About a year ago, Abu Dhabi’s sovereign wealth fund (SWF) injected $7.5 billion into an ailing Citigroup. Kuwait’s fund also invested $2 billion into Citigroup and it put another $3 billion into Merrill Lynch. At the time, officials in the US and Europe suspected SWFs posed a possible threat to western nations’ economies and national security. They rang alarm bells over the funds’ lack of transparency. However, with the financial crisis sweeping the globe, western governments are now begging for investment from the GCC, as the Gulf countries have some of the few large pools of available cash in the world.
British Prime Minister Gordon Brown toured the GCC in November, asking the governments of Saudi Arabia, Qatar and the UAE to pump money into international institutions and British companies to help dampen the effects of the global crisis. During his trip, Brown told reporters the UK “welcomes investment from sovereign wealth funds.”
Just before Brown arrived, the United State’s Deputy Treasury Secretary Robert Kimmitt made a similar trip. Partly due to the new “Santiago Principles” agreement between 23 countries that outlines funds’ code of conduct, and partly because of the need for cash to free up frozen credit markets, Kimmitt wanted to make clear that GCC SWF money was also welcome in the US.
GCC funds are largely uninterested right now and much of the West’s charm offensive has gone to waste. The financial crisis has hit the SWFs’ overseas investments, destroying tens of billions of dollars of wealth. Low oil prices have only compounded the problem at a time when GCC economies need their cash to prop up ailing stock markets, real estate investments and the banking sector.
Just after Brown’s visit in November, the mood in Dubai ranged from gloomy to outright apocalyptic. The bunker attitude was evident at a private equity fund conference in Dubai. As a speaker used a PowerPoint presentation to summarize the growing role of SWFs in the global economy, fund managers from around the world drank coffee and nibbled biscuits in an adjacent ballroom, which one fund manager called “the trading floor.” There didn’t appear to be much trading going on however. Many of the managers, like Ejaz Shamsi, a senior vice president at Pakistan Private Equity, came here looking for cash. Unfortunately, everyone else Shamsi ran into was looking for cash too.
Liquidity drought
“One and a half years ago when I attended there were so many investors available,” Shamsi said. “But at this point in time, the scenario’s totally different… [the SWFs] are sitting on their cash.”
“They’ve already made a lot of losses on investments, so they are reluctant to invest money right now. So it’s difficult for us to convince them, and for them to trust us, and for them to trust the market.”
The private equity fund managers would be lucky to get just a fraction of the cash sovereign wealth funds are currently estimated to possess — the United States Treasury estimates the world’s 26 SWFs currently possess two to three trillion dollars in assets. In the next five years that amount could mushroom to between seven and 11 trillion dollars.
Of those assets, Gulf SWFs have an estimated 700 billion dollars invested overseas, according to the Institute of International Finance. That includes investments across the world, across a variety of sectors, with a majority in Europe and the US. SWF’s are estimated to hold broad portfolios valued at $200 billion in the US alone that include stocks, real estate and bonds, and their exposure to the financial crisis has been just as extensive.
Eckart Woertz, GCC economic program manager at Dubai’s Gulf Research Center, estimates the Abu Dhabi Investment Authority and the Kuwait Investment Authority have 60 percent of their investments in equities, and just as anyone with a retirement plan knows, those equities aren’t worth nearly as much as they were one year ago. But because of the secrecy surrounding SWFs, it’s hard to be sure exactly how much they’ve invested and how much they’ve lost.
Brad Setser, an expert on SWFs at the Council on Foreign Relations, told BusinessWeek the Abu Dhabi Investment Authority may have lost $100 billion over the last few months. Woertz estimates ADIA may have lost up to 25 percent of its investments and the same for KIA.
KIA’s chairman, Bader Al Saad, told Al Arabiya Television in September that his fund had lost around $270 million from its investment in Citigroup. Woertz says Saudi Arabia’s fund is best positioned as the fund was largely invested in bonds. But Saudi’s experience is the exception to the rule and now many Gulf investors have hidden their money under the allegorical mattress.
“Frankly speaking, I don’t want to invest right now,” Dubai International Capital’s chief executive Sameer al Ansari told a business conference in November, according to the Associated Press. “It’s not the time to be brave and go out there and try to hit the bottom of the market.” Al Ansari added that the world is going into a “a deep recession,” which may last two or three years, and he said his fund would be “extremely conservative” and would try to protect its assets, valued at $12 billion.
As the financial crisis took down Lehman Brothers and Merrill Lynch, KIA was less enthusiastic about bailing out US banks or seeing cheap prices as a good investment opportunity. “We are not responsible for saving foreign banks,” Al Saad said. “This is the duty of the central banks in these countries. We have social and economic responsibilities towards our own country.”
Simon Williams, HSBC chief economist for Gulf markets, says SWFs are taking a wait-and-see attitude. “I think most prudent investors, even those with time horizons as long as [the] region’s Sovereign Wealth Funds, will wait for clarity in the global financial markets before establishing positions,” he said. “I think some deals will go through, but I think they’ll be small in number.”
Braving the storm
There has been a big one recently. Late last month, Abu Dhabi’s royal family bought $11 billion worth of shares in Barclays, Britain’s second biggest bank. That gives the family a 16 percent stake in the bank, making it the largest shareholder. Barclays also sold 15 percent of its stock to investors from Qatar’s government, and reports reveal the bank had to promise to pay higher interest payments to their new partners from the Gulf.
But with oil prices falling, economists don’t expect to see a lot of these deals going through. The Institute of International Finance (IIF) estimates oil prices in 2009 will average $56 per barrel — dangerously close to the break-even mark for many Gulf governments who need higher oil prices to keep their budgets out of the red.
The Organization of Petroleum Exporting Countries has been trying to stabilize prices in the $70 per barrel range. Woertz noted that if oil can’t be stabilized, the Gulf economies will need to “plug a lot of holes in their economies at home… Some research shows that with oil prices at $50 per barrel, everyone but Kuwait will face a deficit in 2009,” Woertz said. “The International Monetary Fund is more optimistic. At $60 the GCC should have a significant income, but both reports are pretty negative.”
Meanwhile, the low oil prices come at a time when “pressures have risen on Sovereign Wealth Funds to redirect their investments to the local markets,” said IIF first deputy managing director and chief economist, Yusuke Horiguchi, in a press release.
If oil prices remain in the $50 range, most GCC countries “will need to take recourse to savings — not only for bailing out local banks and propping up local stock markets but for their normal ongoing expenditures and operations,” Woertz told the Oxford International Review.
There are already unofficial reports that this has been occurring. Reuters reported in November that Kuwait repatriated $3 billion to back up its beleaguered stock market and banking sector.
Williams says he doesn’t think funds will start selling foreign assets en masse, but he says their level of aggressiveness in the long term will be decided by this crisis.
“I think what’s going to be interesting over the next months, or years, is what conclusions Sovereign Wealth Funds draw about investing overseas,” he said. Either the funds will see the crisis as a “great time to increase their position,” or “they will look at losses they incurred over past few months and say these were markets we perhaps didn’t understand as well as we thought we did, and can’t control, and maybe it’s better to keep the money in markets we understand.”
Sovereign wealth funds “will look at losses they incurred over the past few months and say these were markets we perhaps didn’t understand as well as we thought we did.”
