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Unified GCC sovereign wealth fund is the 'need of the hour'

By Mohammed Elsidafy

A unified sovereign wealth fund (SWF) for the Gulf is the need of the hour, as is intervention by Gulf-based funds in their respective economies to save them from the effects of the global financial meltdown, said bankers and economic experts in the region.

The percentage of investment by these SWFs in local markets should be raised to between 20 per cent and 30 per cent from the current five per cent, especially after the funds suffered losses estimated in reports at $450 billion (Dh1.6 trillion), several bankers said. These losses might go up to $600bn should the Gulf SWFs try to liquidate the assets they picked up abroad, which have now turned poisonous.

Dr Ahmed Al Janahi, Deputy Group CEO of Noor Islamic Bank, was among bankers in the region advocating the establishment of a sovereign wealth fund, saying it would have a positive effect on economies in the region.

He said the fallout of the global financial crisis necessitates thinking on the lines of setting up a unified Gulf SWF, much like the other joint projects of the Gulf Co-operation Council (GCC) countries, like the Gulf Customs Union and the currency project.

Al Janahi said the SWFs of GCC member-states are old, dating back 50 years in the case of Kuwait and two decades for Saudi Arabia.

It is time to seriously think of a unified Gulf sovereign wealth fund working side by side with SWFs of member-states.

He proposed a capital of Dh100bn for a start, with the GCC countries contributing equally. Investments should be in mineral products, non-oil energy resources such as uranium, and African mines. Investing in the global agricultural and food sector could also be considered, he said.

Commenting on reports that have put the total value of SWFs in the GCC at $1.5trn to $3.trn, Al Janahi said they were just assumptions, since the actual figures were secrets not to be disclosed for reasons of sovereignty and national security.

He said it was time to reconsider the way the Gulf's SWFs, which were generated by oil surpluses over the past few decades, had been invested. There was a need to use a part of the funds in local investments, especially during the current phase, with the world as a whole suffering a liquidity crisis. Al Janahi said despite the losses suffered by the SWFs as a result of investing in global markets, those external investment tools were good.

However, it was time to diversify the tools and countries where the funds are invested, so that the investments are made in several regions. Also, more attention should be paid to risk assessment, rather than making profit and returns the only considerations.

Analyst Ziyad Al Dabbas expected the bodies in charge of managing the funds to reconsider their investment plans and strategies in the light of losses they suffered in the United States and European markets. He estimated the total volume of Gulf SWFs at some $1.trn, and said the funds had lost 20 per cent to 30 per cent of their total assets.

A new, unified SWF for the GCC would need to take into account the elements of risk, returns and liquidity that can be offered by new investment destinations, he said.

Parts of the fund would need to be invested in the local markets, as outside liquidity sources have dried up.

Al Dabbas said a unified Gulf SWF would need a period of time to be set up and could not be done immediately given the differences in investment policies and tools of the existing SWFs in the region. There was also the presence of other economic priorities, such as the Gulf monetary union and other postponed Gulf economic issues that needed to be addressed before an SWF union could be given thought, he felt.

Sheikh Abdullah Al Shakra, Chairman Al Hanoo Holding and Emirates Industrial Cities Company, estimated the fund collected by Gulf states from oil surpluses over the past few years at some $3.7trn.

He said contributions from this fund to local Gulf markets should be increased to 20 per cent to 30 per cent from the current five per cent, following the loss of $450bn in foreign market investments. He expected losses to top $600bn if the Gulf funds tried to liquidate their poisonous assets invested outside.

Al Shakra did not believe assurances by Western economists to Gulf leaders that the present crisis would not go on for a long time. The economists, he said, were trying to dissuade the Gulf leadership from taking their funds to the Asian markets, which have bigger chances of growth. He also said it was time to support the local economy and to complete infrastructure projects. A lesson should be learnt in this from China, Singapore and Russia, which have sovereign wealth funds that are allocated to support their local economies, Al Shakra said.

