What is Capital Account Convertibility and How it Affects a Country
April 3, 2025
What is Capital Account Convertibility ? Capital Account Convertibility means that the currency of a country can be converted into foreign exchange without any controls or restrictions. In other words, Indians can convert their Rupees into Dollars or Euros and Vice Versa without any restrictions placed on them. The reason why it is called capital…
The global financial system is in the middle of a manufactured boom. Earlier, the economies would boom on their own based on the underlying fundamentals. However, in the present scenario, the boom is 100% manufactured by central bankers that are using every trick in the book and some more to create the perception that the…
The 24/7 Real Time Global Marketplace Makes Firms Live for the Moment The present global marketplace as well as regional and nations marketplaces are uber competitive and in addition, dominated and driven by rapidly changing market conditions where short term thinking triumphs and the scenario is complicated with the incessant buzz of 24/7 news cycles…
Imagine a fund with so much money that it held 1% of all the equity from all the stock exchanges of the world and still had money left over to buy huge quantities of other assets as well! Now, imagine that most people in the world were not even aware of the existence of such a fund or the enormous financial power it holds. Also, imagine that the money under the control of this fund was not strictly regulated.
This fund isn’t an illusion. The fund described above is the sovereign wealth fund of Norway. In fact, it isn’t even the largest sovereign wealth fund. It just happens to provide slightly more information than the others. That is the reason why we are discussing the sovereign wealth fund of Norway while not discussing bigger funds like the sovereign fund of the Abu Dhabi government.
In this article, we will have a closer look at the concept of sovereign wealth funds and the power they hold in the financial world.
There isn’t one single definition of sovereign wealth funds. This is because the activities that these funds perform are secretive as well as different from one another. Therefore, coming up with a comprehensive definition is difficult.
However, sovereign wealth funds can be considered to be investment vehicles which receive their funding from the government. Therefore, to begin with, sovereign wealth funds save on marketing expenses that have to be incurred by other funds to raise investments. Also, the flow of funds for investments works like clockwork, and there is absolutely no uncertainty.
Also, the investments being made by these funds are actively controlled by governments. These investments, by and large, involve foreign assets. Sovereign wealth funds invest very rarely in domestic assets. The secrecy which surrounds the investments made by these funds, as well as the opacity of the information regarding their investments, can also be considered to be the defining characteristics of such funds. Governments often state that sovereign funds are created to buy strategically important foreign assets.
Sovereign wealth funds have more cash than many governments in the world do. The estimated total amount of cash invested in such funds is over $10 trillion. To give some idea of how large that amount really is, a comparison can be drawn with the Chinese GDP. China is the second biggest economy in the world. Yet, The monetary value of all the goods and services produced by it is less than the money sovereign funds hold in reserves.
The largest sovereign wealth fund i.e. the Abu Dhabi fund is known to have more than $800 billion in its coffers. Most of the countries which are rich in natural resources such as oil have allocated huge amounts of money to their sovereign funds. Another case in point would be the Russian sovereign fund.
The massive amounts of money possessed by the sovereign wealth funds as well as the power that they have can be understood from the facts that the American government was requesting these funds to intervene and save the economy from total collapse. Sovereign wealth funds were said to have so much money that even if they purchased every toxic asset in the system, they still wouldn’t lose more than 20% of their total value.
Needless to say that these funds are very prudent with their investments and as a result did not pick up any stake in the toxic assets despite requests from the American government to do so.
Sovereign wealth funds are considered to be strategic assets for the nation. Therefore, the governments that create such funds also create mechanisms to ensure that these funds are always flush with cash. Some of the ways that sovereign wealth funds obtain cash are as follows:
The bottom line is that sovereign funds have vast sums of money at their disposal. This, along with the fact that their operations are shrouded in secrecy makes these funds incredibly powerful entities that can change the course of markets if they so wish to.
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