DAVOS, Switzerland (Reuters) - Sovereign wealth funds have an important role to play in the world economy, but agreed international guidelines on the nature of their investments would be welcome, Finance Minister Jim Flaherty said on Friday.
In an interview with Reuters, Flaherty said concerns about the motivation of these funds, which are run by governments mostly in the Middle East and Asia to invest windfall income from oil and other exports, needed to be tackled.
“We do need to deal with the questions which arise with respect to the sovereign wealth funds,” he said on the sidelines of the annual World Economic Forum in Davos. “They are playing an increasingly important role and so we need to deal with those concerns that have been expressed.”
State-controlled investors have provided much-needed capital in recent weeks for U.S. and European banks hit by huge losses linked to the U.S. sub-prime mortgage crisis.
But concern is growing concern in some western countries that these funds may be used as tools of their governments’ foreign policies, worries that sovereign fund representatives in Davos have dismissed as groundless.
“I think we could benefit from a set of principles,” Flaherty said, referring to calls on the International Monetary Fund and Organisation for Economic Cooperation and Development to draw up a set of best practices.
But he said he was comfortable to date with the sort of investments being made despite. “We’ve seen evidence lately on investments by sovereign wealth funds that they actually contribute to financial stability in the capital markets,” he added, referring to their stake building in big U.S. banks hit by the credit crisis.
Flaherty said a meeting of the Group of Seven finance ministers in Tokyo on February 9 would focus on the six-month-old credit crisis and on the sovereign funds issue.
Central banks had acted well in easing the worst of the money market seizure late last year, he said. “I‘m actually encouraged by the high degree of cooperation between the central bankers. The steps they took to ensure adequate liquidity are appropriate and timely.”
Flaherty said the U.S. housing market was clearly in recession, regardless of the broader economy. This would hit the Canadian economy this year, especially the forestry and auto sectors that export to Canada’s biggest trading partner.
But he remained confident that Canada would avoid recession. “We expect our economy to remain positive,” he said.
He noted that the Bank of Canada had indicated it would cut interest rates again after it announced a quarter-percentage point cut in its key rate to 4.0 percent earlier this week.
Flaherty backed the central bank’s view on the Canadian dollar’s exchange rate after dramatic U.S. dollar losses to historic lows about $1.10 late last year. The Canadian dollar was last trading at US $1.0040.
“The Bank of Canada has said they are comfortable with a rate of between 95 to 98 U.S. cents and I agree with that,” said Flaherty. “What we want to avoid most is the sort of volatility we saw in the second half of 2007.”
China needed to do more to make its yuan currency more flexible, as the G7 had repeatedly urged, he said.
“The G7 has been consistent in its advocacy of more flexibility in Asian currencies and particularly the yuan. China has been moving, but not adequately in my view.”
Flaherty also said he was not satisfied with the pace of reform at the IMF and resistance from European countries to reform of IMF voting rights, or quotas, which would give developing countries a greater say -- mostly at Europe’s expense.
“The IMF has an important role to play. (But) I‘m concerned with the quota or voting share issue. That needs to be resolved by the Spring (IMF) meetings and there is still significant resistance to substantive and adequate reform.”
“The key here is for the IMF to remain as a relevant institution and a global one. But the voting share issue has to be resolved,” said Flaherty.
For full coverage, blogs and TV from Davos see: here
Reporting by Mike Dolan; editing by David Stamp