Growth of sovereign wealth funds limited by the financial crisis

Yes there will be more funds allocated to long term investments for returns but as countries incur high fiscal deficits and look to fund them through public debt - both domestic and potentially foreign, there may be some sovereign funds less able to make such allocations.

There is no doubt new sovereign funds may emerge. The is to be expected but will be limited thanks to the medium to long term effects of the financial crisis.

 

As funds held by a government in the form of reserves rise, the portion allocated to short term liquidity needs and emergency balance of payments support contingency decline and the portion that can be invested for the long term rise. The long term allocations are initially put into safe and liquid investments but as the absolute numbers rise, the willingness to take higher risks for higher long term returns rises. So portions of the long term allocations can be assigned to corporate bonds, stocks and alternative investments. The allocations to long term investments may reflect in part earnings from high export receipts reflecting high commodity prices (they are rising again), or high export earnings from export led growth strategies (e.g., China, Japan, Korea, etc.) or from persistent supluses on services accounts.

 

But where there are winners, there may also be losers - countries that have to pay more for commodities or run deficits on the trade or services accounts or have large domestic deficits that may need to be financed from external debt. These countries will have less ability to invest for the long term. So total funds allocated to long term investments may not grow as fast as they did before the financial crisis.