Macroeconomic Shocks of 2022 and Sovereign Funds

Abstract

In 2022, instead of getting back to pre-pandemic “new normal” the world entered into another period of severe economic and geopolitical turbulences. In terms of macroeconomics, the most evident and painful was the hike of hydrocarbons’ and food prices. This drove inflation rates to the levels not seen in recent 40 years. In attempts to cool down underlying inflationary pressures the monetary authorities of many countries had to stop the policies of quantitative easing (QE) and started to raise basic interest rates. In this environment the governments, businesses and families are facing massive debt problems. The main stock market indices crushed deeply and simultaneously in 2002 which meant substantial depreciation of assets. All these macroeconomic shocks seriously affected the performance of sovereign wealth funds which currently present a solid and increasingly influential group of global assets’ holders and managers. The steady growth of the value of their assets under management (AUM) was interrupted last year. According to preliminary analysis, the total losses of AUM can reach circa 1 Trillion US$. Just one fund – Norway’s Government Pension Fund Global (GPFG) – reported a depreciation of its assets by as much as 165 Billion US$ as of end‑2022. This is an amount comparable to the GDP of a mid-size country, for instance Ukraine before current military conflict. However, for Norway’s GPFG and similar state-owned investors (SOIs) of other countries such losses were not critical. SWFs are, basically, “tolerant investors” with very long view on value creation and operational planning, so they easily absorb paper losses. Simultaneously, the huge SWFs of oil and gas exporting Gulf countries enjoyed the hike of hydrocarbons’ international prices and hurried up to invest massive influx of unexpected revenues into depreciated assets in troubled economies of the USA and Europe. More countries tended to expand the mandates of their sovereign funds beyond traditional stabilization and saving functions. Strategic development funds became increasingly demanded by the governments and may appear even at the supranational level (the projected European Sovereignty Fund). So far, it may be concluded that in general macroeconomic shocks of 2002 did not undermine the positions of SWFs as strong and resource-rich global investors. On the contrary, it looks like that their role as an efficient tool of governmental policies of offsetting and preventing multiple market failures is getting to be further strengthened in upcoming harsh times.