Also, the recent move by Latin American countries such as Chile and Venezuela to set up SWFs confirms the role played by these funds in opening up new possibilities for local economies, said Al Shakra.

Economic expert Dr Ahmed Al Banna said all SWFs have long-term investment strategies and the importance of these funds emanates from their ability to provide liquidity for their governments, especially in times of financial crisis.

According to Al Banna, US and European SWFs had been used in times of crises and wars. As for the UAE, here they are used in accordance with long-term strategies to reap extra returns for the funds. Al Banna stressed the need for secure investments by the SWFs, away from risks, regardless of lower returns.

This is possible through diversification of investments, he said. Some of the funds should be used in financing the urgent needs of Gulf states in general, and of the UAE in particular, he said.

A lesson should be learnt from the drop in the price of oil – the main monetary source for the Gulf's SWF, he added, which means surpluses will not continue. What is needed is good strategic planning for the cash available in the funds.

Al Banna denied any knowledge of losses suffered by the SWFs, but said there were estimates of $500bn globally.

Sulaiman Al Mazroui, General Manager of Marketing and Corporate Communications, Emirates NBD, defined "sovereign wealth funds" as investment portfolios, which countries and their financial institutions should use only for commercial and investment purposes. However, they are sometimes used for political purposes, to pressurise other states and obtain political benefits, he added.

Al Mazroui said the GCC SWFs had never been used for any political purposes and were restricted to commercial investments and business exchanges with other countries. He said though the GCC SWFs depended on diversification to minimise risks, a lot of them had fallen victim to fluctuations in international financial markets and were harmed by bankruptcy cases in these markets, which had happened recently.

Although neither the total value of GCC SWFs nor the total amount of their losses was officially disclosed, Al Mazroui expected they had been impacted by what happened in the global financial markets, as a part of their investments had been in these markets. This did not mean bad planning, however, he said, since the international financial crisis occurred suddenly and all funds were impacted be they from the US or any other country.

Top Players

The Abu Dhabi Investment Authority (Adia) is the world's biggest sovereign wealth fund in terms of total asset value and the ratio of the assets to the UAE's Gross Domestic Product. Independent estimates have put its value at $875bn, while Standard Chartered estimates it at $625bn.

Saudi Arabia's SWF is estimated at $300bn to $500bn, while Kuwait's SWF is estimated at $215bn and Qatar's at $60bn.

Reports say GCC funds recently injected $50bn in US financial institutions impacted by the real estate mortgage crisis before the beginning of the international financial crisis.

For example, Adia bought around five per cent of Citigroup for $7.9bn, after the group suffered $11bn in losses due to the mortgage crisis. However, it has recently been said that Adia may revise the deal.

Wealth Management

The history of SWFs dates back to 1953. However, it is recently that they have started to play an increasingly active role in the global economy after some SWFs acquired stakes in international institutions in the financial sector, such as Morgan Stanley, Merrill Lynch and Citigroup. Some consider SWFs as the "right of the next generation" and want them to be used in safe investments

Safety Line

The GCC's SWFs have played a big role in the recent international financial crisis and without them the world, particularly the West, would not have understood the economic potential of the region, according to a top official of the GCC General Secretariat.

Najib Abdullah Al Shamsi, Director of Research and Studies at the GCC General Secretariat, said: "The fact that some sectors need liquidity, such as banks and real estate, does not mean resorting to the assets of SWFs, since they are considered the safety line for GCC economies."

Al Shamsi said lessons should be learnt from the mistakes of the past and there should be a diversification in the investment of these funds, rather than investing them in places prone to economic disasters.

This happened in the US economy, he said, and pointed out that even after reports indicated that the US was suffering from a budget deficit, parts of the GCC's SWF's were invested in US treasury bonds.

He estimated the losses of GCC funds due to the crisis at $800bn (40 per cent of their assets), since the total value of the assets were estimated at $2trn.

Al Shamsi called for adopting a wise policy in utilising the region's natural resources, mainly oil, and preserving the current assets of the GCC's SWFs.