Economics of Sovereign Wealth Funds

Chapter 7 Sovereign Wealth Funds: Investment Flows and the Role of Transparency

Udaibir Das, Adnan Mazarei, and Han Hoorn
Published Date:
December 2010
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Over the past 10–15 years, international recognition that macroeconomic statistics are an essential prerequisite for the formulation of appropriate economic and financial policies has grown, as has recognition of the importance of transparency for the efficient functioning of markets. The recent global financial crisis has reinforced these messages.

Although sovereign wealth funds (SWFs) are not a new phenomenon, more than half of the existing funds were established since 2000, often to help manage foreign currency accumulation prudently and effectively. Although no firm figures are available on the total size of SWFs worldwide, market participants were estimating the total size at about US$2 trillion to US$3 trillion in 2008, compared with total official foreign exchange reserves of around US$7 trillion.

The growing importance of SWFs within financial markets compels coverage of their activities in the macroeconomic data sets upon which policymakers, markets, and users in general rely. The absence of SWF data can hinder economic analysis and potentially mislead data users, most important among them policymakers, market participants, and other commentators on a country’s economic performance. The importance of accurate data was recognized in the fifth principle of the Santiago Principles of the International Working Group of Sovereign Wealth Funds (IWG, 2008, p. 14), which states: “the relevant statistical data pertaining to the SWF should be reported on a timely basis to the owner, or as otherwise required, for inclusion where appropriate in macroeconomic data sets.”

More specifically, the flows and positions of SWFs should be covered in the national accounts data; and in fiscal, monetary and financial, and external statistics. Participation in the internationally coordinated statistical exercises (described later in this chapter) also facilitates monitoring and analysis of international capital flows. Thus, from the perspective of IMF policymakers and other users, including the IMF, it is critical that adequate data are reported to support surveillance of countries’ economic policies.

This chapter (1) sets out some of the important initiatives that have been undertaken since the mid-1990s to improve transparency of cross-border activity, (2) undertakes a brief discussion of domestic statistics, (3) explains the framework created to capture information on SWFs, (4) discusses SWF statistical data reporting practices, and (5) offers some brief conclusions.


Because SWFs have become more prominent owners of foreign assets, analysis of both a country’s external stability and its capital flows in international financial markets requires that SWF activities be covered in external sector data.

First, SWFs often own a significant part of a country’s external wealth. If these external assets are not captured in the balance of payments and international investment position data, external sector data can be misleading. Reliable external sector data are critical to analyzing the country’s external stability.

For instance, a reported net liability in international investment position may in fact be a net asset position once SWF assets are included. Furthermore, the currency risk facing the economy as a whole might be misunderstood without information on SWF assets—an increasingly relevant risk as exchange rates become more flexible.1

Second, the growing financial links among economies, and the resulting potential external financial vulnerabilities, have focused attention on the importance of capturing financial exposures to partner countries in a consistent manner. Omission of the recent growth in the volume of SWFs’ cross-border assets would detrimentally affect the analysis of the international flow of funds and issues such as the common creditors and debtors of economies.2

The international and cross-border links aspects of statistical collection and analysis has special resonance for the IMF, which has made significant efforts to improve data collection for the purpose of analyzing the systemic implications of international financial flows. A summary of statistical initiatives to improve transparency of cross-border flows is provided in Table 7.1.

TABLE 7.1Statistical Initiatives to Improve Transparency on Cross-Border Flows
InitiativeDescriptionImpact on cross-border flows
Special Data Dissemination Standard (SDDS)The SDDS, established in March 1996, aims to guide members that have, or that seek, access to international capital markets in providing their economic data to the public.Enhances data transparency, including external sector statistics.
General Data Dissemination System (GDDS)The GDDS is a structured process through which IMF member countries commit voluntarily to improving the quality of the data compiled and disseminated by the statistical systems over the long run to meet the needs of macroeconomic analysis.A framework for a national statistical development strategy. Comprehensive metadata and description of methodologies used to compile and disseminate external sector statistics.
Data quality
Data Quality Assessment Framework (DQAF)The DQAF brings together a structure and common language for good practices and internationally accepted concepts and definitions in statistics, including those of the United Nations Fundamental Principles of Official Statistics and the SDDS/GDDS.Main instrument of analysis of the data module of the report on the observance of standards and codes (ROSC). Its coverage includes external sector statistics.
Balance of Payments and International Investment Position Manual (BPM6)Internationally accepted standard to compile and disseminate balance of payments and International Investment Position statistics.BPM6 provides advice on how to determine whether SWF assets should be included in reserves or not under different institutional arrangements.
External sector statistics
Assistance to a set of countries in compiling International Investment Position (IIP) StatisticsThe IIP is a statistical statement that shows at a specific time the value and composition of financial assets of residents that are claims on nonresidents, and liabilities of residents of an economy to nonresidents.An SWF’s external assets are classified on the asset side of a country’s IIP.
Reserve Assets and the Data Template on International Reserves and Foreign Currency Liquidity (Data Template).Internationally accepted standard to analyze foreign currency liquidity, which allows the compilation and dissemination of official reserves, other foreign currency liquidity, and predetermined and contingent net drains in a single framework.SWF assets held as official reserve assets are covered.
Currency Composition of Foreign Exchange Reserves (COFER)Confidential database maintained by the IMF on the voluntary reporting of currency composition of official foreign exchange reserves.COFER is published quarterly on a strict multicountry aggregated data basis only.
Coordinated Portfolio Investment Survey (CPIS)The CPIS collects information on a voluntary basis on individual economy holdings of portfolio investment securities—valued at market prices at the end of each year, cross-classified by the country of the issuer.Available data by country of issuer and holder of portfolio investment, such as debt and equity securities from a creditor perspective. SWF coverage depends upon country participation in the CPIS.
Coordinated Direct Investment Survey (CDIS)To be launched with a reference date of end-2009. The objective of the CDIS is to improve the quality of foreign direct investment data at global and bilateral levels. The CDIS will result in the assemblage of a comprehensive database of direct investment positions data, disaggregated by instrument—equity and debt—and by counterpart economy of immediate investor. Country participation is on a voluntary basis.An SWF’s investments are potentially captured by the outward survey of investment. Inward surveys will capture SWF investment into the recipient economies.
Source: Authors’ compilation.
Source: Authors’ compilation.

