Gulf's SWFs' foreign portfolio falls to $1.2 trillion last year

The value of the Gulf's external portfolio – excluding the private assets of the region's ruling families – fell from almost $1.3 trillion (Dh4.7trn) in 2007 to $1.2trn in 2008, according to a report by the Council on Foreign Relations (CFR).

The study says the region's funds are likely to shrink further in 2009 as the price of oil has fallen to a point where many Gulf companies will have to draw on their foreign assets to sustain their current levels of imports.

Oil averaged under $100 a barrel in 2008 as low prices in the fourth quarter offset high prices in the second and much of the third quarter.

That, says the study, translates into an estimated $300bn inflow into the sovereign wealth funds (SWFs) and central banks of the GCC. This inflow topped the $230bn recorded in 2007 when the price of oil averaged $70 a barrel.

"However, the 2008 inflow was more than offset by the mark-to-market losses on the equity portfolios of large sovereign funds," it adds.

So, with oil prices hovering around $40–$70 per cent lower than last July's record peak – SWFs are now unlikely to be the superhero that many beleaguered companies hoped they would.

SWFs were also hard hit by the recent fall in the value of global equities as many of the same factors that worked in their favour from 2004 to 2007 – high allocations to equities, emerging markets and private equity – worked against them in 2008.

The CFR paper says the value of the assets held by Abu Dhabi Investment Authority (Adia) and Abu Dhabi Investment Council (Adic) fell by 28 per cent between December 2007 and December 2008. Holdings of Kuwait Investment Authority fell by 13 per cent and those of Qatar Investment Authority by 11 per cent.

Ben Grindley, Executive Director at Morgan Stanley Dubai, said: "SWFs are not a panacea for the credit issues that most of us are facing today. SWFs have historically been providers of equity but not of credit.

"So the idea that they will subsidise local economies is a complicated and difficult issue unless there is political pressure on those groups."

He said each SWF had its own mandate and so, though there might be opportunities for the funds, they would nevertheless be able to act only on the basis on which they were formed.

Raj Madha, Director of Equity Research at Cairo-based EFG-Hermes, said though Adia and Adic were Abu Dhabi funds, Adia was mandated to invest only outside the region while Adic was mandate to invest locally.

"They are both SWFs – the only difference is the stocks they invest in," he said. "If you look at Adic's stocks, basically they are all in the GCC and if you look at Adia everything is non-GCC."

Rupesh Hindocha, Director, Fixed Income Coverage, at Credit Suisse, Dubai, said this year would see a further shrinkage of the funds as the oil price continued to plummet. "Sometimes we overplay the funds' importance," he said. "They are predominantly known to be equity investors rather than [making] debt investments and I see no reason why it will be changed by this crisis."

The CFR report, which makes a number of "critical assumptions" due to limited SWF data, says as a result of the fall in the market value of the Gulf's foreign portfolio and the price of oil, the region once again faces budgetary and financial constraints. It says most 2009 budgets assume higher spending than 2008 budgets.

"But this is slightly misleading as actual spending generally exceeded the formal budget in 2008. At current oil prices, some ambiguous domestic investment projects either need to be cancelled or financed by selling existing foreign assets."

The report's forward-looking analysis says if oil averages $75 a barrel over the next five years the portfolio of the GCC official sector will rise to $1.7trn. If oil averages $100 it will reach $2.1trn. And if oil averages $50 a barrel most Gulf states will need to curtail spending and planned investment projects to avoid a drawdown of their foreign assets. At $25 a barrel the erosion of assets will be significant, despite continued returns on existing assets.

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