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The external wealth of Arab nations: Structure, trends, and policy implications
Abstract
The paper makes two contributions. First, it analyzes net foreign assets (NFA) and liabilities in selected Arab countries. Second, the paper examines the effects of policy variables that affect the accumulation of NFA and its components, analyzing how the existence of a sovereign wealth fund (SWF), the country's exchange rate regime, and the development of its financial system affect its NFA. The main findings show that the presence of a SWF is positively and significantly associated with foreign direct investment in Arab countries. While financial development matters, intermediate exchange rate regimes are associated to more uncertainty compared to fixed or flexible ones. Our results remain robust even we control for the endogeneity between SWF and NFA components.
How to cite this article: Mohieldin M, Rostom A, Zaki C. The external wealth of Arab nations: Structure, trends, and policy implications. Economic Notes. 2020;e12180.https://doi.org/10.1111/ecno.12180MOHIELDIN ET AL.|17 of 17
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Assets managed by sovereign wealth funds (SWF) have grown nine-fold since 2002, reaching USD 8 trillion in 2018. Around 80% of these investments correspond to cross-border investments. SWFs of Arab countries, mainly oil-rich GCC economies, hold a sizable fraction of these funds (40%). Asset allocation, nevertheless, presents a significant anomaly: despite the presence of highly endowed Arab-owned SWFs, cross-border investment in Arab economies is negligible in terms of transactions as well as of value. We study the allocation decisions of SWFs, both in terms of the probability of investing abroad (extensive margin) as well as the level of investment (intensive margin). In particular, we ask whether SWF investment decisions, at both margins, are largely determined by economic factors-e.g. profitability and risk-or are also influenced by strategic considerations, such as geopolitical interests. Our findings show that, while foreign investors have a positive bias for the Arab destination countries at the extensive margin level, there is a negative bias against them at the intensive one.
Noticing the visible hand of state capitalism in global production and value chain system, this study examines the outward foreign direct investment strategy of sovereign wealth funds (SWFs). Leveraging theoretical insights from the conventional political economy and international business literature, the study first conceptualizes a yield institutions-based view—marketization to sustainable competitive advantage—to gain a better understanding of the main purposes and economic and institutional determinants of SWFs. Efforts have been made to deepen the institutions-based perspective of global strategy and introduce it into, establish its relevance to SWFs research. Second, the study presents SWFs' outward FDI patterns and acquisition deals in times of global financial market turbulence. Findings suggest that SWFs’ outward FDI choices are primarily determined by institutional transitions, market development and government legitimacy in the home country, thus to invest globally, earn higher economic returns, and secure resources. These choices are firmly motivated toward advanced financial markets, and real estate and infrastructure sectors. Third and last, the study discusses several important implications for state capitalism, policymakers, and sustainable development. Keywords: Sovereign wealth funds, State capitalism, Outward foreign direct investment, Cross-border mergers and acquisitions, Global financial crisis, Institutions-based view, JEL classification: F21, F23, G34, M16
This paper studies the domestic and international effects of financial deregulation in a dynamic, stochastic, general equilibrium model with endogenous producer entry. We model deregulation as a decrease in the monopoly power of financial intermediaries. We show that the economy that deregulates experiences an increase in size, real exchange rate appreciation, and a persistent current account deficit. The rest of the world experiences higher consumption and an expansion in the number of domestic producers. Less monopoly power in financial intermediation results in less volatile business creation, reduced markup countercyclicality, and weaker substitution effects in labor supply in response to productivity shocks. Financial deregulation thus contributes to a moderation of firm-level and aggregate output volatility. In turn, trade and financial ties between the two countries allow the foreign economy to enjoy lower volatility as well. The results of the model are consistent with features of U.S. and international data following the U.S. banking deregulation started in 1977.
The authors develop an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices. The model offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models or traditional sticky-price Keynesian models. The authors' analysis leads to a novel perspective on the international welfare spillovers due to monetary and fiscal policies. Copyright 1995 by University of Chicago Press.
