Wednesday, Sep 24, 2008
Gulf News
While the financial systems of leading Western powers reel under the current credit crisis, Sovereign Wealth Funds (SWFs) of resource-rich countries, with an estimated assets of $3 trillion (Dh11.03 trillion), may remain unabated in shifting the globe's financial weight from the West to the East.
Bahrain-based Investcorp, the asset management firm specialising in alternative investments, announced this week the launch of a $1 billion credit investment vehicle that has been formed to acquire whole loans, mezzanine loans, and commercial mortgage-backed securities (CMBS) collateralised by well-performing commercial and residential real estate assets throughout the US. The company said a sovereign wealth fund from the Gulf region has committed $850 million to the vehicle.
The current financial crisis does not seem to deter SWF ambitions in acquiring foreign assets, according to analysts.
"This is neither an American crisis, nor a European or a Gulf one," says Kuwaiti economist Ali Al Nemash. "It is a global crisis..... The crisis has started and not ended," he adds.
And crises are the best times for investments, he continues, including the long-term investments of SWFs.
"Cash is king, and cash rules," he says.
However, he warns that SWFs "should monitor closely, follow-up carefully and study the situation. Choose the right time to invest in American, European or Asian markets."
Benefiting from soaring oil prices and booming foreign exchange reserves, SWFs from the Gulf and far Eastern countries have been investing in different parts of the US and Europe, including major financial hubs such as New York, London and Geneva.
Such investments, regional economists say, are necessary in the situation prevailing in the West.
SWFs of Abu Dhabi, Kuwait, Qatar and Oman have invested in buying stakes in giant Western financial and commodities companies and bonds. For example, The Abu Dhabi Investment Authority (Adia) purchased a 4.9 per cent stake in Citigroup valued at $7.5 billion last year.
Adia is the world's largest SWF, which controls nearly $875 billion in assets, according to reports
Concerns
SWF investments - which are defined as government investments funds separately managed from official currency reserves - have created concerns in Western countries due to the perception that they might be politically motivated. Public concerns were intensified with a noticable increase of investments in the US last year. China, for example, invested $3 billion in the US Blackstone Group last year, which was seen as an assault on US assets.
These fears, however, seemed to have been mollified afterwards, analysts say.
"The tone of criticism [of SWFs investments] has somehow softened [in the past few months] because of the need for these funds' investments...to preserve the social security of the hosting countries," says Al Nemash.
According to Al Nemash, Western governments look at the SWFs investments as "temporary" solutions, and are prepared to pacify fear and tension related to them. They believe they can restrict them if the need arises, recalling the experience of the Kuwaiti Investment Fund in Britain in the early 1980s.
Britain's former Prime Minister Margaret Thatcher had then sought a legislation to block foreign investments exceeding 25 per cent in British Petroleum (BP). As a result, Kuwait, which was the first country to establish a SWF in 1961, had to reduce its share of investments in the company to less than 15 per cent.
And as recently as last August, the German cabinet adopted a bill which blocks non-European investors from winning a share in a German company that would exceed 25 per cent.
The move came amid reports on talks between SWFs from the Gulf, Russia and other regions with Siemens, the German industrial conglomerate and the largest European engineering group.
Meanwhile, representatives of 26 SWFs met in Santiago, Chile earlier this month, and agreed on a set of 24 voluntary principles for the funds to follow and ensuring their competitiveness in global financial markets.
The details were not disclosed, and will only be made public at the annual meeting of the International Monetary Fund (IMF), scheduled on October 11 in Washington, DC, sources told Gulf News.
According to The Times newspaper, the principles would "include encouraging the funds to explain their investment criteria, and recommending that they avoid buying stakes in sensitive companies, such as Western defence contractors".
"They will also vote on setting up a standing committee that will update the guildelines and liaise with Western governments and institutions such as the World Bank and IMF on issues of concern," according to the British newspaper.
Commenting on the principles, a well-informed source, who asked not to be named told Gulf News: "They are quite comprehensive", refusing to elaborate further before the official public revelation of the Santiago agreement.
Known as the Generally Agreed Principles and Practices (GAPP), the norms cover all related aspects, including legal framework, investment policies and risk management policies, participants said.
GAPP was not called a code of practice or rules of conduct because the funds didn't want to imply "that there were good practices and bad practices", the source adds.
Moreover, the agreed principles were reached also in consultation with many other organisations and governments, including the European Union (EU), World Bank, and some of the recipient countries, including Australia, Brazil, France, Germany, India, Italy, Japan, South Africa, the United Kingdom and the US.
"One very important thing they [non-SWFs representatives] have understood through this process is that SWFs understand the need to make their motivation clear...The recipient countries, and other organisations also understand that too much transparency will render SWF uncompetitive," the source adds.
Economists in the region, including a member of the Saudi Shura (consultative) Council and economics professor Waleed Arab Hashem, describe Western concerns regarding the SWFs investments as "unjustified".
Western countries, he continued, "are based on the principles of free economy and fears from investments contradict such principles. If this continues, this will hurt them [Western countries] more than they will benefit from".
However, the Saudi economist explains that Western countries can place some restrictions or barriers on investments in certain fields, citing media, defence companies as an example.
"Or they can define a certain share for foreign investments (in certain companies)", he adds.
Standards
While Saudi Arabia, the world's largest crude exporter, invests billions of dollars abroad, it has no official body as a SWF. Yet, the size of Saudi investments overseas are estimated at nearly $300 billion.
Both Hashem and Al Nemash call for more and higher professional standards in running SWFs, particulary in the Gulf region, and in dealing with the recipient countries.
Gulf countries are part of the International Working Group of Sovereign Wealth Funds (IWG) as individual countries and not as a bloc. Oman and Saudi Arabia are permanent observers, while UAE, Qatar, Kuwait and Bahrain are members of the IWG.
The 26-member IWG includes Australia, Azerbaijan, Bahrain, Botswana, Canada, Chile, China, Equatorial Guinea, Iran, Ireland, Korea, Kuwait, Libya, Mexico, New Zealand, Norway, Qatar, Russia, Singapore, Timor-Leste, Trinidad & Tobago, UAE and the US.
SWFs are a "very diverse group of entities", explains one source. They represent emerging countries, developed countries as well as developing ones. Their histories ranges between tens of years and one year. They vary in size, structure and purpose. They also have different agreement with host countries.
"All of them are united in wondering why they have to explain what they are doing because they are doing nothing wrong," the source said.
The IWG sessions were co-chaired by Hamad Al Suwaidi, Undersecretary of the Abu Dhabi Department of Finance and a Director of the Abu Dhabi Investment Authority, and Jaime Caruana, Counsellor and Director of the IMF's Monetary and Capital Markets Department. According to the IMF, Satiago's meeting was the third for the International Working Group of Sovereign Wealth Funds.
In developing the GAPP, the IWG has met earlier in Washington in April and in Singapore in July earlier this year. The IWG's drafting group also met separately in Oslo in June 2008.
The estimated $3 trillion assets of the SWFs are expected to double in the next few years. Different estimates suggest that their assets may rise further to about $ 6-10 trillion within five years, the IMF noted.
Global insight, the leading company for economic and financial analysis worldwide, announced earlier this year that SWFs have been growing by 24 per cent annually for the past three years.
"Projecting out this annual growth rate, sovereign wealth funds will surpass the entire current economic output of the United States by 2015, and European Union by 2016," forecasted Global Insight.
At present, China, Kuwait, Norway, Russia and Singapore are among the countries with the world's largest SWFs.
Gulf News 2008. All rights reserved.
