Charity Begins at Home:The Role of SWFs as Stabilizers and Long-term Investors
Ibrahim Elbadawi, Raimundo Soto, Hoda Youssef and Chahir Zaki
OIL, MIDDLE EAST, AND THE GLOBAL ECONOMY
RONALD TUTOR CAMPUS CENTER (TCC), APRIL 1-2, 2016
Objectives
Assess the role of Sovereign Wealth Funds (SWFs) in thedomestic economy as:
1. A macro stabilizing instrument, and
2. A financier of long-term investment, most notably ininfrastructure and housing.
Objectives
1. Macroeconomic Stabilization:
Analysing the effectiveness of SWFs as a shock absorber during episodesof oil and other commodity price shocks, along three performanceindicators:
Shoring up the credibility of exchange rate regimes: mainly currency pegs
Promoting counter-cyclicality of fiscalpolicy
Stabilizing stock markets ????: data permitting
Objectives
2. Financing long-term investment
Analyse the investment patterns of SWFs of Arab and other countries to:
Understand the determinants of SWFs investment decisions in the domestic economy and abroad
Undertake a normative analysis as to whether home countries could have done better by investing in domestic economy to achieve long-term developmental goals
Understand the role of other factors, including the institutional environment and the productivity of non-resource sectors in explaining the rationale for “investing in investing” (Collier, 2013)
The Context
The proposed analytical framework will distinguish between two main typesof resource-rich countries in the region:
1-“Resource-rich but capital-poor” countries: benefit from large resourcerevenue but still face large infrastructure and housing deficits (such asAlgeria).
• The case for the optimality of domestic investment in their domesticeconomies: potentially higher returns
• However, success requires “investing in investing”:- Public Investment Management Index (PIMI)- Ease of Doing Business Index
2-“Resource-rich and capital rich” countries: have relatively closed theirinfrastructure gaps and have piled up savings in SWFs and invested mainlyabroad (mainly GCC).
• The case for the optimality of investment in the “neighbourhood”- Higher returns- Strategic geo-political considerations
• Again, success requires “investing in investing” by neighbouring countrieshoping to attract investment by SWFs from the GCC
Do SWF shore up pegs?
• Compute random-effects panel-data probit model
𝑃𝑟𝑜𝑏(𝑝𝑒𝑔 = 1)𝑖𝑡 = 𝑓 𝛼𝑖 , 𝑅𝐻𝑆𝑖𝑡 + 𝜀𝑖𝑡
• RHS includes
• Macro economic variables (economic size; trade structure, TOT shocks)
• Institutional variables (political checks and balances, financial openness)
• Resources rents, oil and mineral exporting countries (+10% of GDP)
• Sovereign wealth funds dummies and interactions
Sovereign Wealth Funds and Exchange Regimes
Do SWF shore up pegs?
• Data• Country de facto pegs: Klein and Shambaugh (2014) defined as
“exchange rates do not adjust by more than 2% at the end of each month and over the course of one year”. Data for around 125 countries.
• Macroeconomic variables: standard IMF/WB definitions for economic size, trade (% GDP), terms of trade shocks (HP filtered), resource rents.
• Trade concentration index: own methodology
• Institutional variables: checks and balances (Henisz, WB), democracy (Polity IV), capital account openness (Chinn-Ito)
• Sovereign wealth funds dummy (from SWF Institute) and interactions
Sovereign Wealth Funds and Exchange Regimes
Do SWF shore up pegs?
• Results • Standard results are in line with received knowledge:
• Larger economies tend to peg less their currencies
• Countries where trade is more important tend to peg less their currencies
• Pegging is being less used worldwide (negative trend)
• New results (robust to controlling for resource rents and SWF)
• We found no effect of terms of trade shocks (price effects, not quantity)
• Countries where trade is more concentrated tend to peg more their currencies
• Financially open economies tend to peg more their currencies
• Negative (less significant) effects of higher political controls or democracy on probability of peg
Sovereign Wealth Funds and Exchange Regimes
Do SWF shore up pegs?• Results
• Higher oil rents lead to higher propensity to peg, particularly GCC economies (Resource-rich and capital rich)
• Mineral rents do not lead to higher propensity to peg
• Presence of SWF • Lowers the probability of a peg in non-resource abundant economies• Raises the probability of a peg in oil exporters and much more in GCC countries
• SWF inception (as opposed to presence) is insignificant (as expected)
• Missing from analysis• Strength of flex exchange rate lobby: share of agriculture+ manufacturing/GDP• Marginal economic effects as opposed to statistical significance• Presence of SWF vs use of SWF (SWF restrictions/nature)• Identify channels of transmission more precisely• Extend time frame backwards (mineral countries with SWF)
Sovereign Wealth Funds and Exchange Regimes
Econometric resultsProbit models
Dependent variable: dummy for having pegged exchange rate
(as defined by Klein and Shambaugh)
1 2 3 4 5 6 7
Size (GDP real) -0.220** -0.234** -0.216** -0.257** -0.244** -0.215** -0.246** Trade (% GDP) -0.206 -0.192 -0.260 -0.321* -0.339* -0.277 -0.316* Trade concentration 0.427*** 0.497*** 0.461*** 0.382*** 0.368*** 0.396*** 0.348** Terms of trade shocks -0.071 -0.064 -0.046 -0.109 -0.126 -0.135 -0.122 Cap. Account Openness 0.746*** 0.650*** 0.662*** 0.661*** 0.683*** 0.674*** Checks and balances -0.365 -0.311 -0.327 -0.329 -0.325 Oil exporter (+10% of GDP) 0.645*** 0.664*** 0.444*** 0.571** Mining exporter (same) -0.453 -0.556** -0.330 Sovereign wealth fund 0.709** 0.312 SWF*oil exporter Start of SWF Start of SWF*oil exporter N 124 124 124 124 124 124 124 Obs 2,272 2,267 2,152 2,152 2,152 2,152 2,152
Time dummies included.