The relationship between international payments and the real exchange rate-the transfer problem-is a classic question in international economics. We use cross-country data on real exchange rates and a newly constructed data set on countries' net external positions to shed new light on this question. We present a simple theoretical framework that leads to testable implications for the long-run comovements of real exchange rates, net foreign assets, relative GDP and terms of trade, and cross-country and time series evidence on the subject. We show that on average countries with net external liabilities have more depreciated real exchange rates, and that the main channel of transmission seems to be the relative price of nontraded goods, rather than the relative price of traded goods, across countries. Copyright (c) 2004 President and Fellows of Harvard College and the Massachusetts Institute of Technology.
This paper studies the impact of commodity terms of trade (CToT) volatility on economic growth (and its sources) in a sample of 69 commodity-dependent countries, and assesses the role of Sovereign Wealth Funds (SWFs) and quality of institutions in their long-term growth performance. Using annual data over the period 1981–2014, we employ the Cross-Sectionally augmented Autoregressive Distributive Lag (CS-ARDL) methodology for estimation to account for cross-country heterogeneity, cross-sectional dependence, and feedback effects. We find that while CToT volatility exerts a negative impact on economic growth (operating through lower accumulation of physical capital and lower TFP), the average impact is dampened if a country has a SWF and better institutional quality (hence a more stable government expenditure).
This paper studies the impact of commodity terms of trade (CToT) volatility on economic growth (and its sources) in a sample of 69 commodity-dependent countries, and assesses the role of Sovereign Wealth Funds (SWFs) and quality of institutions in their long-term growth performance. Using annual data over the period 1981–2014, we employ the Cross-Sectionally augmented Autoregressive Distributive Lag (CS-ARDL) methodology for estimation to account for cross-country heterogeneity, cross-sectional dependence, and feedback effects. We find that while CToT volatility exerts a negative impact on economic growth (operating through lower accumulation of physical capital and lower TFP), the average impact is dampened if a country has a SWF and better institutional quality (hence a more stable government expenditure).
This paper has two objectives. First, it reviews the recent dynamics of global imbalances (both “flow†and “stock†imbalances), with a special focus on the shifting position of Latin America in the global distribution. Second, it examines the cross-country variation in external adjustment over 2008-2012. In particular, it shows how pre-crisis external imbalances have strong predictive power for post-crisis macroeconomic outcomes, allowing for variation across different exchange rate regimes. We emphasize that the bulk of external adjustment has taken the form of “expenditure reduction†, with “expenditure switching†only playing a limited role.
We investigate the relationship between a country’s domestic financial development and the (composition of its) net foreign asset position using a pooled mean group estimator and data for 51 countries during the period 1970-2007. The results show that financial development reduces a country’s long-run net foreign asset position. In addition, financial development leads to higher net equity and lower net debt positions. These findings confirm the theoretical predictions of Mendoza et al. (2009). The results are robust to using different indicators of financial development and inclusion of the level of development of a country in the cointegrating relationship.
In a setting where investors have preferences for future wealth, sovereign wealth funds should invest relatively less in equities than the representative private investor. Tax asymmetries make it relatively more attractive for sovereign wealth funds to invest in fixed income than in stock markets. A high fraction invested in equities may be an indication that the sovereign wealth fund's principal has other preferences than the representative private investor. Host countries may levy corrective taxes on foreign sovereign wealth funds based on the ‘private behaviour equivalent’ principle, in order to reduce potential social costs related to the sovereign wealth funds' investment activities.
