In memory of Dr. Andreas Höfert

Is a Swiss sovereign wealth fund such a bad idea?

| Posted by: Andreas Höfert | Tags: Andreas Höfert

The idea of a sovereign wealth fund was discussed when the Swiss franc floor was introduced in the fall of 2011, in anticipation of a swell of foreign exchange (FX) reserves at the Swiss National Bank (SNB). This idea resurged when the floor was lifted on 15 January 2015. What should the SNB do with the SNB’s FX reserves that now amount to more than 80% of Switzerland’s gross domestic product?

While there is no official position, it seems that the SNB is reluctant about the idea of a sovereign wealth fund (SWF). Former SNB President Jean- Pierre Roth recently wrote an op-ed in the Swiss-French newspaper Le Temps and explained why it is not such a good idea to transform the SNB FX reserves into an SWF.

However, none of his arguments really convinces me. He argues that “the portfolio of the SNB didn’t result from genuine Swiss savings but was acquired by printing money,” unlike Norway, for example, which finances its SWF from oil revenues. This analysis is too shallow, I rebut. Indeed, one reason why the Swiss franc appreciates is that for decades now the nation has run significant surpluses in its balance of payments (over 9.5% of Gross Domestic Product on average per year for the last 25 years).

This means that Switzerland is saving tremendously and thus the world becomes more indebted to Switzerland. If these savings are not invested abroad (directly or indirectly), the Swiss franc should rise, unless the SNB accumulates FX reserves. In this context, an SWF would compensate the restraint to investing Swiss savings abroad. SWFs are not a peculiarity of countries with commodities revenues. Singapore, very comparable to Switzerland, has an SWF, which manages FX reserves generated by the significant and recurring surpluses in its balance of payments.

Jean-Pierre Roth also argues that the SNB (or a SWF) cannot invest the FX reserves because they “must remain easily mobilized.” It must remain possible to quickly counteract a depreciation of the Swiss franc, meaning sufficient ammunition must be available at any time. Yet an SWF can also be designed to use only part rather than all FX reserves. Moreover, the Swiss franc is a safe haven. It will rise when markets decline and depreciate amid euphoria. Due to the nature of money that feeds it, a Swiss SWF could become an astute investor, mechanically buying at the bottom of the market (selling Swiss francs) and then selling when markets go up (buying Swiss francs).

Another argument against using the SNB’s FX reserves to create an SWF is that it would “provoke a strong negative reaction” from neighboring countries. But this goes against the wish expressed last week by the International Monetary Fund (IMF) that the SNB practice a form of quantitative easing by purchasing securities in Switzerland and abroad. Moreover, the FX reserves of the SNB currently comprise - largely - European sovereign bonds which are very expensive (thus salable), and are now desperately sought after by the European Central Bank (ECB) for its own quantitative easing program.

Further, even though SWFs are “unpopular,” they are also formidable tools for influencing international politics. This could serve Switzerland when it renegotiates its bilateral agreements with the European Union.

A final argument against a Swiss SWF would be that it could invest in foreign companies competing with Swiss companies and hence threaten them. Therefore this fund could contradict the interests of the country. Counter-arguing once more, managers could design the SWF so that it would only invest in sectors nonexistent in Switzerland (automotive, energy, aviation, etc.). But beyond this, would Nestlé really be hurt if a Swiss SWF held stakes in Danone and Unilever? These companies all have international shareholder bases.

The devil residing in the details may make an SWF more complex than it seems, but I think this idea is not as bad as some would have us believe. An economic environment where we repeatedly hear that there is no alternative to the policies in place calls us to consider options.