With oil prices having quadrupled in the past five years, oil-exporting countries are awash with hard currency, much of which is being channeled into government-run investment funds. VOA's Barry Wood reports that the funds are controversial because of a lack of transparency and fear that their investments might be used for political purposes.
Abu Dhabi's investment fund this week injected $7.5 billion into America's biggest financial institution, Citigroup. The transaction gives the Abu Dhabi Investment Authority (ADIA) a nearly five percent stake in the New York-based bank. Ted Truman, a former U.S. Treasury official now a researcher at Washington's Peterson Institute, recently completed a study of sovereign wealth funds. He says Abu Dhabi's investment in Citigroup is not a surprise.
"First of all, Citi needs the capital," said Ted Truman. "That's the most important thing. Citi needs the capital and Abu Dhabi was a natural because it has probably the largest sovereign wealth fund currently. We don't know how large it is, but let's say it is $700 billion.
Citigroup has gotten into trouble because of bad investments in sub-prime U.S. home mortgages. Its stock price has been at a five-year low.
The Abu Dhabi investment fund was set up back in 1976 and Truman says it is more transparent than most of the two-dozen sovereign funds he studied. Most funds reveal little of their financial data and some decline to specify how many shares they own in particular companies.
Twenty eight nations, about half of which are oil exporters, have sovereign wealth funds with combined assets of over $2 trillion. Experts predict that total could triple over the next five years.
China's sovereign fund has assets worth about $200 billion. Earlier this year that fund invested $3 billion in New York's Blackstone Group, one of the world's largest private-equity investors. Truman says sovereign funds seem to prefer financial institutions.
"Sovereign wealth funds over the past several months or this year have invested in a wide number of financial institutions, whether it is Blackstone or Hong Kong Shanghai Bank, or banks and other institutions," he said.
Altogether, countries hold foreign exchange reserves worth about $5 trillion. Some of that money is invested in U.S. Treasury debt-bearing interest of around four percent annually. Typically, investors in financial institutions receive about double that return.
Christopher Cox, who heads the Securities and Exchange Commission, a principal regulator of U.S. stock markets, says he is troubled that sovereign funds are controlled by governments. These entities, he says, are likely to act in the interests of those governments. Warren Buffet, the legendary U.S. investor and philanthropist, says sovereign funds will continue to grow in power as long as the United States persists in sending more money abroad than it takes in.
The U.S. payments deficit is the world's largest and exceeds five percent of U.S. economic output. Buffett says as long as long as America has a trade deficit, a little part of the country has to be given away each year.