Malan Rietveld

A study of how official investors should manage new forms of risk in the aftermath of the Global Financial Crisis. Key issues include the management of market, political and regulatory risk – and how the risk management function should be managed and governed in the official-sector context. The book focuses on the unique risks faced by sovereign wealth funds and other official investors, and how these risks are changing in the post-crisis financial and political landscape. Key contibutors: Donghyun Park (Asian Development Bank), Zheng Bingwen (Chinese Academy of Social Science), Dale Gray (IMF), Martin Skancke (Norwegian Ministry of Finance) and Nasser Saidi (Dubai International Financial Centre).

A updated guide to the policy questions surrounding the emergence of sovereign investors in the wake of their high-profile role in the Global Financial Crisis. The book covered four key areas: (i) the role of sovereign investors in 21st century financial markets; (ii) the regulatory approach to sovereign investment; (iii) the internal challenges of sovereign investors; and (iv) the future of sovereign investing. Key contributors: Shahmar Movsumov (State Oil Fund of Azerbaijan), Javier Santiso (OECD Development Centre), John Gieve (Bank of England), Jagdish Bhagwati (Columbia University) and Roman S. Shiyko (Russian Ministry of Finance).

A ground-breaking book that explored and defined the “sovereign wealth fund” phenomenon, indentifying best-practice on how to establish funds to handle competing demands for spending, saving and investment. Key contributors: Mohamed El-Erian (Harvard Management Company), Philipp Hildebrand (Swiss National Bank), Jennifer Johnson-Calari (World Bank Treasury), Knut Kjaer (Norges Bank Investment Management), Linah Mohohlo (Bank of Botswana and the Pula Fund), Guillermo Ortiz (Bank of Mexico) and Lawrence Summers (former US Secretary of the Treasury).

Paper provided by Stellenbosch University, Department of Economics in its series Working Papers with number 12/2013.

In the wake of the international financial crisis nominal income targeting has received renewed attention from a number of leading macroeconomists as alternative to inflation targeting. The case for nominal income targeting has been built on both positive and negative arguments. The negative case relates to perceived inadequacies of inflation targeting, including: the presumed lack of robustness of inflation targeting to aggregate supply shocks, inadequate concern with financial stability, as well as concerns with the accountability of inflation targeting central banks. The positive case for nominal income targeting is that it will better suit current macroeconomic circumstances and policy needs, without sacrificing the gains made by inflation targeting. A thorough evaluation of these arguments is presented in this paper with the conclusion that the case for nominal income targeting is weak compared with the way in which inflation targeting has been implemented internationally.

Paper presented at the Biennial Conference of the Economic Society of South Africa, University of the Free State, Bloemfontein, South Africa, 25-27 September 2013.

This paper assesses to what extent the institutional foundations of modern central banking offer valuable lessons for the design of similar arrangements for sovereign wealth funds. The agency relationships established by the (desirable) operational independence of both modern monetary authorities and sovereign wealth funds result in an emphasis on institutionalised credibility, the adoption of explicit policy targets, contingent rules and arrangements that promote accountability and transparency. Although there is currently less agreement around the appropriate objectives and mandate of sovereign wealth funds than there is for central banks, important lessons around institutional solutions and rules-based policy frameworks can learned from the post-war (mis)adventures in monetary policy. The arguments presented in this paper suggest a broad institutional framework on which future research can build by investigating in greater detail the technical aspects of sovereign wealth funds’ operational independence, mandate clarification, policy rules and targets, and accountability and transparency mechanisms.

NRGI-CCSI joint research project on Natural Resource Funds (formerly Revenue Watch and Vale Columbia Center)

Key messages
• A clear division of responsibilities—for example, between the legislature, president or prime minister, fund manager, operational manager and external managers—can help funds meet their objectives and prevent corruption.
• Putting day-to-day management in the hands of a capable and politically independent body with strong internal controls can help meet investment targets and prevent mismanagement. The choice of where to house this day-to-day operational manager—whether as a unit within the central bank, a unit in the ministry of finance, as a separate entity or at a custodial
institution—is context-specific.
• Formal advisory bodies, drawn from the academic and policymaking communities, have made significant contributions to improving fund governance at the national level in countries like Chile, Ghana, Norway and Timor-Leste and at the subnational level in the United States.
• Codes of conduct and monitoring systems to prevent misconduct by the fund’s executive, staff and external managers are useful tools for preventing patronage, nepotism and corruption. In order to be effective, such mechanisms must be vigorously enforced.
• Good fund governance requires that appropriate organization, staffing policies and internal controls be complemented by transparency, independent oversight and the political will to follow the rules.

Paper prepared for the Development Dialogue, Institute of Social Studies, The Hague, 4-5 October 2012

Sovereign wealth funds have gained increasing attention in recent years from academics and policymakers as a tool through which to promote the prudent management of public revenues from exhaustible natural resources. This paper analyses the potential role of sovereign wealth funds as an important part of a broader institutional framework for the management of public revenues from natural resources in underdeveloped, yet resource-abundant, African countries. The paper provides a typology of sovereign wealth funds based on funding sources and investment models, and responds to criticism of the model. It is argued that sovereign wealth funds should be viewed as an institutional reform that can help address causes of the resource curse, as well as ethical questions around inter-generational equity in the allocation of the benefits arising from exhaustible resources.

NRGI-CCSI joint project on Natural Resource Funds (formerly Revenue Watch and Vale Columbia Center)

Natural resource funds—a subset of sovereign wealth funds—held approximately $4 trillion in assets as of July 2014. This money, which belongs to the public and comes from extraction of non-renewable resources, should serve the public interest. Governments can use these funds to cover budget deficits when resource revenues decline; to save for future generations; to earmark for national development projects; or to help mitigate Dutch disease by investing abroad. They
can also be used to reduce spending volatility, in turn improving the quality of public spending, promoting growth and reducing poverty, and protect oil, gas and mineral revenues from corruption. Citizens in Chile, Norway, some Persian Gulf countries and some U.S. states have
experienced these benefits. Unfortunately, poor natural resource fund governance has often undermined public financial management systems and funds have been used as sources of patronage and nepotism, with
dramatic results. Ostensibly designed to steady macroeconomic management or set aside savings for the future, many funds have lacked clear goals or rules, and thus have complicated public finance without making it more effective. And in places like Angola and Russia, they have been used to avoid public scrutiny, facilitating billions of dollars in wasteful spending.

NRGI-CCSI joint research project on Natural Resource Funds (formerly Revenue Watch and Vale Columbia Center)

Key messages:
- Clear investment rules can enhance natural resource fund investment performance, limit excessive risk-taking and help prevent mismanagement of public resources.
- A fund’s policy objective (e.g., saving resource revenues for the benefit of future generations; providing a source of short-term financing to stabilize volatile budgets) should inform its target financial return (e.g., 3-5 percent per year), which is an implicit statement of the fund’s risk appetite.
- Most natural resource funds are governed by a set of detailed investment rules that constrain investment decisions. These generally include a target asset class allocation (percentage of investments in cash, fixed income, equities and alternative assets), restrictions on
domestic investment, restrictions on risky asset purchases, and restrictions on the use of natural resource funds as collateral to guarantee public debt.
- In practice, there is significant scope for tailoring a natural resource fund’s rules-based investment strategy to a country or region’s specific needs, expertise and context. However, a large degree of discretion over investments is likely to lead to patronage or mismanagement.