Sovereign funds cushion Gulf states

Sovereign wealth funds are cushioning oil- dependent Gulf economies
against the financial crisis, but observers warn that some
governments have raided them for current spending and many
investments have shrunk in value. The four main funds are Abu Dhabi
Investment Authority (ADIA), Kuwait Investment Authority (KIA), Qatar
Investment Authority (QIA) and the Saudi foreign assets managed by
the Saudi Arabian Monetary Agency (SAMA). "They put the Gulf
countries in a comfortable position to deal with the (global economic)
crisis," said economist Eckart Woertz, from the Dubai-based Gulf
Research Centre. According to UN figures released last month, the
four funds' aggregate value fell only slightly during last year's
financial meltdown as new cash injections offset most of the fall in
the capital value of investments. The UN's World Investment Report
2009 said the funds' estimated combined value eased slightly to
1.115 trillion dollars at the end of last year from 1.165 trillion
a year earlier. Capital losses last year reached 350 billion dollars
or more than 35 percent of total value, according to UN calculations,
but the report said government injections of 300 billion dollars
largely counteracted the fall. In any case, the impact of the capital
losses on the economies concerned appears to be minimal. "These are
long term funds that stay offshore on international markets. Mostly
they do not have an immediate asset liability in the short term and
are rather meant to be spent many years from now when oil revenues
will decline," said Woertz. The Gulf SWFs have never officially
disclosed the size of their assets nor losses and the funds' exact
value remains unclear, especially that of ADIA, which some reports put
at near 800 billion dollars before the crisis. "The size of ADIA was
overstated, sometimes by as much as 100 percent," said a paper
published by the US-based Council on Foreign Relations (CFR) in
January 2009 , valuing ADIA at 453 billion dollars as of December
2007. ADIA's fortune is reckoned to have shrunk to 328 billion
dollars by December 2008 , according to the UN report. Kuwait's fund
meanwhile is estimated to have dropped from 262 billion to 228
billion dollars in 2008 , while Qatar's fund slumped from 65
billion to 58 billion dollars, the UN said. These funds' heavy
losses were largely offset by substantial inflows, however. Analysts
said the funds' exposure to the fall in global equities was the main
factor in the losses. "Many of the same factors that worked in its
(ADIA's) favour from 2004 to 2007 -- a high allocation to equities,
emerging market, and private equity -- worked against it in 2008 ,"
said the CFR paper. SAMA stood out as it reaped the benefits of its
conservative investment policy, which led to it concentrate its
foreign assets in fixed income instruments such as US bonds. SAMA's
foreign assets are estimated to have increased from 385 billion
dollars at the end of 2007 to 501 billion dollars in December 2008
, according to UN estimates. Saudi finance ministry figures,
meanwhile, show the kingdom's net foreign assets peaking at 443.2
billion dollars in November 2008. "The three main funds, apart from
SAMA... which have inflated their coffers during the oil boom, have
taken huge risks. The share of equities in these funds became higher
than bonds," said Kuwaiti economist Jassem al- Saadoon. He scolded
some of these funds for " politically-motivated" moves to invest in
struggling Western financial institutions in the midst of the crisis.
"The countries owning these funds made a mistake in wanting to prove
to the world that they were responsible states... But they have not
taken the right decisions," he said. "I believe that this has
deepened their losses even after the recovery in global stock
markets," Saadoon added, citing investments in Merrill Lynch by KIA,
and in Citigroup by ADIA and KIA. Woertz highlighted another negative
factor for the funds. "The financial crisis and lower oil prices
have necessitated withdrawals... for funding government investment in
infrastructure," the economist said. Saudi Arabia in particular
appears to be tapping into its foreign assets to cover its budget
deficit, according to a report by Saudi financial firm Jadwa
Investment. Saadoon criticised governments' use of Gulf SWFs for
current expenditure instead of treating them as savings for the
future. "These are, metaphorically speaking, retirement funds for the
nations," he said. He lamented what he called a lack of a "strong
commitment to keep them as funds for the future." However, whether or
not the funds' investments recover in line with global stock
markets, the recovery in oil prices should reduce governments' need
to dip into the funds to finance spending. "Above 50 dollars oil
(per barrel), most of the GCC (Gulf Cooperation Council) budgets will
be balanced in 2009 ," Woertz said.