Sovereign wealth funds turning to debt, equity markets

LONDON • Sovereign wealth funds (SWFs) are seeking to raise funding via debt and equity markets as the coronavirus crisis and low commodity prices stretch state finances.

Many SWFs have traditionally relied on cash funnelled from their governments to support the bulk of their finances, but recent moves could indicate a shift. For example, Investment Corporation of Dubai this month sold US$600 million (S$819 million) in bonds, while Turkey's sovereign investment fund was also planning a bond issue, but postponed the move due to market volatility.

Meanwhile, Indonesia is preparing to establish an SWF with government capital and shares in state-owned companies, complemented by private investment.

Djibouti plans to expand its newly launched fund to US$1.5 billion in assets under management over the next decade. While it has not said how it plans to do so, analysts anticipate participation from public and private investors.

Although some funds did raise money via equity and debt markets before the pandemic, more are expected to turn to those options as Covid-19 exacts a heavy cost on governments while subdued economic activity weighs on returns of existing investments.

"It is definitely an increasing trend among sovereign development funds, perhaps in order to alleviate the debt at country level," noted Mr Diego Lopez, Global SWF's managing director, referring to those funds that had a mandate to help foster growth in their local economies.

Meanwhile, governments in several countries have drawn down savings from their funds in the months after the pandemic.

"Relatively low prices for commodities and large fiscal responses to the pandemic entail little to no government budget surplus to be contributed to the assets under management of sovereign wealth funds," said Utrecht University School of Economics' associate professor of finance Stefano Lugo.

"In some countries, the government may even decide to withdraw from SWFs to pay for its fiscal stimulus plans. Using debt capital can partially counterbalance these trends."


Raising money via equity markets was not uncommon before the pandemic, with the Russian Direct Investment Fund and India's National Investment and Infrastructure Fund among those turning to private investors to support investments at home.

Singapore's Temasek, Mubadala Investment Company of Abu Dhabi, Malaysia's Khazanah Nasional, Samruk Kazyna of Kazakhstan and Mumtalakat of Bahrain were among those funds that raised debt pre-pandemic, according to data from Global SWF.

The latest estimates for the amount of debt accumulated by SWFs are unclear.

Research from Mr Lugo and his colleague Fabio Bertoni from 2016 found that they had outstanding debt of around US$180 billion, a figure likely to have risen since then, said Mr Lugo.

But issuing and buying debt is not without risk.

"The main comparative advantage of SWFs as investors is their ability to keep a very long-term view," said Mr Lugo.

"Debt-servicing obligations may partially undermine this advantage. I see this as the main risk of using debt capital for most SWFs."

Debt-raising can also create uncertainty about how likely it is that governments will guarantee the debt, something that can vary among countries. For instance, Fitch Ratings, which revised its rating outlook on Turkey Wealth Fund to negative last month, assesses the government as having a "strong" link to the fund and having an "incentive to provide extraordinary support" if needed.


A version of this article appeared in the print edition of The Straits Times on October 31, 2020, with the headline 'Sovereign wealth funds turning to debt, equity markets'. Print Edition | Subscribe