Sunday, Mar 23, 2008

(This story was originally published on Saturday.)

WASHINGTON (Dow Jones)--The International Monetary Fund's executive board gave the go-ahead Friday for the staff to develop a code of best practices for sovereign wealth funds by the IMF's autumn meeting in October.

The IMF plans to hold a roundtable with the state-owned funds in April, with the aim of coming up with a draft of a code by August.

Jaime Caruana, director of the IMF's monetary and capital markets department, said the set of principles agreed to Thursday by the U.S., Abu Dhabi and Singapore was a welcome contribution to its own work. And he noted that the three countries endorsed the multilateral effort underway by the IMF and Organization for Economic Cooperation and Development to develop a set of best practices for both sovereign wealth funds and the countries in which they invest.

"I think we are all moving basically in the same direction," said Caruana on a conference call. "We think a better understanding of the role and the practices of the sovereign wealth funds, and the development of this set of best practices, would be mutually beneficial to all the parties."

U.S. Treasury Secretary Henry Paulson announced an agreement with officials from Abu Dhabi and Singapore, which operate sovereign wealth funds, on sets of principles for both the funds and their recipients.

The joint statement called for the funds to make a formal pledge to invest for commercial rather than "geopolitical" reasons, as well as for strong disclosure and governance standards. Recipient countries were urged to avoid protectionist measures or discriminate against the funds, according to the principles.

Recent investments in cash-hungry Wall Street firms totaling over $35 billion show that the funds can contribute to global financial stability, Caruana said, but added that best practices would help "mitigate" concerns about the funds and their investment strategies.

According to a staff paper, the IMF's best practices would cover governance, institutional structure and transparency. While the IMF plans to draw upon some of its past work on transparency and reserve management, some issues are expected to generate significant discussion - such as a fund's independence from the state and how transparent portfolio holdings should be.

Caruana declined to speculate on what the final set of best practices would look like ahead of the April meeting with funds, but said: "Nobody's going to ask something that is so market sensitive that it can put sovereign wealth funds at a competitive disadvantage."

The U.S. Treasury welcomed the IMF board decision.

"The U.S. welcomes sovereign wealth fund investment and applauds this as a postive step in the effort to keep the global economy open to investment flows," said Treasury spokeswoman Brookly Mclaughlin.

The funds, which have grown rapidly to as much as $3 trillion globally, have come under greater scrutiny as they have shifted more assets into equity holdings. The IMF projects that they could expand to $10 trillion in five years, while other estimates anticipate as much as double that amount.

Their growth could have major implications for global asset flows, particularly in the case of the U.S., since the international reserves of many countries include a large allocation in U.S. Treasurys. As sovereign wealth funds seek a more diversified portfolio, the value of the dollar is poised to decline.

In an analysis by the IMF staff, the U.S. was estimated to see an annual drop in inflows of between 0.25% and 0.5% of gross domestic product, which would result in a 2% to 5% decline in the dollar and a 10- to 25-basis-point pickup in real interest rates in the U.S.

"While the model estimates do not suggest a disorderly depreciation of the U.S. dollar, or a disorderly unwinding of global imbalances, they do not take into account possible second-round effects as other investors react to the change in the behavior of (sovereign wealth funds)," the report says, adding that it would "help alleviate the overvaluation of the dollar."

-By Tom Barkley, Dow Jones Newswires; (202) 862-9275; tom.barkley@dowjones.com

(END) Dow Jones Newswires

23-03-08 0427GMT