SWFs’ New High-Profile Role In The Region And The World
During the 1990s, when oil prices plunged to US$10 a barrel and the economies of the GCC stagnated, the critical role that government investment vehicles could play in stabilizing economies and helping citizens of the region became clear. The Saudi Arabian Monetary Agency (SAMA), Saudi Arabia’s central bank, which had accumulated significant excess foreign reserves since the 1970s, was able to cushion the severity of a decade of slow growth by infusing money into the Saudi economy. Similarly, the Kuwait Investment Authority (KIA) was instrumental in rebuilding the Kuwaiti economy in the aftermath of the invasion of Kuwait and the 1990 Gulf war.
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Since that time, SWFs have become the primary means by which the GCC countries manage their national wealth. And whereas the SWFs of the 1990s were primarily risk-averse investors of foreign exchange reserves, SWFs now are far more sophisticated. The rise in oil prices since 2000 and into mid-2008 pushed foreign exchange reserves to historic proportions—an increase of more than sevenfold over the span of two decades. With a mounting need to find places to invest their money, together with the larger investment universe that globalization affords, SWFs began to seek maximum returns on their investments. They invested in domestic industries, as well as looked overseas to acquire new knowledge and technology. They even engaged proactively with the management teams of the companies in which they invested. As a result, SWFs play a far greater, more vital strategic role in the region by directly linking their higher-return investments to the GCC’s goals of economic diversification and socioeconomic development. The strategic importance of SWFs will only grow more essential to the region in coming years.
The GCC’s funds are among the wealthiest of all SWFs in the world. Combined GCC funds reached close to $1.6 trillion in total assets in 2007. The major GCC SWFs include the United Arab Emirates’ Abu Dhabi Investment Authority (ADIA), Kuwait’s Investment Authority (KIA), Qatar’s Investment Authority (QIA), and Bahrain’s Mumtalakat Holding Company (MHC).
The Changing Investment Landscape
When they were created, SWFs were concentrated in oil-producing countries and particularly those of the Gulf region. Historically, oil prices were determined by political events, such as the Arab-Israeli war in 1973. The foreign exchange surpluses that resulted from such events were invested in treasury notes and deposits in the international banks of the industrialized world—mainly the United States and some European countries. Some of these “petrodollars,” which were in turn loaned to developing nations, accrued additional benefits for international banks.
This equation changed dramatically during the last decade. Spurred by revenue surpluses and more investment opportunities, SWFs across the world grew in number and raised their profiles. In the Gulf, oil prices, driven more by increased global demand and less by political events, have pushed foreign exchange reserves in oil-producing countries to record highs. The export-led growth of Asian countries like Singapore and China have given these countries significant additional income and an incentive to seek higher returns on their accumulated wealth. In 2007, net capital outflows from emerging markets reached $1.4 trillion—the majority of which originated in Asia, with a measurable share from oil-rich Middle Eastern countries. The number of SWFs around the world reached, by 2008, an estimated 53 funds of varying size and geographic distribution (see Exhibit 1).
Exhibit 1
Geographic Distribution of Sovereign Wealth Funds Worldwide
Article Index
- SWFs’ New High-Profile Role In The Region And The World
- The Changing Investment Landscape
- Exhibit 1 - Geographic Distribution of Sovereign Wealth Funds Worldwide
- Exhibit 2 - Wealthy GCC Funds
- The Case For More Proactive Investment
- Exhibit 3 - Pension Funds and U.S. Stocks Achieve Highest Returns
- Exhibit 4 - Central Bank Losses Are Far Higher Than Stocks over Time
- Exhibit 5 - Oil Returns Are Far Lower Than Equities over Time
- The Role of SWFs In Pursuing Socioeconomic Goals
- A Mounting Call For The Regulation Of SWFs
- Lessons From Global SWFs
- The Norway Model
- Exhibit 6 - Evolution of SWFs—Norway
- The Singapore Model
- Exhibit 7 - Evolution of SWFs—Singapore
- The China Model
- Exhibit 8 - Evolution of SWFs—China
- Emerging Themes
- What Can Be Done To Enhance The GCC SWFs’ Role In The Future?
- Conclusion
Author Profiles
Richard Shediac is a partner with Booz & Company based in Abu Dhabi. He specializes in financial services and public sector projects and has led and participated in various strategy, operations improvement, and organization projects in the Middle East, Europe, and Asia.
Hatem Samman is the Director of the Booz & Company Ideation Center. He is based in the Middle East. As a lead economist, he has written extensively on policy issues across diverse economic sectors.
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