In the early 1990s, as the progressive deterioration of the quality of information about international financial flows began to undermine the conduct of national economic policy and international policy coordination in several ways, the IMF published the principal findings and recommendations of a working group on the measurement of international capital flows (IMF, 1992).3 The recommendations included the creation of the IMF Committee on Balance of Payments Statistics (Committee) to advise on developments in international financial markets and to work with the IMF to better capture these activities.

One of the first initiatives of the Committee was an internationally coordinated survey of portfolio investment, which became the Coordinated Portfolio Investment Survey (CPIS). The CPIS is now an annual voluntary exercise involving more than 70 large economies that are investing abroad in securities.4 This survey provides position data by country of issuer and holder of portfolio investments, such as debt and equity securities, from a creditor perspective, thus potentially including SWFs. Indeed, some countries with SWFs do undertake the CPIS and provide data to the IMF. When these countries provide a sectoral breakdown by holder, an indication of the geographic distribution of SWF assets can be gauged.

In 2007, the Committee promoted an internationally coordinated survey of foreign direct investment positions—the Coordinated Direct Investment Survey (CDIS). This voluntary survey was launched in 2010 to collect data for end-2009 with a focus on position data attributed by counterpart country. SWFs’ investments are potentially captured by the outward survey of investment. Because of the nature of SWFs, inward investment in domestic SWFs is unlikely (unless the SWF is established offshore), but inward surveys of recipient countries will capture SWF investment into the economy, from a counterpart perspective.

Both the CPIS and CDIS capture financial positions between member countries and complement the Bank for International Settlements’ international banking statistics, which is the oldest of the internationally coordinated surveys and covers cross-border banking business. Information from the Bank for International Settlements on SWF activity is gathered as if SWFs are customers of banks—that is, from a counterpart perspective.

A number of international initiatives collect data on SWF assets held as official reserves. In the late 1990s, the IMF introduced a framework to disseminate comprehensive information on countries’ international reserves and foreign currency liquidity on a timely basis, known as the data template. The IMF also established a database for storing and disseminating countries’ template data.5 For subscribers to the IMF’s Special Data Dissemination Standards, SWF assets held as official reserves are covered by the data template.

Since December 2005 the IMF has published, on a quarterly basis, aggregate data from the Currency Composition of Foreign Exchange Reserves, another voluntary initiative. The securities held within official reserves are collected through the voluntary Securities held as Foreign Exchange Reserves (SEFER) exercise and presented along with the results of the CPIS on a country-of-issuer basis. These two initiatives provide, for analysis purposes, the currency of denomination and cross-border holdings of all securities held as official reserves, making no distinction between SWF assets held as official reserves and other securities held as official reserve assets.

These endeavors have been collaborative efforts, involving IMF staff, IMF member countries, and staff of other international agencies, to improve the availability of cross-border financial data to support policymaking and market analysis. Coverage of SWFs’ investments has become increasingly important as their significance in international markets has grown.


The system of national accounts provides a comprehensive and systematic framework for the collection and presentation of the economic statistics of an economy. SWFs’ activities could significantly affect the generation and distribution of income, consumption behavior, and accumulation activities of the economy, and so need to be included in the national accounts.

SWFs’ activities should be covered in government finance statistics to allow the asset and liability position and the fiscal risks of the public sector to be assessed,6 and the way in which SWF operations are integrated with the overall fiscal accounts and macroeconomic policy objectives to be evaluated. Regardless of whether the assets of SWFs are held by the general government, on the balance sheet of the central bank, or by a separate public entity, the net assets of SWFs should be encompassed in the general government’s net worth.

Furthermore, transactions, including income transactions, should be captured in the appropriate government accounts, not least because the revenues associated with an SWF’s assets may have an important impact on the government’s fiscal performance (and thereby the country’s domestic and external stability).

