Redefining Political Risk Management – The SWF Dimension

by Dr. Eliot Kalter

Sovereign wealth funds (SWFs) are becoming significant players in an unstable global financial stage.

The financial crisis of 2007-08 and now the Euro crisis point to the dangers, not only of unsustainable economic and structural policies, but also of depending on the availability of financing from capital markets that punish “poor performers,” or not, depending on “risk appetite.”

European countries did not suddenly create unsustainable deficits; rather, the easy availability of financing encouraged the profligate behavior until the capital markets shifted to a “risk off” position and an unwillingness to finance what became unsustainable deficits.

These events have made clear the importance that long-term investors (LTIs) make their asset allocation decisions based not only on a careful assessment of current economic and financial risk factors, but also those factors that will affect these conditions in the long-term future.

SWFs and other LTIs need to focus beyond financial risk, to the long-term political risk factors that underlie the sustainability of the decision framework within which investment decisions are made.

Redefining Political Risk Management – The SWF Dimension