Governments around the world drained a collective US$137 billion from sovereign wealth funds during the June quarter, according to a specialist research house, with some set to empty.
The Global SWF study found 24 governments covering “all six continents” tapped into sovereign wealth funds in the second quarter as the COVID-19 economic crisis intensified.
Government funds based in Norway and Singapore saw the largest nominal withdrawals – of US$37 billion and US$36 billion, respectively.
But “the situation is most critical in Emerging Markets and including Africa and Latin America, where some funds may get exhausted altogether”, Global SWF says.
In particular, the report says sovereign investment vehicles housed in Peru and Colombia boasting 20-year plus track records “may have their days numbered”.
To date, the majority of drawdowns have been from ‘stabilisation funds’, designed for crisis management, but various governments have dipped into both savings and development pools to dampen COVID-related fiscal stress.
Some funds based in countries including Canada, Ireland and Norway, also established special purpose sidecar vehicles to “support… their domestic economy and businesses”.
“In any case, this crisis is far from over, and we will be monitoring the significant withdrawals that will happen by year-end, especially in the Middle East region,” the Global SWF report says.
Rod Ringrow, head of official institutions at asset manager Invesco, told Reuters last week that many sovereign wealth funds came into the crisis with healthy cash reserves.
However, Ringrow said as the crisis rolls on governments may end, or decrease, planned contributions to wealth funds.
“Now the game has changed for all, but it’s too early to gauge if it is transitory or a longer lasting shift in emphasis for the funds,” he told Reuters.
Danae Kyriakopoulou, chief economist at the Official Monetary and Financial Institutions Forum, said in the report that governments faced a tricky balancing act with sovereign wealth funds as COVID-19 financial pressures mount.
“On the one hand, they’re future generation funds, so they’re being saved for the future to maintain that wealth,” Kyriakopoulou said.
“But on the other hand, they’re rainy day funds – and if you don’t use them now, when you have a storm, when are you going to use them?”
In NZ the opposition National Party has vowed once again to suspend government contributions to the NZ Superannuation Fund (NZS) should it gain power in the October election.
The current Labour-led administration only restarted NZS contributions post the last election in 2017 following an eight-year hiatus begun by a previous National government at the tail-end of the global financial crisis.
Earlier this month, NZS reported a respectable – under the circumstances – 12-month return of 1.73 per cent to the end of June this year. But the NZS had a torrid first quarter of 2020, according to Global SWF.
“The worst reported [2020 March quarter] performance was from NZ Super, which keeps 70% of its portfolio in listed equities and lost 26% of its value in US$ terms in February and March alone,” the researcher says.
In aggregate, Global SWF says the US$9 trillion sovereign wealth sector plunged in value by 16 per cent in the first quarter of 2020 only to rebound an average 13-14 per cent in the following three months.