By Shipra Prakash
26 May 2008 [MEDIAGLOBAL]: Poorer commodity-rich countries can benefit from the increase in commodity prices, according to Global Insight, a forecasting company that provides financial, political and economic information on over 200 countries.
Sovereign wealth funds are now considered a critical issue in the United States. Countries that have a lot of cash left over as a result of oil or gas revenues find it beneficial to invest excess revenues, and huge quantities of such cash have been invested in the U.S.
According to Global Insight, $80 billion have been put into bank shares or bank equity stakes in the U.S. The company claims that “Sovereign Wealth Funds have been growing at a staggering 24 percent annually for the past three years. Projecting out this annual growth rate, Sovereign Wealth Funds will surpass the entire economic output of the United States by 2015, and European Union by 2016.”
A recent press release by Global Insight stated that commodity rich nations such as Nigeria and Oman are benefiting from the surge of prices in the commodity market. Nigeria has grown its sovereign funds the most in the last five years, followed by Oman and Kazakhstan.
But the long-term effects of price increases may be mixed. “Nigeria is a net exporter of crude oil so its current account position and its external debt situation has improved substantially. So I would say it enjoys commodity prices, although it will suffer from the rises in the agricultural commodity prices,” Michael Lewis, Global Head of Commodities Research at Deutsche Bank, told MediaGlobal.
Rob Vos, Director of the Development Policy and Analysis Division of the Department of Economic and Social Affairs at the United Nations, also believes that the rise in commodity prices will have limited benefits for commodity-rich countries. “Such countries will be affected by a global slowdown as the demand [in volume] for their primary exports is falling,” he told MediaGlobal.
“Furthermore, these countries also import other commodities, including food, which is creating inflationary pressures and this adversely affects incomes of the people in these countries as well,” he added.
According to Global Insight’s Sovereign Wealth Fund Tracker, China remains the largest Sovereign Wealth generator, with $1.2 trillion in Sovereign Wealth Funds.
Even though China imports raw materials, it uses them to make and export manufactured goods on a large scale.
But Vos cautioned that China also faces challenges linked to economic downturns elsewhere. “China is not the big winner, because it will suffer a slowdown because of lower demand for its exports. Twenty-five percent of China’s exports are to the US and another 40 percent or so to Europe and Japan.”
Yet a slowdown in China is not necessarily a bad thing. “Some observers may also see this as a blessing, since they believe that China’s growth in the past years—11.9 percent in 2007— has been too fast, leading to an overheated economy. We also believe that growing at a somewhat lower growth rate at 8.5 percent (our projection for 2008), a still pretty high one by any standard, growth in China would be more sustainable, especially if it would focus more on domestic sectors, including rural and agricultural development and reducing the rising income inequalities,” Vos said.
Increased demand for commodities in China is another problem. “China does not benefit from rising commodity prices. This is best represented by the fact that the country is a net importer of many commodities, not just for oil, but for copper, nickel, soybeans and where it historically has been an exporter (coal and aluminum) these exports have been collapsing as the country’s demand for commodities soars,” Lewis said.
“This year the country moved to become a net importer of aluminum and I would expect China to be a net importer of corn and coal at some point,” he added.