Recent weeks saw a surge of proposals for new sovereign wealth funds – some in countries that already host established SWFs – as governments look to strategic development and fiscal stabilization in a turbulent and uncertain era.
This week witnessed the Philippines’ controversial Maharlika Investment Fund (MIF) being given the legislative nod following a lightning speed process that received heavy criticism. With initial capital of US$8.9 billion sourced from state banks, dividends from state-owned enterprises and government coffers, the fund seeks to be a catalyst for economic diversification, similar to the US$7 billion Indonesia Investment Authority (INA).
Oman: a Future Fund Managed by OIA
Other countries are following suit. The Omani government is planning an SWF with US$5.2 billion in initial capital, the Oman Future Fund. Like MIF, the new fund is set to be a catalyst for foreign direct investment as well as domestic private capital. It will be under the management of the US$42 billion Oman Investment Authority (OIA), but approval for financing projects by the new fund will come from a joint team established by the OIA, the Ministry of Finance and “other parties”.
Italy: A New Fund to Muddy the Waters
In Europe, Italy and Ireland announced new SWFs – despite their existing SWFs. On Wednesday, the Italian cabinet announced the approval of a bill to create a EUR1 billion (US$1.1 billion) fund to support domestic firms, focusing on strengthening strategic supply chains. Again, with its sights on private co-investment, the scheme aims to raise at least an additional EUR500 million from private investors, according to Reuters. The news agency also said the government is approaching SWFs of Saudi Arabia, Qatar, the UAE, Azerbaijan and Norway “to give the fund more firepower.”
Prime Minister Giorgia Meloni plans to finance the fund using some of the resources originally earmarked for the EUR40 billion "Patrimonio Rilancio", which was established in 2021 to support pandemic-hit companies but has only disbursed a fraction of its capital. The new fund will be run by the state lender Cassa Depositi e Prestiti (CDP), which also oversees CDP Equity – the investment arm of the Minister of Economy and Finance (MEF) which aims to attract foreign capital and support Italian companies operating in sectors that are considered to be “strategic” for the economy (“Made in Italy”). It is unclear how the new fund will be any different in its mandate to CDP Equity, with critics pointing out the potential for duplicating its work.
Ireland: A Stabilization Fund Backed by Corporation Tax Windfall
A similar move was undertaken by Ireland earlier in May, with finance minister Michael McGrath proposing an SWF to manage its budget surpluses. The finance ministry forecasts the country will run a cumulative budget surplus of EUR656 billion (US$712 billion) over the next three fiscal years. It estimates that a EUR142 billion (US$156 billion) fund could be built up by 2035 if, over the 2023-30 period, the government invests a large portion of corporate tax receipts. The stabilization fund would serve as a fiscal buffer and could meet up to 82% of projected healthcare and pension costs by 2035.
The sums are considerably bigger than the nine-year old US$16 billion Ireland Strategic Investment Fund (ISIF), which has a mandate to support economic activity and employment, in addition to delivering commercial returns. Fiscal surpluses are being racked up by a corporate tax boom, which has seen receipts surge by more than 400% in the last decade as a result of multinationals transferring massive amounts of intellectual property to their Irish entities. McGrath anticipates budget surpluses reaching 6.3% of GDP by 2026.
The plans could be scuppered by the possible election in 2025 of a government led by Sinn Fein, which is pledging to ramp up capital investment instead of planning for high budget surpluses. Additionally, the corporate tax take is subject to volatility, as well as a concentration of risk due to the dominance of a few multinationals in corporate tax revenue.
Any restructuring, change in profitability, regulatory changes or other commercial factors could massively impact on tax revenues and the financing of the fund. In turn, this could limit its impact on the demographic changes, such as ageing, that are adding to future health and welfare costs. As such, the debate will focus on whether to allocate surpluses to existing infrastructure needs to improve economic competitiveness, or to a stabilization fund that may still struggle to address future fiscal pressures.
Taiwan: Forex-Backed Fund Opposed by Central Bank
While the Philippines, Oman, Italy and Ireland are progressing with plans for new funds, albeit at different stages, Taiwan’s plans for an SWF are being vigorously opposed by the territory’s central bank. Taiwanese legislators had passed a law to give the bank the power to use its forex to run an SWF, but last month the central bank cautioned that tying up forex in illiquid assets could undermine its ability to meet hard currency needs and maintain the stability of the forex market.
Taiwan’s forex reserves are estimated at US$555 billion, representing 116% of exports and 73% of GDP. Lawmakers such as Taiwan People’s Party Legislator Cynthia Wu are dissatisfied with the 2.7% average return on investment on its portfolio, which is 96% comprised of foreign government bonds and deposits, and want 10% of reserves invested in potentially higher yielding assets.
Liquidity concerns have made the central bank highly conservative in its approach to forex management. It is not a member of the IMF, which has in the past delivered lifelines to countries facing solvency problems such as South Korea. At the same time, Taiwan’s sovereign status puts it in a geopolitically sensitive position that could require defensive moves to support the Taiwanese dollar.
Yet, Taiwan already has several state-owned investment vehicles, such as the National Development Fund (NDF). The fund supports industry innovation, research, and development in Taiwan, with direct investment into firms, indirect investment via venture capital funds, and loan financing. In August 2017, the NDF established Taiwania Capital, a VC investment company that now operates six funds with total AUM of US$665 million, focusing on tech startups.
The NDF’s holdings would be eclipsed by any active SWF seeded with 10% of the territory’s forex reserves (amounting to around US$56 billion), yet unlike the central bank it has the capacity and skills to engage in wealth creation – a factor that Governor Yang Chin-long is keen to stress in his opposition to central bank oversight of an SWF. Rather than drag the central bank into sovereign wealth management, Taiwan may want to transition the NDF – or Taiwania – into a fully-fledged SWF, with or without the use of forex reserves.