The Geographic Challenges of Establishing Sovereign Wealth Funds in Frontier Markets (Case Study)

by Adam B. Robbins

Introduction Sovereign wealth funds (SWFs) face numerous, complex challenges in their establishment and growth. Like any investor, they seek investment returns in financial markets. SWFs face additional challenges stemming from their sovereign ownership: as state owned entities, they are embedded in the political economies of their host countries, and must navigate their complexities.

Further complicating the matter is the location of many new SWFs. Over the past decade, SWFs have proliferated in frontier markets, far from the centers of global finance, adding a series of geographic challenges. Examining the development of SWFs in Mongolia and Trinidad and Tobago, this paper examines how policy makers in frontier markets learn to build effective SWFs, despite the geographic, political, and knowledge management challenges they face.

The first section presents a brief overview of the policy objectives of SWFs, and the impetuses behind their creation. The section explores the resources that are available to policymakers in states creating new sovereign funds, as well as what resources are needed. This paper asserts that high-level advisory on macroeconomic policy issues is readily available and transferable, while training on ground-level, intrinsic implementation skills is also available but not easily applied in frontier markets. The section explores why implementation skills are particularly important in the investment management industry, and how the geographical contexts of new SWFs reinforce this challenge.

The second section examines the development of SWFs in Mongolia and Trinidad and Tobago as case studies, based on research interviews. This section analyzes the development of SWFs in these countries, and applies the theoretical explorations of section one to these experiences. In the case of Mongolia, the Mongolian government understands SWF policy principles, but faces domestic political concerns and resource constraints that inhibit the establishment of an SWF conforming to these principles. In the case of Trinidad and Tobago, policymakers have also faced resource constraints, but have found methods to cope with the lack of funding and expertise. Future iterations of the paper aim to draw upon the experience of additional frontier SWFs, to allow for a more comprehensive comparative analysis of common challenges, and how policymakers have successfully addressed them.

Drawing from the exploration of the geography of finance in the first section, and the frontier SWF case studies in the second, the third and final section of this paper suggests potential methods to mitigate the geographic and knowledge management challenges faced by new SWFs in frontier markets.

The Geographic Challenges of Establishing Sovereign Wealth Funds in Frontier Markets (Case Study)