Sovereign Wealth Funds and Exchange Regimes
Do SWF reduce fiscal procyclicality?
• Methodology• Isolate cyclical components using HP filter + Ravn-Uhlig optimal
smoothing parameter.
• Use government consumption instead of government expenses
• Lack of data
• Correlation between consumption and expenses cycles is 0.94
• Use government consumption levels (in logs) not as share of GDP (endog.)
• Use resource rents per capita (in logs) not as share of GDP (endogenous)
Sovereign Wealth Funds and Fiscal Procyclicality
Do SWF reduce fiscal procyclicality?
• Stage 1: Compute Random-Coefficient panel data model
𝐶𝑦𝑐. 𝐺𝑜𝑣. 𝐸𝑥𝑝𝑖𝑡 = 𝛼𝑖 + 𝛽𝑖 𝐶𝑦𝑐. 𝑅𝑒𝑛𝑡𝑠. 𝐶𝑎𝑝𝑖𝑡𝑎𝑖𝑡 + 𝜀𝑖𝑡
• cyclical component of government expenditures (HP filtered, real)
• cyclical component of resource rents per capita (HP filtered, real)
• Stage 2: correlate estimated 𝛽𝑖 with • Macroeconomic variables (rents per capita, foreign reserves)
• Institutional variables (openness, exchange regimes, political)
• Sovereign wealth funds (dummy and interactions)
• Stage 3: checks for “graduation effects”
Sovereign Wealth Funds and Fiscal Procyclicality
Do SWF reduce fiscal procyclicality?
• Results Stage 1:• Countries with higher rents per capita tend to have higher fiscal
procyclicality, especially oil exporters (figures)
• Oil countries seem to drive the result, mineral countries not as procyclical
• Results Stage 2:• Fiscal Cyclicality is reduced by:
• Higher levels of checks and balances (political constraints)
• Floating exchange rates
• Less open capital accounts
• Sovereign Wealth Funds
• Are associated with higher fiscal procyclicality (probably reflects reverse causality)
• Are ineffective in reducing procyclicality in oil-exporters, but are effective in mineral exporters
Sovereign Wealth Funds and Fiscal Procyclicality
Sovereign Wealth Funds and Fiscal Procyclicality
Sample 1990-2013
Do SWF reduce fiscal procyclicality?Correlation between Cycles in Goverment Consumption
and Cyles in Resources per capita, 1990-2013
Sovereign Wealth Funds and Fiscal Procyclicality
Do SWF reduce fiscal procyclicality?
• Methodology
• Results Stage 3:• Evidence of incipient graduation for some Arab oil-rich economies,
i.e., learning from experience and ability of redraft fiscal layout
• Also some evidence of countries relapse
• Formal tests are due.
• Missing from analysis• Marginal economic effects as opposed to statistical significance
• Study the impact of the absence of automatic stabilizers (VAT, income tax) that is typical of resource rich economies
• Fiscal rules and other institutional stabilizers, including exchange regime
Sovereign Wealth Funds and Fiscal Procyclicality
Sovereign Wealth Funds and Fiscal Procyclicality
Graduation Effects in Fiscal Procyclicality
Do SWF support long-term investment?
• Methodology• Estimate models of the likelihood of SWF allocating funds to
• Investing abroad (cross border)• Investing in investing
• As well as the value of transactions• Control variables:
• Size of home economy• Size of recipient economy• Economic sectors• Polity indicators in both the home and recipient economies
• Missing from analysis• Measure of infrastructure deficit • Proxy for investment rate of return: economic governance indicators (World
Bank’s Doing Business; Control of Corruption; Gov Effectiveness ..)• Strategic considerations: whether or not the recipient country is a neighbor or
within the region of the country owning the SWF
Sovereign Wealth Funds and Financing Long-term Investment
Econometric Results
Sovereign Wealth Funds and Financing Long-term Investment
Econometric Results
Sovereign Wealth Funds and Financing Long-term Investment
Econometric Results
Sovereign Wealth Funds and Financing Long-term Investment
The road ahead
• Complete building of the data base:
• Indicators of Governance of SWFs
• Indicators of economic rates of returns
• SWF’s interventions in stock markets
• Estimate more robust regressions
• Address the missing aspects identified above
• Address potential endogeniety issues and other diagnostics
• Robustness checks
• Data permitting, assess the role of SWFs as stabilizers of
stock markets
Conclusions
Export concentration index
• Database of annual exports (value) from country “i” to country “j” of goods, classified at 4-digit ISIC level. (Hidalgo et al, 2013)
• 119 countries, 1962-2013, 112+ million observations
• Number of countries changes (split and merge).
• Use Herfindhal index on 26 groups of goods to measure concentration in value (US$), year by year, by country.
• Herfindhal Index is between 0 and 1, higher is more concentrated.
Sovereign Wealth Funds and Exchange Regimes (appendix)