(Bloomberg Opinion) -- Scottish leader Nicola Sturgeon has navigated her own course in dealing with the aftershocks of the novel coronavirus. In pursuing what she calls an “interventionist approach” to the pandemic thrashing the economy, she’d be wise to consider creating a sovereign wealth fund to build a trust fund for her nation.
Scotland is willing to consider taking equity stakes in local companies to defend them from the costs of the extended lockdown triggered by the outbreak. “We are absolutely open to doing this if it makes strategic sense,” she told reporters in Edinburgh on Monday.
In a report this week, an independent panel commissioned by the Scottish government even urged legislators to develop the ability to oversee equity holdings, “which are likely to arise out of the crisis.” The suggestion was among 25 recommendations to resuscitate growth in the economy, which shrank by 2.3% in the first quarter. However, the panel concluded the effort wouldn’t require “a new public sector organisation.”
That’s a shame because it would miss the opportunity to establish a standalone wealth fund. It’s also particularly odd given that the report explicitly notes the success of Singapore’s state investment firm Temasek Holdings Pte in becoming a major investor acting on a commercial basis. Temasek is the biggest stakeholder in half of that country’s 10 biggest companies, managing S$313 billion ($225 billion) as of March 2019.
The Scottish report includes some good ideas, such as accelerating the timetable for the Scottish National Investment Bank, a new body that will be up and running by the end of the year, to “leverage initial public capital by issuing bonds.” The agency would need special dispensation from the U.K. Treasury to do so. Moreover, investors would have to make some assumptions about Scotland’s likely economic future when assessing what interest rate to charge, not least because of the prospect the country could repeat its bid to seek independence from Britain.
But the availability of long-term funds in the fixed-income market at ultra-low interest rates — witness Austria borrowing for 100 years at less than 1% in a bond sale this week — makes borrowing to invest a no-brainer for governments. It would also have the serendipitous effect of reducing the cost of building a wealth fund.
While the pandemic provides an opportunity for countries that are having to bail out their industries to convert that assistance into equity holdings, the justification for creating wealth funds is broader.
In their new book “Angrynomics,” M&G Ltd. fund manager Eric Lonergan and Mark Blyth, a professor of international economics at Brown University, argue that creating wealth funds is a way of rebalancing the distribution of a society’s riches. Borrowing cheap money to invest would allow a redistribution of the returns to the poorest households, giving them a greater stake in economic success, they say. And money has rarely been so affordable.
Scotland need not go it alone. Last week, Conservative lawmaker Bim Afolami proposed that the U.K. government borrow and invest 15 billion pounds ($19 billion) in small- and medium-sized British companies. In doing so, he said it should establish a so-called Recovery Fund, a vehicle for investing in the country’s future, in which young people and National Health Service workers would be “at the front of the queue” to buy shares in.
Afolami’s idea caught Boris Johnson’s attention. The U.K. prime minister said he had studied the proposal with interest, and that the government would reveal “imaginative ways in which we can stimulate a strong rebound” in the coming weeks.
I argued in April that establishing wealth funds would be a great way for countries to channel the state aid keeping businesses afloat during the pandemic. My colleague Nir Kaissar suggested in May that the U.S. would benefit from a fund of its own.
Sovereign wealth funds are an idea whose time has arrived. It would be a tragedy if governments didn’t make the most of the fabulously favorable environment to borrow cheaply and invest for the future.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable."
©2020 Bloomberg L.P.
