Regional SWFs urged to support national budgets

Sovereign wealth funds (SWFs) in Gulf oil producing countries need to play a more active role in supporting national budgets to lessen the influence of volatile crude prices on the fiscal balance, according to a Saudi official.

Majed Abdullah Al Moneef, an advisor at the Saudi Ministry of Petroleum and Mineral Resources, said the success of SWFs in the GCC to achieve financial and economic stability hinges on what he described as their flexibility in spending and withdrawal and depositing of funds.

Citing recent estimates by the US Council on Foreign Relations (CFR), Moneef said the global financial crisis had cost SWFs in the GCC around $350 billion (Dh1.28 trillion) but the loss was partly offset by a sharp rise in their oil export revenues in 2008.

"The success of those SWFs in contributing to economic stability and fiscal discipline in their countries will of course depend on several criteria, mainly their flexibility in depositing and withdrawing funds and in investing by those SWFs," Moneef wrote in an article published this week in the quarterly bulletin of the Cairo-based Arab Economic Research Association.

Moneef, who also heads the GCC Energy Team and an associate economy professor at King Saud University in Riyadh, referred to what he called lack of flexibility in Algeria's SWF, which had to pay high interest on bonds issued by the government a few years ago, far surpassing the revenue of its investments.

He said such a practice had affected the fund's resources and put further pressure on government finances.

"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," he said.

"In contrast, the SWFs in Norway represents a government account with the Central Bank. This account involves deposits by the government from oil earnings and is used in funding the non-oil budget deficit, which includes the difference between the non-oil income and spending on non-oil sectors. This SWF has no powers to spend elsewhere.

"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."

Moneef said 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. "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."

He said the crisis had cost regional SWFs a staggering $350bn because of a sharp decline in the value of their foreign assets. But, he said, the losses had been partly offset by the surge in their oil export earnings, which allowed them to pump nearly $273bn in fresh funds into their SWFs.

"The combined losses of the GCC's SWFs in 2008 because of the global financial crisis are estimated at $350bn, nearly 27 per cent of their total assets," he said, citing estimates by the CFR.

In its report this year, the New York-based CFR estimated the loss of the Abu Dhabi Investment Authority (ADIA) at about $183bn. Those by the Kuwaiti Investment Authority were estimated at $94bn while they were put at $27bn by the Qatari Investment Authority and $46bn by the Saudi Arabian Monetary Agency.

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