Sovereign funds cushion Gulf states despite losses

Sovereign wealth funds are cushioning oil-dependent Gulf economies against the financial crisis, but observers warn that some governments have raided them for current spending and many investments have shrunk in value.

The four main funds are Abu Dhabi Investment Authority (Adia), Kuwait Investment Authority (KIA), Qatar Investment Authority (QIA) and the Saudi foreign assets managed by the Saudi Aamarabian Monetary Agency (Sama).

"They put the Gulf countries in a comfortable position to deal with the (global economic) crisis," said economist Eckart Woertz from the Dubai-based Gulf Research Centre.

According to UN figures released last month, the four funds' aggregate value fell only slightly during last year's financial meltdown as new cash injections offset most of the fall in the capital value of investments.

The UN's World Investment Report 2009 said the funds' estimated combined value eased slightly to $1.115 trillion (Dh4.09trn) at the end of last year from 1.165trn a year earlier.

Capital losses last year reached $350bn or more than 35 per cent of total value, according to UN calculations, but the report said government injections of $300bn largely counteracted the fall.

In any case, the impact of the capital losses on the economies concerned appears to be minimal.

"These are long-term funds that stay offshore on international markets. Mostly they do not have an immediate asset liability in the short term and are rather meant to be spent many years from now when oil revenues will decline," said Woertz.

The Gulf SWFs have never officially disclosed the size of their assets nor losses and the funds' exact value remains unclear, especially that of Adia, which some reports put at near $800bn before the crisis.

"The size of Adia was overstated, sometimes by as much as 100 percent," said a paper published by the US-based Council on Foreign Relations (CFR) in January 2009, valuing Adia at $453bn as of December 2007. Adia's fortune is reckoned to have shrunk to $328bn by December 2008, according to the UN report.

Kuwait's fund meanwhile is estimated to have dropped from $262bn to $228bn in 2008, while Qatar's fund slumped from $65bn to $58bn, the UN said. These funds' heavy losses were largely offset by substantial inflows.

Analysts said the funds' exposure to the fall in global equities was the main factor in the losses.

"Many of the same factors that worked in its [Adia's] favour from 2004 to 2007 – a high allocation to equities, emerging market, and private equity – worked against it in 2008," said the CFR paper.

Sama stood out as it reaped the benefits of its conservative investment policy, which led to it concentrate its foreign assets in fixed income instruments such as US bonds.

Sama's foreign assets are estimated to have increased from $385bn at the end of 2007 to $501bn in December 2008, according to UN estimates.

Saudi finance ministry figures, meanwhile, show the kingdom's net foreign assets peaking at $443.2bn in November 2008.

"The three main funds, apart from Sama, which have inflated their coffers during the oil boom, have taken huge risks. The share of equities in these funds became higher than bonds," said Kuwaiti economist Jassem Al Saadoon. He scolded some of these funds for "politically-motivated" moves to invest in struggling Western financial institutions in the midst of the crisis.

"The countries owning these funds made a mistake in wanting to prove to the world that they were responsible states. But they have not taken the right decisions," he said.

"I believe that this has deepened their losses even after the recovery in global stock markets," Saadoon added, citing investments in Merrill Lynch by KIA, and in Citigroup by Adia and KIA.

Woertz highlighted another negative factor for the funds. "The financial crisis and lower oil prices have necessitated withdrawals for funding government investment in infrastructure," the economist said.

Saudi Arabia in particular appears to be tapping into its foreign assets to cover its budget deficit, according to a report by Saudi financial firm Jadwa Investment.

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