As in the physical world, sheer size attracts attention in the financial world mainly for the fear of impact of their movements in financial markets and hence in real economy and its stakeholders. Having originated from the economic activities of sovereigns or that of their establishments and managed by institutions reporting to them, characterized by opacity in their operations arising out of fear of transparency, the activities of most sovereign wealth funds were largely restricted to certain sectors of developed economies or their financial markets. With their growing size and quest for increased returns to serve the economic objectives for which many of them have been created, sovereign wealth funds have done their bit to rid them of few of the above characteristics in an effort to foray into the real economies of the developing world. Though sovereign wealth funds voluntarily adopted the Santiago guidelines, their voluntary nature and the recent financial crisis led to new lessons for the recently created International Forum of Sovereign Wealth Funds (IFSWF) to match sovereign wealth funds and their aspirations with that of the long-term funding aspirations of most emerging economies. OECD guidelines for Corporate Governance (2005) and SWF Recipient Countries (2008) set the right path for sovereign wealth funds to adopt and move forward to promote a mutually rewarding experience for both the investor funds and the investee economies. A global institution for regulation and monitoring of the activities of sovereign wealth funds will go a long way in matching intentions with expectations among capital providers and emerging nations.
We analyze disagreements over de facto exchange-rate-regime classifications using three popular de facto regime data series. While there is a moderate degree of concurrence across classifications, disagreements are not uncommon, and they are not random. They are most prevalent in middle-income countries (emerging markets) and low-income (developing) countries as opposed to advanced economies. They are most prevalent for countries with well-developed financial markets, low reserves and open capital accounts. This suggests caution when attempting to relate the exchange rate regime to financial development, the openness of the financial account, and reserve management and accumulation decisions.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
We examine episodes of current account adjustment in industrial countries over the past 30 years. We find that they were typically associated with a sizable growth slowdown and a large exchange rate depreciation. There was no discernible change in the nature of capital flows just prior to an adjustment. Hence, adjustments may be responding to the resolution of domestic imbalances rather than being an exogenous event. We show that global developments triggered the adjustment, possibly by triggering the unwinding of the domestic imbalances. Most of the ex post adjustment of the financial account was in private sector flows, primarily by foreign investors.
Although capital flows are closely monitored, surprisingly little is known about the accumulated stocks of foreign assets and liabilities held by various countries, especially in the developing world. This paper constructs estimates of foreign assets and liabilities and their equity and debt subcomponents for a sample of 67 industrial and developing countries. It characterizes the stylized facts of international balance sheets and asks whether there are trends in net foreign asset positions and shifts in debt–equity ratios over time. Finally, it explores the sensitivity of estimated stock positions to the treatment of valuation effects not captured in balance of payments data.
This paper shows that the quantitative predictions of an equilibrium asset-pricing model with financial frictions are consistent with key features of the Sudden Stop phenomenon. Foreign traders incur costs in trading assets with domestic agents, and a collateral constraint limits external debt to a fraction of the market value of domestic equity holdings. When this constraint does not bind, standard productivity shocks cause typical real-business-cycle effects. When it binds, the same shocks cause strikingly different effects depending on the leverage ratio and asset market liquidity. With high leverage and a liquid market, the shocks force “fire sales” of assets and Fisher's debt-deflation mechanism amplifies the responses of asset prices, consumption and the current account. Precautionary saving makes these Sudden Stops infrequent in the long run.
We revisit Obstfeld and Rogoff's (1995) results on exchange rate dynamics in a two-country, monetary model with incomplete asset markets, stationary net foreign assets, and endogenous monetary policy. The nominal exchange rate exhibits a unit root. Under flexible prices, it also depends on the stock of real net foreign assets. With sticky prices, the exchange rate depends on the past GDP differential, along with net foreign assets. Endogenous monetary policy and asset dynamics have consequences for exchange rate overshooting. A persistent relative productivity shock results in delayed overshooting under both flexible and sticky prices. A persistent relative interest rate shock generates undershooting under flexible prices.
Negative net foreign asset positions have been associated with a troublesome stability problem in flexible exchange rate regimes. In this paper a symmetrically-specified, two-country, portfolio balance model is employed to provide some perspective on this problem. It is concluded that negative net foreign asset positions do not constitute an independent source of instability. Instability can arise only under nonrational expectations or because of destabilizing speculation.
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