Sovereign Funds….. Characteristics, Importance and Objectives

Sovereign funds around the world are growing significantly to diversify the investment portfolio on the one hand and to distribute risks on the other. Investment funds appeared in the light of achieving financial savings in high-income countries, and then spread to several countries, so their tasks multiplied to include finding better financing opportunities in terms of expected risks and the cost of using financing.

In its current form, funds are one of the most important tools that promotes the use of periods of prosperity to cover recessions in an effort to safeguard the rights of future generations through the achievement of sustainable development goals, thus placing them in front of multiple goals and justifications for the establishment of a state economy based on the status and structure of these funds.

Despite the diversity of objectives, motives, and justifications for the establishment, what distinguishes investing in sovereign funds is that they are non-stereotypical financing tools that work to reduce risks as much as possible, in addition to exploiting untapped assets in different economies.

In view of the diverse importance of the nature of the work and justifications for the establishment of sovereign funds globally, regionally and locally, the Strategic Forum for Public Policies and Development Studies issues this research paper with the aim of enhancing societal awareness towards the concept, nature of work, goals and motives of governments in establishing these funds, through the following axes:

First: The significance of establishing sovereign funds:

Concept Justifications and motives

Second: The importance and characteristics of sovereign funds:

Objectives and properties

Third: Features of Sovereign Funds in Egypt and the World:

The most important Arab funds The most important global funds Egypt Sovereign Fund

First: The significance of establishing sovereign funds

-Concept

Sovereign funds refer to innovative financing tools with a special purpose that are owned and created by the governments of countries in order to achieve macroeconomic goals, by keeping these assets to employ them for the purpose of achieving financial surpluses that contribute to achieving the financial balance of public budgets or to invest the financial surpluses themselves generated from the impact of oil revenues. And energy in general, and the capital of these funds may include local or foreign financial assets.

-Justifications and motives

The justifications and motives for establishing these funds vary according to the nature of each economy in terms of the existing economic system, its degree of liberalization and its connection to the world, and the extent of this economy’s ability to respond and withstand local and external shocks, and of course to the changes of economic cycles on the one hand, and the disparity and difference in the structure of economies around the world between the advanced industrial The developing and emerging ones. The most important justifications and motives for establishing sovereign funds can be addressed as follows:

-Financial Surpluses

Economies around the world vary between rentier countries in nature and their budgets depend on the revenues achieved from the sale of raw materials or energy, especially oil and gas. Thanks to global price hikes, these economies are achieving large financial surpluses, which puts them in front of the inevitability of investing these funds in non-stereotypical investment forms and formats, which prompts them to establish investment funds of a special nature to invest these funds internally or externally or to enter into multinational and transient investment partnerships to the limits.

-Funding gaps

There are rentier economies that achieve financial surpluses aimed at investing them, while there are other economies around the world, especially in the Middle East, North Africa, Southeast Asia and South America that need to cover their development goals through financing, which qualifies them to receive some international investments through the establishment of sovereign funds that have a similar nature. A private company that works to exploit its untapped resources in a non-stereotypical manner by entering into international partnerships with the aim of reaching low-cost financing formulas and tools with calculated and hedged risks.

– structural imbalances

Developing countries are characterized by the presence of large structural imbalances that would cause a widening of the financing gap as well as an increase in the trade deficit, which prompts them successively to devalue the local currency through the formulation of harsh corrective economic programs aimed at supporting the economic situation that suffers from disruption from time to time over a period of time ranging from Between 5 to 10 years, which prompts governments to formulate low-cost financing frameworks, such as the establishment of sovereign funds that enable them to work outside the government’s traditional financial framework, thus contributing to avoiding resorting to successive international borrowing or relying on hot money, which has dire consequences on the financial and monetary levels.

– International investment movement disorder

The current global conditions have resulted in severe turmoil in developed markets. This turmoil includes both sides of economic, financial and monetary policies, to make investing in sovereign funds a safe path towards avoiding the effects of inflation on the one hand and working to sustain development through green investment on the other hand. The current geopolitical tensions have promoted the diversification of traditional and non-traditional international investments to prevent supply chain disruptions in terms of traditional and energy investments on the one hand, and non-traditional green investments on the other

.Second: The importance and characteristics of sovereign funds:

The economic importance of sovereign funds is to provide innovative non-cost-generating financial instruments or burdens that enhance Governments’ efficient asset management, which can be addressed in a manner that achieves the following objectives: Objectives :-Financing the state’s development programs without contributing to increasing the financial burdens of the public budget.-Reducing pressure on monetary policies, especially with regard to attracting foreign capital as long-term investments instead of hot money, which has a severe negative impact once it leaves the markets.-Supporting fiscal and monetary policies to adapt to external and internal shocks, especially with regard to imported inflation and the flexibility of productive agencies.-Finding development alternatives that are compatible with the green transition to face climate change, such as investing in clean energy stations and green hydrogen.

