Gulf SWFs' losses offset by diversified investments

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A slump in global equities has inflicted heavy losses on Gulf government funds but such losses have been more than offset by the diversified nature of their investments, according to a key Western financial institution.

The slump, caused by the ongoing global financial crisis, has already prompted GCC countries to repatriate a large part of their Western-based assets for investment at home, said the Washington-based Institute of International Finance (IIF).

It put the investments by the six-nation GCC in equities and other sectors in the United States at around $260 billion (Dh954bn) at the end of 2007.

"The sharp slump in equities and real estate prices in the US and Europe may have reduced the value of sovereign wealth funds (SWFs) that are partly invested in equities and real estate," the IIF said in a study on the GCC.

"We expect that a portion of the GCC's foreign assets that were invested in equities has incurred significant losses following the sharp fall in the price of global equities... nevertheless, the diversified nature of investments and the substantial current account surplus in 2008 should result in a significant increase in the stock of foreign assets."

Citing what it described as unofficial sources, the report said the global financial crisis had prompted the GCC governments to withdraw a "significant portion of their SWFs from abroad to invest them at home".

"Nonetheless, all GCC countries remain net external creditors. Our estimate of the stock of gross foreign assets [government, banks, and non-bank financial institutions] is at around $1.5 trillion [130 per cent of GDP] at the end of June, more than four times the gross foreign liabilities," it said.

"The sovereign and other investment funds in the GCC countries have in recent years become important to the global financial system. Such investments are believed to be diversified and cover a broad range of financial instruments, countries, and currencies. Recently, following the global financial crisis, the GCC is experiencing a new wave of capital repatriation from the US and the euro-zone to the Mena region."

A graphic provided by IIF showed the GCC's investments in US equities, as well as short- and long-term debt jumped from only around $75bn at the end of 2001 to a record $260bn at the end of 2007.

Most of the 2007 investments were based in equities, which were valued at about $140bn. Long-term debt stood at $80bn and short-term debt at nearly $40bn, according to the report.

"The GCC countries are contributing towards reducing global imbalances... a large portion of the region's oil revenues has been used to invest in infrastructure investment and oil and gas sectors to increase production and refining capacity. Sizable imports of capital goods for the large investment projects that are under way or planned, together with rising consumer goods imports, are reducing the sizable surpluses and helping to stabilise global trade imbalances.

"The GCC countries are seen as new and significant investors in world financial markets... investment in financial assets by the GCC is estimated at about half of their oil revenues. The sovereign and other investment funds in the GCC have in recent years become important to the global financial system. Such investments are believed to be diversified and cover a broad range of financial instruments."

By Nadim Kawach

© Emirates Business 24/7 2008