New opportunities for SWFs arise in Central Europe

We live in the second year of the credit crunch which started in April 2007 and the uncertainty is only increasing as more nations are falling into recession and the financial system continues to suffer substantial woes as unemployment is on the rise and cash-strapped institutions lost trust and are hesitant to lend each other. Sovereign Wealth Funds (SWFs) remain to be the only cash-rich investors left in the financial playground. But their future prospects and strength is being questioned as the commodities’ prices like oil are continuing to plummet and export-oriented countries experience a decrease in orders while a global recession is on a horizon.

Some SWFs got burned when they invested in the deteriorating western banking sector and did not secure enough insurance against the possible fall in the stock prices. Other investors with more protection like e.g. Singapore’s Temasek were luckier. After the Fed refused to save Lehman Brothers and we experienced a turbulent weeks full of panic, short-selling and uncertainty on the financial markets, chances are that also SWFs will grow more reluctant to invest further to secure bank stakes. They would be wise to put more weight in their infrastructure investments. Dubai Ports eyes investing in Russian infrastructure and a Saudi-American joint-venture GE-Mubadala has been formed with an aim to invest in infrastructure abroad. Some EU politicians step up their rhetoric against SWFs and are proposing to create an EU-wide Sovereign Fund. The unsolved question is how such a fund would be funded bearing in mind the fact that almost all EU members run a deficit budgets and in some cases their national debt levels approach or surpass100% of their yearly GDP. Therefore chances are that SWF investment will be more welcome in coming months and the asset prices will be even more depleted and therefore lucrative. Thus SWFs have an upper hand in this time despite more trouble that they are starting to feel at home. After the last two rounds of EU enlargement the new EU-members are receiving a substantial assistance from EU structural funds to build large infrastructure projects like highways and because of EU regulation they are also forced to enhance the quality of their water and waste treatment and other environmental measures. The new members need to match EU money with their own funds. A couple of countries were relaying on development of Public Private Partnerships (PPP) to secure sufficient financing. But as the lending standards at distressed banks tightened and affordable large-scale financing dried up some projects look prohibitively expensive or have at least uncertain future. This would be a perfect opportunity for SWFs investment .Especially those less controversial funds from smaller countries like Singapore’s Temasek or South Korea’s KIC are well positioned to start negotiations on possible infrastructure investments. For example my country - Slovakia needs several billions of Euros to finance its highways construction in coming years and the financing is getting more expensive. Slovakia has a unique position as the fastest growing EU member and it will adopt Euro as of January 2009 which will give it an unprecedented advantage in the Central Europe space as the exchange rate risks will be eliminated. Plus it has experienced a significant Korean investment in the last years with green field investments from Kia and Samsung among others. New EU members are more likely to be more open for SWF investment as their older EU counterparts and bear higher potential of economic growth as many of them enjoy lower tax and administrative burdens.