Sovereign wealth funds’ expanded assets support creditworthiness
NEW YORK, Nov 12: The rapid growth in the number and size of sovereign wealth funds over the last decade provides important support for sovereign creditworthiness in the current low commodity and oil price environment, says Moody’s Investors Service.
The number of sovereign wealth funds in countries that Moody’s rates has more than doubled over the past 15 years. As of year-end 2014, the 26 globally invested sovereign wealth funds had $4.5 trillion of assets under management, about twice the size of hedge funds and nearly half global foreign exchange reserves. As sovereign wealth funds are largely unleveraged, their assets provide a sizeable buffer against commodity shocks.
As a result of their sizeable reserves, sovereign wealth funds are helping to support domestic fiscal credit profiles, acting as a buffer to the commodity price shocks and improving external stability and debt sustainability, according to the report “Sovereign Wealth Funds: Sizeable Assets Provide Important Fiscal Buffers Against Lower Oil Revenues.”
“Seventy-three percent of sovereign wealth fund assets globally are funded from oil and gas export revenues. As oil prices remain lower for longer, fiscal and current account balances of oil exporters will be under increasing pressure,” says Elena Duggar, a Moody’s Senior Vice President. “As a result, we expect increasing use of sovereign wealth fund assets to finance budget deficits and support domestic economies.”
In turn, the current low oil prices are prompting some sovereign wealth funds to shift to more liquid assets which can be used to fund fiscal deficits. Nevertheless, not all countries are drawing down on their sovereign wealth funds, notes Moody’s. Governments are using a variety of tools to address the commodity revenue shortfalls, including using their conventional foreign exchange reserves, issuing debt, reducing government deposits in the domestic banking systems, and policy reform designed to reduce expenditures.