'Most global estimates about size of SWFs are inaccurate'

Sovereign wealth funds (SWFs) are keeping the world guessing on the exact size of their financial resources as most of them are still resisting growing global pressure to become more transparent, according to a Saudi official.

While the IMF and numerous other sources have tried to provide rough figures about the assets of those enormous investment vehicles, their estimates have remained mostly inaccurate, said Majed Abdullah Al Muneef, an advisor at the Saudi Ministry of Petroleum and Mineral Resources.

Some of those sources could be close to reality when it comes to a handful of funds which make disclosures, but their estimates about other SWFs regarding both their present and future financial position remain highly overstated, Muneef said.

In a 80-page study published in the Arab Oil Co-operation magazine of the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec), Muneef said many sources were based on what he described as unrealistic projections, while others had not taken into consideration off-budget spending and military allocations when calculating oil earnings of producing nations.


Assets estimate

Citing estimates by the International Monetary Fund, the US Council on Foreign Relations (CFR) and numerous other sources, Muneef put the total assets of SWFs worldwide at between $2.093 trillion (Dh7.68trn) and $2.968 billion at the start of 2008.

He said the big gap in such estimates is due to inaccuracies in projecting the resources of the Abu Dhabi Investment Authority (Adia), the Qatari Investment Authority (QIA), Singapore's fund and some other SWFs.

The largest gap was in estimates about Adia, with some sources evaluating funds under its management at only $250bn and others estimating them at as high as $875 billion in February 2008, Muneef said.

"The disparity in the estimated SWF resources worldwide is due to the large gap in the estimates about key funds, including Adia, QIA and that of Singapore," said Moneef, who also head the GCC Energy Team and is an associate economy professor at King Saud University in Riyadh.

"CFR and other sources believe the estimates about the Gulf SWFs are exaggerated as most of them have not taken into account, when calculating oil revenues, leakages such as military expenditure or unscheduled spending [off-budget]. For this reason, CFR estimates put assets at only around $714bn at the end of 2008… around $500bn were also controlled by the Saudi Arabian Monetary Agency (Sama), including nearly $70bn managed by the Saudi Pension Fund."


Exaggerated numbers

Muneef said forecasts about the future assets of SWFs have also been highly exaggerated, citing one conducted by Morgan Stanley in 2007 showing the total resources of global SWFs could soar to $12trn by 2015.

"These projections are highly exaggerated as they were based on exaggerated estimates of present assets and on unrealistic assumptions about oil prices, the capacity of economies which own those funds, the return on those investments [5.5 per cent annually] and other illogical projections," he said.

"One conservative study now believes the combined assets of all GCC SWFs and those of Sama will climb to about $2.2trn in 2012 if oil prices remain at an average $100 a barrel during that period and to nearly $1.8trn if oil prices average $75 and only $1.4trn if oil prices average $50. The study notes that GCC countries usually save about 42-46 per cent of the increase in oil prices above $50 a barrel – the price needed to cover their imports."

Muneef said the bulk of studies issued over the past few years about SWFs are based on mere assumptions as GCC funds do not make any revelations about their activities despite a recent Western campaign for SWF transparency.

"Some of those studies are even based on just statements issued by officials from owner countries or a publication by a SWF that it owns shares in this or that company. The only accurate information could be that about the Norwegian SWF, which normally discloses its performance and assets." Quoting some of those studies, Muneef said investments by the GCC funds cover securities, bonds, real estate and other fields.

While those of Adia and other GCC SWFs are concentrated in securities as long-term investment, the bulk of those managed by Sama are in low-risk, low-return bonds as a short and medium term investment, Muneef said.

"This is because the functions of those funds are different from those of Sama, which is classified as more a stabilisation fund than a SWF. The assets managed by those SWFs are mainly as high-risk long term investment."


Investment breakdown

A breakdown showed nearly 55-67 per cent of Adia's investments are in securities, while 12-16 per cent are in bonds and the rest in other fields. It showed 60 per cent of the assets of the Kuwaiti Investment Authority (KIA) are invested in securities, while 25 per cent in bonds and 15 per cent in other investments. QIA's assets are distributed 60 per cent in equity and 20 per cent each in bonds and other instruments, while those of Oman's State Reserve Fund are based 30 per cent in bonds, 20 per cent in equity and 50 per cent in others. The study showed around 80 per cent of Sama's assets are invested in bonds and 10 per cent each in securities and other instruments.

