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State funds poised to dwarf economies

Thanks to resource boom, cash pool will surpass U.S. GDP by 2015 at current growth rates

Reuters

LONDON -- Fuelled by resource income, state sovereign wealth funds from China to Africa are reshaping the global economy and at their current growth rate will surpass current U.S. economic output by 2015, a report said yesterday.

By 2016, analyst group Global Insight said the funds, which grew 24 per cent a year in the past three years, would outstrip the current output of the European Union - which has become the world's largest economy due to the recent decline in the value of the dollar.

China, Russia and Kuwait were the owners of the largest funds, the report said - but with others including African oil-rich countries once more associated with instability and conflict following rapidly behind.

Their growth may effectively reverse the trend in which rich Western investors put money into emerging markets by making developed economies more dependent on emerging market cash. Even if growth slowed, they would likely eclipse the United States within a decade, the group said.

"There has been a shift of financial weight from west to east, particularly to China, Asia, the Middle East and other energy countries," said Jan Randolph, Global Insight head of sovereign risk.

"Riding the energy and commodities boom, together with the wilting dollar, sovereign wealth funds will continue to be the key players in the changing financial landscape of the global economy thrown into flux by the credit crunch."

The report put the combined value of sovereign wealth funds at $3.5-trillion in 2007, more than enough to match the established economies of Britain, Germany or France.

Rising Chinese and Asian demand for commodities has seen prices soar, with oil within sight of a once unthinkable $120 a barrel yesterday. Many oil-producing states pegged their budgets assuming a much lower price of perhaps $50-$60 this year, banking the difference in their wealth funds.

But most sovereign funds are notoriously secretive, making detailed estimates difficult. Global Insight said it used a range of sources to compile its estimates.

Nigeria's sovereign wealth fund grew 291 per cent in the past five years, followed by Oman at 256 per cent and Kazakhstan at 162 per cent, it said. Angola, still recovering from decades of civil war, saw its wealth fund grow 84 per cent.

Sovereign wealth funds made $60-billion in mergers and acquisitions in 2007, the report said, accounting for 35 per cent of worldwide M&A activity.

In January, 2008, it estimated they accounted for 28 per cent of mergers and acquisitions in the United States - exceeding activity from private equity buyouts, which were hit by the credit crunch.

Sovereign wealth funds also account for around 10 per cent of private equity investments globally, Global Insight said, making their activities even harder to scrutinize.

Sovereign purchases have included taking stakes in major Western banking houses hit by the credit crunch and their exposure to the U.S. mortgage market.

The report estimated that sovereign wealth funds injected up to $80-billion in bank shares or bank equity stakes in the U.S. in 2007, and are likely to provide even more capital this year and next.

Global Insight said rising inflation in many of the countries with large funds would likely push them to invest even more money abroad.

"Sovereign wealth funds are the new financial power brokers, replacing the combined financial muscle of hedge funds and private equity and usurping central banks as the international capital providers of last resort," Mr. Randolph said.

*****

By the numbers

$30-trillion

Potential value of sovereign wealth funds in 10 years.

$45-trillion

Current world gross domestic product

24 per cent

Annual growth in sovereign wealth funds during the past three years.

93 per cent

Percentage of investment by sovereign wealth funds in January, 2008, that went to the Western financial sector.

$80-billion

Amount of money injected into U.S. bank shares or bank equity in 2007.

$150-billion

Bank writedowns related to U.S. subprime mortgage losses at the end of February.

10 per cent

Amount of sovereign wealth fund involvement in global private equity investments.

Source: Global Insight

© 2007 The Globe and Mail. All rights reserved.

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