Every Economy is having discussion regarding finding ways of managing the fiscal surplus or deficit with respect to rising crude prices. Its know to every one even the 5 years child that due to the tension of Libya the crude prices are set to climb high. What we are busy in finding is the level to which the crude prices will climb and how long the tension of Libya will fill the pockets of Sovereign funds. In my previous articles I have depicted that one economy makes growth at the cost of another economy. In pure economic terms every economy cannot prosper at the same time. History stands for the proof.
NEW SOVEREIGN FUNDSThe high crude has brought smiles on the Middle East companies. Once again their pockets of Sovereign funds will swell like Elephant Size egg. Thank god we don’t find elephant eggs otherwise that should have fell short of the original size of the Sovereign Funds size. The aggregate assets under management increased from $3,590bn in 2010 to $3,980bn or 4 trillion approximately, at the start of 2011.So now one can imagine how hard it is to describe the size of the fund.
The difference between the benchmark price and the prevailing price of oil is usually paid into the Excess Crude Account. This amount is being kept and transferred to another account for deployment or investments purpose. Very recently the African Government is coming out with a policy for creating and doing investments through sovereign funds. It is expected to cease soon, as the Senate has joined their House of Representatives counterparts to record a significant progress on the passage of the Sovereign Investment Authority bill.
The bill seeks to invest a portion of the excess profit made from crude oil sales in the Sovereign Wealth Fund to be held and managed by the Nigerian Sovereign Investment Authority. The authority is expected to invest the funds in a diversified portfolio of medium and long term investments "for the benefit of future generations of Nigerian citizens.
UAE INVESTMENTSAs we all know that UAE is the biggest sovereign wealth reserve and also one of the biggest investor of the world. Very recently UAE is going to invest a huge block of sovereign wealth fund into Chinese agriculture segment. The UAE and other Gulf states in collaboration with Singapore companies are entering the Chinese agriculture market to ensure food security. There has been a considerable increase in the number of Singapore food companies, showing interest in expanding their presence in the UAE and Middle East. He said the number of Singapore companies in Gulfood almost doubled from 24 companies last year to 40 companies in 2011.
US AT THREAT FROM SOVEREIGN
Large U.S. banks went to sovereign wealth funds with hat in hand during the crisis. From 2007 to 2009, Wall Street sought tens of billions of dollars from Saudi Arabia, Abu Dhabi and Kuwait - as well as China and South Korea - hoping to shore up their balance sheets with those cash infusions. These investments have been unable to generate the return as dreamt while doing the same. The US is now of great concern about the return being generated on these funds since if they don’t proposer the sovereign funds might press the button of pull back. Another concern is that rising fiscal deficit might force the sovereign inventors to transfer their funds into other economies and resulting a tide for the dollar.
Overall the credit rating of US is at very much risk. The fiscial deficit of 14 trillion dollars is now turning out to be a night mare for the US government. The US government needs to improve and find solution to manage the fiscal deficit other wise foreign investments from US will flow to some other economies.
One will be surprised that high crude prices are turning out to be blessing for US economy. U.S. remains a popular investment for sovereign funds and other major foreign investors. This is due to its relative investment safety and stability when compared to Europe, which is suffering through a debt crisis, and more volatile emerging markets. This is the reason why US is going to advantageous when crude prices will be back to the level of 2008.One must understand that US needs funds for its economic life. It has no room for further Quantitative Easing measures. All its free money is on the way of exit.
U.S. policy makers are designing polices to become more open to foreign investments and specifically in offering tax breaks and loan guarantees to get funds like the China Investment Corp. and the Government of Singapore Investment Corp. with some $4 trillion in assets investing in U.S. infrastructure.
The $71 billion Australian sovereign wealth fund has also entered a joint venture with US pension fund/financial services group TIAA-CREF (Teachers Insurance and Annuity Association, College Retirement Equities Fund) to pursue further US investment opportunities over the next two years.
The US government will face a very hard time in drawing funds for its economy. This is one of the reasons why many financial institutions who were having investments into US treasuries are taking an exit button in the present market conditions. PIMCO's Total Return Fund (PTTRX) have exited all its holding from the treasuries. In January 2011 it was holding 125 of the portfolio into US Treasuries and in the month of February its holding is simply ZERO. The prime reason for this is that once the $600 billion QE2 comes to an end the interest rates are bound to go up form US Fed. Since government debt competes with corporate debt for bond investors' money, corporations will also soon need to pay higher interest rates to raise cash. Hence dollar is getting liquidated for the time being.US in under deep nightmare about the fear of loosing investments from the recent and old sovereign funds inflow.
US is busy in making arrangement to attract the high crude prices profits where as the rest of the world struggles to tame inflation and rising food prices.
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