The total assets of sovereign wealth funds (SWFs) have soared to nearly $3 trillion (Dh11trn), surpassing the $1.5trn managed by hedge funds worldwide, according to Morgan Stanley estimates.
Some economists forecast they will grow to $12trn by 2015, an amount that roughly corresponds to the size of the entire US economy.
Figures like these are viewed as a double-edge sword in the West. On the one hand, it is a great opportunity to avail capital in times of a tight credit market.
But on the other hand, there may be a risk that some funds could be used for “non-commercial reasons”, as Sayari Hamad Al Sayari, Governor of Saudi Arabian Monetary Agency (Sama), pointed out, without elaborating. Earlier this year, Saudi Arabia confirmed it was in the early stages of creating a small sovereign wealth fund in a bid to diversify its income. Plans for the Saudi fund first emerged in January when Muhammad Al Jasser, vice-governor of Sama said the ministry of finance is looking into a new fund.
Al Jasser said on the sidelines of the World Economic Forum in Davos the process of setting up a fund will be “deliberately slow” to prevent negative repercussion from places like the United States and parts of Europe.
“There’s too much populist bias now against emerging market sovereign wealth funds,” he said.
Given the recent calls from the EU for more transparency from state-run funds, the Kingdom may have to tread carefully to avoid creating international economic tensions, says the Oxford Business Group (OBG).
But the complaint on sovereign wealth funds has been far more noticeable in Europe than the US, Edward Morse, Lehman Brothers managing director and chief energy economist told Emirates Business.
“In the US you don’t see much concerns on any aspects of the sovereign wealth fund and the reason is that in a public regulatory system, nobody cares who the alternate owner is as long as the company is regulated properly,” he said. “In Europe, there is a certain suspicion targeted at the Middle East.”
Adrian Slywotzky, Oliver Wyman’s managing director added most of the SWF investments to date are passive and are thus less risky.
“A significant number of the investments have been passive, most of the investors are just in a position similar to other investors,” he told Emirates Business. The key to a successful active investment, he added, is to develop the right relationship with the local management.
One strategy that could be undertaken by any Saudi fund to prevent a contentious situation with its allies in the West would be to concentrate on non-dollar assets, OBG said.
“However, whatever the strategy, it is the Kingdom’s ability to stay in the black, that will determine how large any fund could become,” it added.
Saudi’s plans for SWF are still “on the drawing board and is not going to be sizeable and will be around $6bn only and run by the Public Investment Fund (PIF)”, Al Sayari told OBG.
The PIF was set up in 1971 to provide financing for domestic projects to develop the national economy. Compared to Abu Dhabi’s $1.3trn assets, Saudi’s initial assets of $6b are relatively small.
As SWFs are entities that manage state savings for the purposes of investment, a healthy national current account surplus is a prerequisite. Saudi Arabia is enjoying unprecedented wealth, with a current account surplus of more than $95.5bn and foreign asset reserves above $250bn.
Historically, the country has “used surpluses and reserves as a counter to cyclical changes in government spending”, said Al Sayari.
Until recently, the Kingdom was not in a position to worry about what to do with surplus cash. Government debt had weighed heavily on the country’s ability to invest, but this trend has been turned around and high oil prices have led to mounting reserves.
According to John Sfakianakis, chief economist at SAAB bank, debt, which peaked in 1999 at 119 per cent of gross domestic product (GDP), has been steadily reduced over the years. Thanks to record petrodollar prosperity, debt at the end of 2007 stood at 19 per cent of GDP, down nine per cent compared to 2006.
Speaking on the nation’s fiscal future, Al Sayari said: “I expect to see budget surpluses in the coming years.”
This, coupled with SAAB’s conservative forecast of budget revenues of $120bn in 2008 means the financial backbone is there, should Saudi’s SWF strategy develop more aggressively in the future. A state-run wealth fund, developing slowly over time, could play a significant role in diversifying the country’s wealth away from oil, while providing a soft landing when hydrocarbon income subsides.
Naturally, reduction in debt and continued economic growth means more funds will be available for investment. This led some industry experts to believe the nation could create a mammoth sovereign wealth fund.
But Al Sayari told OBG the Kingdom’s primary concern “is to focus on domestic development, economic diversification and job creation”. The country’s idea to invest abroad is – at this early stage – going to be kept aside, Al Sayari added. Given the country’s potential for creating a large fund, this will be welcome news to some foreign countries that are weary of sovereign funds.
European officials, along with concerned US-based politicians, are saying that they welcome the influx of capital, especially with the current erosion in credit confidence. But they would prefer to see this investment process in transparent terms.
The reason for this is that countries such as Germany and France worry funds from the Middle East, Russia and China may be investing in Europe to flex political muscle over strategic companies such as utilities, instead of purely maximising government wealth, OBG said.
SWFs have grabbed the limelight lately, mainly due to the size of some acquisitions. The Abu Dhabi Investment Authority (Adia), one of the world’s largest fund, controls around $900bn in assets. Investments such as its $7.5bn in troubled Citigroup received plenty of attention. Speculation is also rife Saudi Arabia is ploughing $1.7bn into UBS. Some view this as regional funds becoming too influential.
Total assets of SWFs soar to $3 trillion