– Characteristics and nature of sovereign funds’ operation:

Investment funds (sovereign) operate within a framework of a special nature in accordance with the objective and purpose of their establishment. These funds are designed to achieve fiscal surpluses for the Government, thereby enhancing the efficiency of the financial management of the Government sector, including those aimed at investing in the Government’s financial surpluses at certain periods (vogue), with a view to exploiting them in future periods with lower surpluses (stagnation). The nature of these funds’ work may be presented in accordance with the objective of their establishment by the President or source of funding as shown in the following figure:

Third: Features of Sovereign Funds in Egypt and the World:

The emergence of investment funds dates back to the middle of the last century with the growth of Keynesian economic thought (relative to John Maynard Keynes), the British Minister of Finance during the Great Depression, who contributed his theories to the need for the government to be present in the economy in order to correct its paths, reduce chances of recession and prolong prosperity, and investment funds diversified according to The objectives, justifications and characteristics of its establishment. It is important to address the most important sovereign funds at the international, regional and local levels as follows:

1- Major global funds The volume of investment in sovereign funds globally amounted to about $10.5 trillion in 2021, according to the Global Sovereign Wealth Fund (SWF) report for 2022, compared to about $9.9 trillion in 2020, with growth rates expected to reach $17.7 trillion by 2030. , with a total number of 172 funds distributed in 87 countries, until 2022, and the United States of America has the largest number, with a total of about 23 funds, then the United Arab Emirates with about 10 sovereign funds, and China with 6 sovereign funds, and Egypt has one sovereign fund with an investment value exceeding $11 billion.

Sovereign funds around the world

The largest capital is ever concentrated in the five major international currency countries, including China, the United States and European countries, which may be due mainly to two main factors: The first is the reliance of some of these States on inflationary financing patterns. Because their currencies are strong, they export their inflation to the entire world. The second factor is the trade surplus generated by the major industrialized States, which prompts the importance of investing those surpluses with extraordinary instruments in order to minimize risks as much as possible.

2. The most important Arab funds: The Abu Dhabi Investment Authority came first among Arab sovereign funds with an investment volume of about $829 billion in 2021, followed by the Kuwait General Investment Authority with an investment volume of about $693 billion in 2021, and the Saudi Public Investment Fund with an investment volume of about $480 billion. Egypt’s sovereign fund was 14th with an investment volume of about $ 11.8 billion.

The sovereign funds of the Arab countries, especially the oil-exporting countries, depend mainly on the establishment of these funds to hedge against the consequences of low oil prices in the short term and shift towards diversifying their economies in the medium term to get out of the burden of the rentier economy in the long term. The following figure monitors the main sectors targeted by the investments of these funds as a result of the consequences of coronavirus and geopolitical changes in the world as follows:

3- Egypt’s Sovereign Fund:

General framework

The Egyptian Sovereign Fund was established by Law No. 177 of 2018 and its Statute was promulgated in February 2019 by Prime Minister’s Decree No. 555 of 2019. The licensed capital of the Fund is 200 billion pounds and is expected to reach approximately 1 trillion pounds by 2024.

It should be noted that the establishment of the Egypt Sovereign Fund was intended to provide wealth for future generations by maximizing the return of untapped assets of the State by attracting investors from home and abroad, as well as investing in important sectors such as localizing and deepening industry and digital transformation and creating leading entities in various fields.

The Sovereign Fund of Egypt includes a number of sub-funds that meet the development of five productive sectors, which can be dealt with as follows:

1-Egypt Sub-Fund for Tourism, Real Estate Investment and Antiquities

2-Development Egypt Sub-Fund for Utilities and Infrastructure.

3-Egypt Sub-Fund for Health Services and Pharmaceutical Industries.

4-Egypt Sub-Fund for Financial Services and Digital Transformation.

5-Misr Sub-fund for asset restructuring management with multiple issues.

Investment  volume in 2021

With regard to the fund’s performance in 2021, it worked on implementing 10 projects with investments amounting to about 25.5 billion pounds, of which the fund’s share amounted to about 3.9 billion pounds, the share of the local private sector about 6.1 billion pounds, and the share of the foreign private sector about 15.4 billion pounds. The importance of the Egyptian Sovereign Fund also lies in the increase in its investment accelerator to about 5.4 times, meaning that each increase of one billion pounds as new investments in the fund contributes to attracting investments to the Egyptian economy at a value of about 5.4 billion pounds.

The Fund is expected to continue to achieve further successes in view of the multiplicity of projects being studied over the next five years, as it has 40 projects under consideration in seven different sectors with a total investment of about 140 billion pounds, and the Fund’s target share of these projects is about 31.8 billion pounds.

Egypt’s sovereign fund also supports the Egyptian State’s plan to move towards a green economy through its cooperation with the Ministry of Electricity and Renewable Energy, the General Authority of the Suez Canal and some specialized international companies, to implement projects for the production of green hydrogen in total investments exceeding $13 billion, with the participation of several official entities, most notably the Suez Canal Economic Zone.