Hot Topic: Capital Flows and the New Financial Order
Monday 19th May 2008 - 10:30am - 11:30am
Hot Topic: Capital Flows and the New Financial Order
• Cyrus Ardalan • Shaukat Aziz • Ibrahim S. Dabdoub • Robert B. Zoellick
• Barbara Stelzner
Wednesday 19 May
The recent sub-prime lending crisis has highlighted the increasingly important role of non-bank financial institutions, including, particularly the sovereign wealth funds created by a number of countries to invest their surplus export earnings. Some observers argue this trend potentially represents a fundamental shift in the global financial architecture, requiring a policy response from regulators and the financial industry. Moderator
Barbara Stelzner, Director, News and Programming, CNBC Europe, United Kingdom, opened the session by posing three interrelated questions: Are we indeed witnessing a transition to a new global financial system? Is this system sustainable? How can emerging players, such as sovereign wealth funds, be integrated into it?
To a large degree, panellists disagreed with the premises behind all three questions.
Cyrus Ardalan, Vice-Chairman, Barclays Capital, United Kingdom, pointed out that the weakening of the traditional banking sector – frequently cited as a harbinger of a new financial system – is the result of forces completely unrelated to the growing influence of sovereign wealth funds. The banks have been damaged by their exposure to sub-prime losses and the liquidity squeeze that virtually paralysed the credit markets in late 2007. The rise of sovereign wealth funds, on the other hand, is a product of the surge in oil and commodity prices, which has redistributed global income to countries, such as Persian Gulf oil producers, that are incapable of absorbing such funds in their domestic economies. It is also important to put the growth in sovereign assets in perspective, Ardalan added. Although sovereign wealth funds now control approximately US$ 3 trillion in assets, it is still a modest sum in a world in which US households alone hold US$ 45 trillion in financial assets.
Shaukat Aziz, Prime Minister of Pakistan (2004-2007), noted that sovereign wealth funds are hardly a new creation, having been active in the capital markets for a number of decades. Talk of a new financial architecture ignores the fact that the financial system is constantly evolving in response to market forces. “If you believe in liberalization, globalization and deregulation, there is no cause for concern,” he said. Indeed, by playing a key role in the speedy recapitalization of banks impaired by sub-prime losses, sovereign investors helped stabilize the credit markets, preventing a more systemic crisis. “I would say we should give a vote of thanks to all the sovereign and non-sovereign funds that stepped in and saved the global financial system,” Aziz said. “Where else could these institutions have raised billions of dollars in capital in such a short time?”
Ibrahim S. Dabdoub, Chief Executive Officer, National Bank of Kuwait, Kuwait, and Chair of the Arab Business Council, argued that sovereign wealth funds should hardly be considered competitors of banks and other traditional financial institutions – and, indeed, rely heavily on those institutions to help them manage their portfolios. Most sovereign investors also share a strong community of interest with the countries where they invest, Dabdoub added, given that they rely on consumers in those same economies to purchase oil and other exports. “Sovereign funds are basically stakeholders in the stability of the global economy,” he argued. He expressed concern that the recent focus on sovereign wealth funds reflected a more general rise in protectionist sentiment in industrialized countries. “I hope this is not part of a really stupid political agenda,” Dabdoub said.
Robert B. Zoellick, President, The World Bank Group, USA, also rejected the idea that sovereign wealth funds are part of a major financial power shift, but suggested they do have the potential to accelerate the development of capital markets in less developed countries, expanding access to credit for low-income business owners and consumers. “If you could take just 1% of sovereign assets and direct it to investment opportunities in Africa, you could put US$ 30 billion into African development,” Zoellick said. However, he did not entirely dismiss concerns about the investment policies pursued by sovereign wealth funds. “The history of government allocation of capital has not been such a good one over time,” he noted. “So people are asking some legitimate questions.”
Participants generally agreed on three key points:
• The rise of sovereign wealth funds does not represent the emergence of a radically different financial system. Rather, it is part of the natural evolution of the existing architecture
• Modern sovereign wealth funds have the same fundamental motive as private investors – the pursuit of superior returns. However, it is legitimate to monitor their activities to ensure they remain apolitical
• The recent sub-prime crisis has demonstrated that sovereign wealth funds are a stabilizing force in the global markets, precisely because they have the ability to deploy large amounts of capital quickly