Slow Progress on SWF Governance Standards

Only nine of 31 sovereign funds fully complied with the governance and disclosure standards of the Santiago Principles, according to GeoEconomica.

1geoeconomica2014 (Source: GeoEconomica)Governance and transparency standards at some of the world’s largest sovereign wealth funds (SWFs) are still falling below agreed levels, according to a study.

Geneva-based political risk consultancy GeoEconomica found that only nine of 31 SWFs surveyed had complied with a “good governance and financial disclosure standards” agreement laid out in 2008, known as the Santiago Principles. This is up only slightly from the 2013 study, which found six funds in compliance with the principles. Funds run by Gulf countries were particularly criticised in the latest report.

Compliant funds included Australia’s Future Fund, the New Zealand Superannuation Fund, Norway’s Government Pension Fund Global, and the Alaska Permanent Fund, which were all rated A or A-, along with SWFs from Chile, East Timor, and Trinidad & Tobago. The SWFs in the study represented total assets of about $4 trillion.

Another nine sovereign funds—including the Korea Investment Corporation and Singapore’s Temasek Holdings—were considered broadly compliant.

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However, four of the five largest funds in the world—the China Investment Corporation, the Abu Dhabi Investment Authority, the Kuwait Investment Authority, and Singapore’s GIC—were identified as only partially compliant.

“Partially compliant funds do not disclose robust financial information, such as an audited income statement and balance sheet, conclusive information about funding, and withdrawal arrangements, rates of returns, or performance benchmarks,” the report said.

According to GeoEconomica, funds in the Middle East were especially opaque and fell significantly behind their peers in public disclosure policies. This is cause for concern, the firm argued, as they represent a sizeable chunk of the world’s sovereign funds with combined assets under management of about $1.3 trillion.

“Arab SWFs have demonstrated neither their managements’ operational independence nor their economic and financial orientation, and therefore have not contributed to building confidence in the SWF industry in line with principles’ aspiration,” the report said.

Furthermore, the consultancy named the $304 billion Qatar Investment Authority as the only fund that was non-compliant with the Santiago Principles and said it “has yet to take any meaningful steps to meet some of the principles’ basic disclosure standards.”

QIA ranked second to last in 2013’s rankings with a 31% overall compliance ratio.

The report also highlighted most sovereign wealth funds have trouble coordinating between fund management and government “driven by fear that disclosure would compromise their overall reputation and compliance with the principles.”

Home > News > Newsmakers > Hermes: Why Emerging Markets Will Avoid Another Crisis

Newsmakers October 29, 2014

Hermes: Why Emerging Markets Will Avoid Another Crisis

Chief Economist Neil Williams argues emerging markets are better positioned to handle interest rate rises in the US.

Emerging markets will not be plunged en masse into another crisis when the US Federal Reserve begins to raise interest rates next year, according to Hermes’ Chief Economist Neil Williams.

The Federal Open Markets Committee (FOMC) is expected to confirm the end of its quantitative easing (QE) program at a press conference later today, and market expectations have shifted to the first increase in the core interest rate and the wider effects this could have on the dollar, government bond prices, and global markets.

“I would not fall off my chair if the US picked up the QE baton again later this year.”—Neil Williams, chief economist, HermesWilliams said developing economies were far better insulated from adverse conditions than in previous crisis periods after taking time to “get their own houses in order” while western economies were still reeling from the nadir of the banking crisis. Emerging countries have reduced their dollar-priced debt significantly and have sufficient resources to even introduce their own versions of QE if necessary, he said.

“We shouldn’t fear a full-blown emerging market crisis,” Williams said. “There aren’t many major sovereigns with currency pegs fixed to the dollar, so countries can allow their currencies to release the pressure.

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“Any blow-out is likely to be in local debt, and those countries can print money.”

Hermes—the fund manager owned by the BT Pension Scheme—predicts that the US will raise its core interest rate from its record low of 0.25% to 0.75% at the end of 2015, although Williams emphasised the movements would be “baby steps”.

His predictions have the Bank of England’s base rate at 1% at the end of 2015, while the European Central Bank (ECB) could reduce its core rate even lower to 0.05%, from 0.25% currently.

The ECB is likely to introduce “full-blown QE” next year, Williams said, in an attempt to stimulate the eurozone’s floundering economy. President Mario Draghi has already hinted that he would be prepared to buy up some private sector fixed income assets, but Williams said the ECB would likely begin to buy government bonds next year if yields rose.

The economist also claimed the Federal Reserve could return to QE in the coming months if it feels more monetary stimulus is needed. Pointing to five-inflation expectations of 2%, the same level as when QE was introduced six years ago, Williams argued that if the FOMC had had access to this data when it brought in QE, it would have pumped even more money into the economy.

“I would not fall off my chair if the US picked up the QE baton again later this year,” he said.

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