Sovereign wealth funds could see their assets decline or growth slow as falling commodity prices put increasing pressure on governments to use those assets to fill budget gaps, said a report released Thursday by Moody’s Investors Service.
“Seventy-three percent of sovereign wealth fund assets globally are funded from oil and gas export revenues,” said Elena Duggar, senior vice president, credit policy at Moody’s and co-author of the report, in a new release. “As oil prices remain lower for longer, fiscal and current account balances of oil exporters will be under increasing pressure. … As a result, we expect increasing use of sovereign wealth fund assets to finance budget deficits and support domestic economies.”
Reeling from falling oil prices and international sanctions, Russia withdrew $20 billion total from its Moscow-based funds — the $66 billion Reserve Fund and the $74 billion National Welfare Fund — in 2014. An additional $130 billion was drawn from its foreign-exchange reserves, according to Moody’s.
The ratings agency also cites reports that the $762 billion Saudi Arabian Monetary Agency has been drawing down it funds over the past six months. And while drawdown pressure is forcing some sovereign wealth funds to shift to more liquid assets, in places like Norway, Singapore and Hong Kong, fund assets exceed the amount required for fiscal buffers, giving them room to pursue higher-risk, higher-return asset classes such as emerging markets, real estate, infrastructure, private equity, and domestic and regional investments, the report said. These investments look especially attractive in the current low-interest-rate environment.
In 2013, Norway’s $865 billion Government Pension Fund Global, Oslo, announced plans to increase its real estate allocation to nearly 5% from 0.9% of total fund assets. The $85 billion Korea Investment Corp., Seoul, also expects to double its alternatives allocation over the next 10 years.
To avoid drawing from their sovereign wealth funds, other actions governments are taking to address their commodity revenue shortfalls are tapping into conventional foreign-exchange reserves, issuing debt, reducing expenditures and raising new revenue not tied to commodities, Moody’s said.