IMF First Deputy Managing Director Dan Katz said the global economy had proven resilient despite the pandemic, energy shocks and repeated disruptions to trade and supply chains.
However, the benefits remained uneven, with economies at the centre of the technology investment boom outperforming energy importers outside technology supply chains. “Sovereign wealth funds are being asked to do more than ever,” Katz said at the International Forum of Sovereign Wealth Funds meeting in Athens.
Interest-rate normalisation had increased potential returns but also raised government borrowing and debt-service costs.
The Fund said heavier sovereign-debt issuance could alter the risk profile of government bonds traditionally viewed as safe assets.
Sovereign wealth funds should distinguish more carefully among safety, liquidity and duration risks when investing in public debt.
Changing trade and capital flows also meant portfolios could appear diversified while remaining exposed to common supply-chain vulnerabilities.
Companies across different countries and industries could depend on the same computer chips, shipping routes, energy supplies, payment systems or digital infrastructure.
The Fund said investment managers should examine underlying dependencies rather than relying only on traditional classifications by country, sector or asset class.
Rapid technological development presented another risk because investment was increasingly concentrated among a small number of companies and the infrastructure supporting artificial intelligence.
Funds should assess whether portfolios were becoming overly dependent on a narrow group of businesses and common assumptions about the future of technology, Katz said.
Higher investment in private markets, direct projects and technology infrastructure also increased the importance of maintaining sufficient liquidity during market stress.
The Fund said governance frameworks should consider sovereign wealth funds as part of the wider public balance sheet alongside government debt, state-owned enterprises and future financial obligations. “The goal is to strengthen net public wealth, not the fund’s gross value,” Katz said.
Governments running fiscal deficits should avoid borrowing at high costs simply to continue contributing to sovereign wealth funds unless expected risk-adjusted returns exceeded financing costs.
Domestic investment mandates also required commercial benchmarks, conflict-of-interest safeguards and transparent accounting for non-commercial objectives.
The Fund said legislation should clearly define a fund’s purpose, authorised withdrawals and procedures for changing mandates.
Timely public reporting, legislative oversight and clear communication were essential to protecting public trust as governments placed greater demands on sovereign wealth funds, Katz concluded.
–IMF/ChannelAfrica–
