Western fears on Gulf SWFs not rational, says Arab Fund

A recent Western campaign against sovereign wealth funds (SWFs) is unjustified and is a politically motivated move which should be countered by those funds, according to a top Arab monetary official.

Although such a campaign has abated since the Abu Dhabi Investment Authority (ADIA) and other SWFs rushed to rescue collapsed US financial institutions in late 2007, the change in the West's position could be intended only to seek support from those funds, said Jassim Al Manai, Chairman of the Abu Dhabi-based Arab Monetary Fund (AMF), a key Arab League financial organisation.

In a study published recently, Manai said counter-measures by SWFs from the Gulf and other countries should include a positive propaganda, stronger transparency by the funds and lower investment in Western establishments which he said represented a national symbol.

Manai also dismissed Western reports that Arab funds are seeking to control the financial system there, saying the recent multi-billion dollar cash injections by some SWFs into ailing US institutions was a losing investment in the short term.

"Despite the recent change in the Western adamant position towards those funds, our fear is that the Western countries might feel that they are forced to admit those funds into their institutions rather than adopting a confirmed policy…there have been experiences in the West showing that their position towards these funds has never been stable and is governed by transitional circumstances that could change by time," he said.

"It now appears that the fears by the Western countries from the SWFs in the Gulf and other countries are not based on rational justifications. They are rather influenced by political and protectionist approaches."

Manai, a veteran Bahraini economist and ex-official, said Arab fears are substantiated by the fact that their funds have not been involved in any "negative practices" in the West and their combined assets do not exceed two per cent of the global equities turnover of around $165 trillion a year.

He said Arab funds are convinced that such fears are based more on expectations than on practical experiences. On the contrary, he added, the long-term investments by those funds constitute a "stabilising factor" for global markets while the SWFs are considered "peaceful investors" who provide massive funds without insisting on having any controlling or effective representations in the managements of Western institutions.

"For these reasons, we do not believe that the sensitiveness and concerns by Western governments towards these funds are justified ... nor do we believe that these governments need to introduce new laws governing those funds because they have enough laws and regulations dealing with foreign funds," he said. "But all this should not mean that the Gulf SWFs and other funds should remain idle and take no action. We insist that these SWFs must not downplay the concerns of Western countries and should respond with measures that could contribute to alleviating those fears and concerns."

Manai proposed what he called a propaganda drive by SWFs to highlight their positive role in the Western financial system and demonstrate that they serve the common interests of both parties. He also urged SWFs to improve transparency in activities and to define the responsibilities with their partners.

"These funds also need to avoid making much fuss about Western companies which represent national symbols. It means they should avert acquiring strategic stakes in these firms and focus on modest investments in other companies in various sectors as a means of diversification," he said.

"The SWFs should realise that their issue is no longer a purely investment or economic. It has been politicised and has become part of the international political relations. Dealing with this issue should not be confined to investment experts in these funds but it take bigger economic and political proportions."

Manai did not name any of those SWFs but wealth funds in the UAE and other Gulf oil producers control more than 50 per cent of the total assets owned by the more than 50 SWFs worldwide. At the end of 2007, these assets were estimated at around $3trn compared with only $500 billion in 1990.

According to Western banking forecasts, the assets are expected to jump to nearly $12trn by 2015 mainly because of high oil prices and expectations the current account of investing nations would record large surpluses. Independent estimates put the combined wealth of the three main Gulf SWFs – the UAE, Qatar and Kuwait – at over $1trn at the end of 2007 compared with nearly $700bn in 2000. More than 75 per cent of those assets are controlled by ADIA, which is independently classified as the world's largest government-controlled fund, with an estimated asset size of $875bn.

Kuwait's SWF controlled nearly $215bn at the end of 2007, while Qatar's wealth was estimated at $60bn. The surge in the GCC wealth funds over the past seven years has been a result of a sharp rise in their oil export earnings, which are expected to top $555bn this year compared only $56bn in 1998, when crude prices tumbled to only $10 a barrel.

KEY TALKS ON PRACTICES

The International Working Group of Sovereign Wealth Funds (IWG) – comprising 26 member countries – are currently meeting in Santiago, Chile, to agree on a common set of voluntary principles and practices intended to guide investment practices by SWFs.

These principles cover areas of the legal framework, governance and institutional structures, and investment policies and risk management.

The meeting aims to reach an understanding on the Generally Accepted Principles and Practices (GAPP) on SWFs in advance of the IMF-World Bank Annual Meetings on October 10-13. The GAPP is expected to be presented to a meeting of the IMF's policy-guiding body, the International Monetary and Financial Committee (IMFC), on October 11 when it convenes during the Annual Meetings in Washington.

During the April 2008 meetings of the IMF and the World Bank, the IMFC had welcomed "the IMF's initiative to work, as facilitator and co-ordinator, with SWFs to develop a set of best practices by the 2008 Annual Meetings." The IMFC emphasised that SWF best practices should be developed on a collaborative and voluntary basis, and go hand in hand with work in the Organisation for Economic Co-operation and Development (OECD) and elsewhere on best practices for countries receiving SWF investments.

In developing the GAPP, the IWG earlier met in Washington on April 30-May 1, 2008, and in Singapore on July 9-10, 2008. The IWG's drafting group also met separately in Oslo in June 2008. Sovereign wealth funds, some of which have been around at least since the 1950s, have become increasingly important players in the international monetary and financial system. Recently the rapid accumulation of foreign assets in some countries has resulted in an increase in the size, and in a growing number, of SWFs.

As a result, the total assets of SWFs worldwide have grown dramatically over the past 10-15 years, and various market estimates suggest that their assets may rise further from $2-3 trillion today to about $6-10 trillion within five years. At present, China, Kuwait, Norway, Russia, Singapore, and the UAE are among the countries with the world's largest SWFs.

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