4.4 SWFs Flashcards
Sovereign wealth funds (SWFs) are large, state-owned investment funds that exist to benefit FGSN and possibly to SC
Sovereign wealth funds (SWFs) are large, state-owned investment funds that exist to benefit future governmental spending needs and possibly to stabilize currencies
As of 2018, SWFs controlled almost _____ in assets (with about XX% of that amount in alternative investments), which is about equal to the assets under management of _______.
As of 2018, SWFs controlled almost $8 trillion in assets (with about 20% of that amount in alternative investments), which is about equal to the assets under management of all hedge funds and private equity funds combined.
What is the source of funds for a SWF?
Budgetary surpluses at the national level.
Money usually comes from natural resources, such as oil and gas, but may also come from persistent trade surpluses and possibly the receipt of foreign aid that was not used immediately
National governments hold some of their sovereign wealth in the form of foreign currencies. Those currency holdings are typically managed by ______ and referred to as its ________. The RA is affected by inflows and outflows of currencies that result from IT and CF. In aggregate, they comprise the country’s BoP accounts
National governments hold some of their sovereign wealth in the form of foreign currencies. Those currency holdings are typically managed by the central bank and referred to as its reserve account. The reserve account is affected by inflows and outflows of currencies that result from international trade and capital flows. In aggregate, they comprise the country’s balance of payments accounts
change in reserve account = X + X
change in reserve account = change in current account + change in capital account
The current account measures ________. A country that exports more goods and services than it imports is said to have a ________, while a country that imports more than it exports is said to have a ___________.
The current account measures trade in goods and services. A country that exports more goods and services than it imports is said to have a current account surplus, while a country that imports more than it exports is said to have a current account deficit.
The capital account measures _______, such as ________. Net inflows of capital into a country are referred to as a ______, while net outflows of capital are referred to as a ______
The capital account measures cross-border investments, such as loans or purchases and sales of assets. Net inflows of capital into a country are referred to as a capital account surplus, while net outflows of capital are referred to as a capital account deficit
A current account deficit tends to be associated with a ______, and a current account surplus tends to be associated with a _______.
A current account deficit tends to be associated with a capital account surplus, and a current account surplus tends to be associated with a capital account deficit.
A country’s reserve account increased by $2 billion during the most recent year. Imports were greater than exports by $3 billion for the year. Calculate the country’s capital account surplus or deficit for the year.
∆ reserve account = ∆ current account + ∆ capital account
+$2 billion = –$3 billion + ∆ capital account
∆ capital account = +$5 billion
The capital account for the year shows a surplus of $5 billion.
A country’s currency will tend to appreciate if the country has:
1. LI
2. HIR
3. PPCI
4. SIG (FI)
5. A/CA
- low inflation cf other countries
- high interest rates cf other countries
- policies promoting capital inflows
- slow income growth (cf other countries) (reduces imports)
- absolute or comparative advantage in production of goods for export
Countries with floating (market-determined) exchange rates have reserve accounts that are ______. Exchange rates with other currencies will adjust to keep _______roughly in balance with ________.
Countries with floating (market-determined) exchange rates have reserve accounts that are relatively stable. Exchange rates with other currencies will adjust to keep demand for exports and imports roughly in balance with inflows and outflows of capital.
How would a country weaken its domestic currency relative to a trading partner’s currency?
By selling their currency and buying the other currency in the FX market.
Why would a country weaken its currency relative to a trading partner?
To make their exports cheaper for the other country (therefore increase), and reduce imports from that country.
From 19XX to 20XX, the Chinese yuan was pegged at XXX yuan per U.S. dollar.
From 1994 to 2005, the Chinese yuan was pegged at 8.28 yuan per U.S. dollar.
Some economies, such as China and Singapore, have export economies built around manufactured goods and services. Others (e.g., many Middle Eastern countries) have an export market focused on commodities, such as oil and gas. Exports based on manufacturing are _____, but commodity exports are ______ because _________
Some economies, such as China and Singapore, have export economies built around manufactured goods and services. Others (e.g., many Middle Eastern countries) have an export market focused on commodities, such as oil and gas. Exports based on manufacturing are relatively predictable, but commodity exports are much less predictable because commodity prices can be highly volatile.
For example, the spot price of Brent crude oil in the early 1990s was around $20, but it jumped up to $135 per barrel in July 2008 before crashing back down to the low $40s by early 2016. Such volatility has been reflected in the reserve accounts of countries with oil-focused economies.