Likewise, SWFs’ activities are important for monetary and financial statistics given that they may affect monetary policy formulation and financial analysis. SWF assets may be included in the balance sheets of the country’s central bank, which affects the measures of the central bank’s net foreign assets and, possibly, net claims on the government. Or an SWF may be a separate institutional unit classified as a financial corporation. SWFs may borrow from domestic financial institutions. Understanding the impact of SWFs on these aggregates is also necessary for determining consistency of monetary statistics with other macroeconomic data sets.

In the context of the balance sheet approach used for assessing sectoral financial positions, SWF data are needed to complete the coverage of the institutional sector in which these funds need to be classified.7 Data inconsistencies may be identified in the balance sheet approach framework if an SWF’s data are reported for, say, external statistics but not for government and financial statistics.


The Balance of Payments and International Investment Position Manual (BPM6;IMF, 2009) provides explicit guidance for the reporting of economic and financial data by SWFs. There is no special treatment for SWFs and their assets in the international statistical standards, but the explicit discussion of SWFs in BPM6 brings clarity to the appropriate treatment.

Based on discussions with reserve asset and balance of payments experts, and a worldwide consultation period, BPM6 includes a definition of SWFs taken directly from the Santiago Principles (IWG, 2008), as well as advice on the compilation and dissemination of external sector data on special purpose government funds, usually known as SWFs, particularly in relation to official reserve assets. Indeed, BPM6 provides advice on determining whether SWF assets should be included in official reserve assets under differing institutional arrangements.

BPM6 does not call for the separate identification of SWF assets within the external data, but allows for the voluntary disclosure of SWF assets not included in official reserves. Although assets in SWFs that are not readily available for use to meet a balance of payments need do not meet the definition of official reserve assets, such assets are an indication of the external financial wealth of an economy, and so can be provided as information additional to that on official reserve assets. Thus, if official reserves decline as the result of a transfer of assets from official reserves to an SWF, a separate item can show that this decline is not due to adverse circumstances but instead is a sign of strength in the future. This signal may be particularly important if there are significant transfers of funds from official reserves to the SWF.

BPM6 also advises on the sectoral classification of SWFs as institutional units, consistent with the principles of government finance and monetary statistics and the system of national accounts, and the functional classification of their assets, such as portfolio or direct investment, if not held as official reserve assets.


In 2008, a survey of current institutional and operational practices was prepared by the IWG Secretariat, based on information provided by the IWG members, for use by the IWG in drafting the Santiago Principles (Hammer, Kunzel, and Petrova, 2008). The survey included a section on statistical data reporting.

In the survey, respondents indicated that they produce economic and financial data on a regular basis. While some SWFs make information available to the public, others provide statistical data to only relevant national agencies. A majority of SWFs surveyed mentioned that they make their data available to compilers of macroeconomic statistics (Figure 7.1).

Although a majority of the SWFs surveyed indicated that relevant data are included in balance of payments and international investment statistics, or government finance statistics, in most cases SWF-specific data cannot be separately discerned because of consolidation with other items. This is in line with the current statistical standards, which do not provide for separate reporting of SWF assets.

Figure 7.1Statistical Data Provided by SWFs to Compiling Agencies (Percentage of Respondents)

Figure 7.2Primary Sources of Funds for SWFs (Percentage of Respondents)

The majority of responding SWFs reported they were funded from mineral royalties (principally oil), while the remainder are funded from fiscal surpluses or other sources, including official reserve assets and returns on fund investments. In a few cases, divestment proceeds and borrowing from markets also contributed to asset accumulation. The identification of all these sources of financing is important for the proper coverage of macroeconomic statistics of the reporting economy.


For policymakers and other users it is important that data on SWFs’ activities are consistently captured in the macroeconomic statistics—national accounts data; and fiscal, monetary and financial, and external statistics. Furthermore, to help support analysis of international markets, at both the international and national levels, the participation of countries with SWFs in the internationally coordinated statistical exercises, such as the CPIS and the CDIS, is also important. As recognized in the Santiago Principles, the absence of SWF data can hinder economic analysis and potentially mislead policymakers, market participants, and other commentators about a country’s economic performance.


The currency composition of the international investment position is introduced in the sixth edition of the IMF’s Balance of Payments and International Investment Position Manual (BPM6) (IMF, 2009).

For example, the April 2007 edition of the IMF’s Global Financial Stability Report included an article on “Changes in the International Investor Base and Implications for Financial Stability” (IMF, 2007).

Also well known as the “Godeaux Report.”

The results of the CPIS are available on the IMF Web site at “Portfolio Investment: CPIS Data—Database Contents,”

The data template framework integrates data on on-balance-sheet and off-balance-sheet international financial activities of countries’ authorities and supplementary information, including data on predetermined future foreign exchange flows. More information is available on the IMF Web site at “Data Template on International Reserves and Foreign Currency Liquidity,”

For instance, SWFs with explicit liabilities will need to take into account the portfolio mismatches and risks to balance sheet soundness.

The balance sheet approach presents a matrix of data by institutional sector—general government, deposit-takers, other financial corporations, and so forth—to permit the identification of balance sheet vulnerabilities. For more information on the balance sheet approach, see Mathisen and Pellechio, 2007.

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