 SWFs said they had reached a preliminary agreement on a draft set of Generally Accepted Principles and Practices (GAPP), also known as the Santiago Principles. The GAPP is a voluntary framework to guide the conduct of appropriate investment practices, as well as governance and account-ability arrangements, of sovereign wealth funds.
“The GAPP seeks to help maintain the free flow of cross-border investment and sustain open and stable financial systems,” Lipsky said. “By embracing the GAPP’s principles and practices, SWFs could reduce concerns and thereby help to mitigate the risk of protectionist pressures on their investments and restrictions on international capital flows,” he added.
Positive role in global financial system
Highlighting the increasing importance of SWFs not only in their own countries but also in the international financial system, Lipsky said that such funds today account for between one-fourth and one-third of all foreign assets held by sovereigns. “SWF assets are projected to surpass the stock of foreign exchange reserves in the not-so-distant future and to top $7—$11 trillion by 2013,” he said.
Praising the “shock-absorbing role” that the SWFs had played by providing capital during the past year’s financial turmoil, Lipsky said it reflected the funds’ typically long-term investment horizons, limited liquidity needs, and mainly unleveraged positions. Also, the funds clearly understand “their long-term interest in preserving well-functioning, open, liquid markets,” he noted.
However, recipient countries have raised concerns about the potential noncommercial motives of SWF investments. Such negative perceptions could be damaging to all parties as well as diminish the stability of the global financial and monetary system by undermining the efficient flow of global capital, he said.
In this context, both SWF sponsor and recipient countries would benefit from the “enhanced clarity” provided by the voluntary principles and practices. The GAPP would improve the understanding of SWFs and allow the newly established funds to benefit from the experience of others, Lipsky pointed out.
Next steps for GAPP
Speaking on September 2 at the conclusion of the Santiago meeting, the co-chair of the International Working Group of Sovereign Wealth Funds (IWG), Hamad al Suwaidi, said the next step is for each IWG member to recommend the GAPP to their respective governments in the coming weeks. The IWG then expects to present the GAPP to the International Monetary and Financial Committee, the IMF’s key policy-guiding body, when it convenes on October 11 in Washington. The GAPP is expected to be published after that meeting.
The IWG members are also exploring the establishment of a standing group of sovereign wealth funds. This recognizes the need to carry forward the work relating to GAPP, as necessary, and to facilitate dialogue with official institutions and recipient countries on developments that affect SWF operations.
IMF as facilitator
The Working Group was co-chaired by Jaime Caruana, Director of the IMF’s Monetary and Capital Markets Department, with the IMF acting as the group’s secretariat.
David Murray, chairman of the Future Fund Board of Guardians—the Australian SWF—lauded the role of the IMF as facilitator and coordinator of the work of the IWG. “The IMF, with its 185 members, is the only institutional body in the world that has sufficient understanding of the macroeconomic policies and central bank arrangements of those countries and precedents in some of the work they’ve done that could help us understand ways of approaching the GAPP.”
He emphasized that the “GAPP remains a voluntary document of sovereign wealth funds,” but noted that “the IMF is easily the best institution to help guide this work.”