SWFs still face risk of Western curbs

Government investment funds from the Gulf and other countries still face the risk of possible restrictions by Western host nations because of their negative impact on the fiscal balance, an Arab League report said yesterday.

While a possible agreement between the International Monetary Fund (IMF) and those institutions, better known as sovereign wealth funds, could assuage Western fears, the expected sharp growth in their assets could still prompt host countries to impose curbs, said the report by the Kuwaiti-based Inter-Arab Investment Guarantee Corporation (IAIGC), a key Arab League financial body.

IAIGC estimated the combined assets of the more than 50 SWF worldwide at nearly $3 trillion (Dh11trn) at the end of 2007 compared to around $500bn in 1990. It projected them to jump to $12trn by 2015, mainly because of high oil prices and expectations the current account of investing nations would record large surpluses.

The report said more than 50 per cent of the total assets of those SWFs is controlled by oil producers, mainly the UAE and other Gulf states.

"The real danger to these SWFs and other government investment vehicles is that host countries would still impose restrictions on the operations of these funds and on their financial and capital transactions with the external world… these means more curbs and barriers to the capital movement worldwide as all countries have the right to choose the best investment and best sectors for its market," the report said.

"But we do not expect this growing SWF phenomenon to dwindle or disappear in the foreseeable future as these funds are basically dependent on the current account surplus… they could be affected only when those countries with large current account surpluses start to suffer from persistent deficits in their current account."

IAIGC, which groups the UAE and most other Arab countries, gave no figures on the assets of individual SWFs but independent estimates have put the combined wealth of the three main GCC SWFs in the UAE, Qatar and Kuwait at over $1trn at the end of 2007 compared to $700bn in 2000.

More than 75 per cent of those assets are controlled by the Abu Dhabi Investment Authority (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 $600bn this year compared to around $130bn in 2000 and only $56bn in 1998, when crude prices tumbled to $10 a barrel. The leap in the income boosted the combined GCC current account surplus to a record $225bn in 2007 despite massive government transfers to their SWFs abroad. IMF estimates showed the 2007 surplus was nearly 12 per cent higher than the 2006 surplus of around $200bn and far above the $160bn recorded in 2005.

Bowing to Western pressure, the IMF has been involved in talks with the SWFs from the GCC and other countries to define a code of conduct for their operations. In a recent statement, the IMF said it expects to produce a set of generally accepted principles for the non-binding code in time for its October 11 meeting in Washington.

"We hope an agreement between the IMF and the SWFs will contribute to alleviating the fears of host countries concerning the practices of those funds and to easing Western pressure and restrictions on their activities," IAIGC said.



The number

$3trn: The combined assets of more than 50 sovereign wealth funds worldwide at the end of 2007, according to IAIGC figures