Muneef said the global financial distress, which has inflicted heavy losses on SWFs and sharply depressed crude prices, should prompt those funds to play a more active role in supporting fiscal balances in their home countries.

"The success of those SWFs in contributing to local economic stability and fiscal discipline will of course depend on several criteria, mainly their flexibility in depositing and withdrawing funds and in investing by those SWFs," he said.

"A second criterion for the success of those SWFs is how far they are linked to public finance. The presence of various government parties that are empowered to spend from those funds will negatively affect their role in achieving fiscal and economic stability as is the case in Libya and Kazakhstan."

In contrast, Norway's SWF represents a government account with the Central Bank, involving deposits by the government from oil earnings. He said such revenues are used in funding the non-oil budget deficit, which includes the difference between the non-oil income and spending on non-oil sectors.


Gulf SWF reforms

"Gulf SWFs should play a similar role as part of an overall policy to reform their fiscal system… the Gulf countries could either set up a special fund that will act as an isolated island to support the budget, while the fiscal system remains untouched or they can assign their SWFs to play this role as part of an overall reform programme aimed at ensuring fiscal discipline," said Muneef.

GCC states – the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman – should consider devising new policies after the eruption of the global crisis and the plunge in oil prices to better manage their wealth, he added.

"Such policies should be intended to enable the Gulf countries to encounter the repercussions of fresh oil shocks and market crises on their economic and financial decisions," Muneef said.

Gulf funds' assets to erode further in 2009

The global financial distress has inflicted heavy losses on state funds from the Gulf oil heavyweights and their assets will likely erode further in 2009 because of low oil prices, according to the US Council on Foreign Relations (CFR).

Even if oil prices averaged about $75 in the next few years, the asset portfolio of the sovereign wealth funds (SWFs) in the region could still suffer as high public spending means little surplus will be left for those funds, the New York-based Council said in a study.

In a working paper by two of its experts, CFA said the assets of those funds, especially the Abu Dhabi Investment Authority (Adia), had largely been overstated, estimating Adia's funds at below $300 billion (Dh1.1 trillion). In case oil prices surge back to $100 a barrel, Gulf SWFs will be able to rebuild their resources, which could swell to around $2.2trn by 2012, the study said.

While acknowledging that Adia is the largest SWF, the study said its size had largely been overstated, sometimes by as much as 100 per cent.

It said Adia was also hard hit by the recent fall in global equities, as many of the same factors that worked in its favour from 2004 to 2007 – a high allocation to equities, emerging market, and private equity – worked against it in 2008. Other SWFs, including the Kuwait Investment Authority (KIA) and the Qatar Investment Authority (QIA) are in a similar position.

The Saudi Arabian Monetary Agency (Sama) by contrast benefited from its fairly conservative portfolio, the study said, adding that it is now likely to hold the largest sovereign portfolio in the Gulf. It estimated the external assets of Adia and the Abu Dhabi Investment Council at less than $400bn, adding that they could be as low as $300bn – well below Sama's more than $500bn in assets.

The study said the surge in oil prices to record high levels in 2008 pumped at least $300bn into Adia and other Gulf SWFs and central banks, compared with nearly $230bn in 2007, when oil prices averaged $70.

"However, the 2008 inflow was more than offset by the mark-to-market losses on the equity portfolios of the large sovereign funds…. all these funds now look likely to shrink in 2009, as the price of oil has fallen to the point where many Gulf economies will need to draw on their foreign assets to sustain their current level of imports," the study said.

"Estimates of the Gulf's current and future external wealth consequently need to be scaled back to reflect the large losses of many Gulf funds and the much more subdued pace of future asset accumulation that seems likely over the next couple of years."

CFR figures showed that 2006 and 2007 were the golden years for the GCC's sovereign funds because of high oil prices and strong global equity markets. It estimated that Adia's funds under management rose from $285bn in 2005 to $400bn at the end of 2006 and $475bn at the end of 2007. KIA's assets peaked at $275bn and QIA reached nearly $65bn – for a total of around $800bn.

"This made the large Gulf funds among the biggest sovereign investors in a host of risky assets – as no other large pool of public money had a comparable appetite for risk," the CFR study said.

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