Gulf SWFs to keep a low profile after slowdown

Heavy losses caused by the collapse of global markets will ally with the crash in crude prices to force Gulf state funds to slow down their investment push into the West and other countries, a key Saudi investment fund has said.

NCB Capital, an offshoot of the Saudi National Commercial Bank, said the sovereign wealth funds (SWFs) in the six-nation Gulf Co-operation Council (GCC) have received a severe blow from the global economic crisis as the bulk of their assets are based abroad.

It said the Abu Dhabi Investment Authority (Adia), ranked as the world's largest SWF, and other government funds in the region, could have suffered as much as 30 per cent loss.

"Sovereign wealth funds, which were until recently so controversial, experienced a sharp reversal of fortunes last year… the Gulf SWFs, which rode the oil boom into a number of high-profile investments outside the region, have seen the value of their holdings fall significantly," NCB Capital said.

"This dramatic turnaround raises questions about the willingness of the SWF's to engage globally when the market outlook remains highly uncertain.

This is especially problematic in the area where they received some positive response, namely their initial foray into propping up the capital base of international financial institutions.

However, the losses incurred especially in the financial sector, have led the funds to largely retreat from the scene for now… this, along with the lower oil price, will mean at least a short-term slowdown in the changing balance of global economic and financial power in favour of the Gulf."

Citing independent estimates, the study said the foreign assets of Adia and other GCC SWFs could have plunged by 25-30 per cent over the past year.

Saudi Arabia, which does not have a SWF, escaped major losses from the crisis given its "conservative investment policies", the study said.

"Among the leading losers is the largest of the sovereign funds, Adia, whose holdings were previously estimated at more than $875 billion… Adia may have taken a hit of more than $100bn in 2008, among other things because of the sharp decline of its high-profile investment for a 4.9 per cent stake in the ailing Citigroup," NCB said.

It noted that since Adia's investment in late 2007, Citigroup's share price has fallen by more than 95 per cent from around $35 to $1.

"The United States Government's third rescue effort with $25bn capital infusion in the form of preferred shares to save the ailing giant could give it a 36 per cent stake in the bank and effectively dilute the existing shareholders' equity by 74 per cent," the NCB Capital study added.