Kingdom and sovereign wealth funds
The challenge with using central bank assets for driving economic development is the fact they typically have to be held in liquid, relatively low-risk assets. The best example globally is US Treasuries — a large, deep, liquid market.
The range of comparable assets in Saudi Arabia is limited. Part of the challenge here is the underdevelopment of the fixed income market and the near-absence of secondary trading.
The equity markets are more developed but, again, the range of truly liquid shares is narrow and the markets have a history of volatility, which limits the exposure.
The prudent management of reserves also necessitates a balance, diverse allocation of assets. In practice, this has tended to mean that a significant proportion is invested internationally.
If there is a deficit given lower oil prices and lower oil revenues, part of this money is set for repatriation to finance the budget deficit and maintain stability in the fiscal policy.
SAMA has historically mobilized its reserves to ease periods of a tighter fiscal balance, for example during the global downturn. This remains a possibility but is likely to be of relatively marginal significance.
The ability of the central bank to invest locally will be facilitated by the development of deeper financial markets and products that meet the necessary criteria for liquidity in particular.
The reason why many countries, including more recently even Saudi Arabia, have opted to create more dedicated sovereign wealth funds (SWFs), is because these typically provide greater flexibility in asset allocation and management than in the case with central bank reserves, which also have to serve as a monetary policy instrument.
Similar to what Kuwait has done with the Kuwait Investment Authority, which they call as the generation fund, and Abu Dhabi Investment Authority, they have their own sovereign wealth funds. Qatar has similarly done so most recently. Singapore has two similar funds.
Norwegian Pension Fund, which is well known, is one of the largest funds in the world. If such a fund is created, it can be used for the future generations and can be an asset to generate income.
It is acknowledged that SWFs established by Middle Eastern countries occupy an important position in world capital markets in terms of size or activity.
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