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BRIC sovereign wealth funds: The external wealth of governments

London, October 2010

BRIC sovereign wealth funds: The external wealth of governments ...

Deutsche Bank Report: Key conclusions are:

 

- FX reserve accumulation in the BRIC countries (Brazil, Russia, India, China) continues. FX reserve accumulation is difficult to justify in terms of “risk insurance”. All four BRIC governments are net foreign (currency) creditors and external financing requirements are small. Even if private-sector foreign liabilities are taken into account, BRIC external balance sheets look strong.

 

- Financially, the BRIC governments will suffer increasing financial losses on their rising foreign asset holdings. Investing foreign assets more aggressively through sovereign wealth funds may help limit losses, but is very unlikely to avoid loss-making altogether. This may not be negative in terms of economic development and growth, but it will result in continued, tangible financial opportunity costs and (quasi-) fiscal losses.

- Three of the four BRIC countries have established sovereign wealth funds (SWFs). The SWFs differ in terms of size, financing modalities and investment strategies. Only Russia can properly be said to have a savings fund. Brazil’s FSB might turn into one provided the expected surge in energy production and exports leads to both current and fiscal account surpluses later this decade.

- Among the BRICs, China holds by far the largest “excess” FX reserves. Equally significantly, China, and more specifically the Chinese government, will continue to witness a massive rise in gross (and net) foreign asset holdings over the coming years. Generally speaking, the large net position will afford China and the other BRICs with very significant scope to pursue economic, financial and political objectives – or various combinations thereof.

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