Business | Investment
A helping hand from the Gulf
Gulf sovereign wealth funds (SWFs) have once again been hitting the global headlines in the wake of the Kuwait Investment Authority's (KIA) injection of $5 billion into two troubled US banks.
- By Oliver Cornock, Special to Gulf News
- Published: 01:39 February 2, 2008
Gulf sovereign wealth funds (SWFs) have once again been hitting the global headlines in the wake of the Kuwait Investment Authority's (KIA) injection of $5 billion into two troubled US banks. KIA, like other SWFs - investment arms of their respective governments - has several benefits for Kuwait, and has done the global economy something of a service by restoring a degree of liquidity and confidence. However, SWFs may face some opposition from sceptical Western governments and boardrooms.
KIA has extended loans to Citibank and Merrill Lynch, two US lenders which reported large write-downs in the wake of the global credit crunch attributed to the collapse of the US subprime mortgage market. Both had already taken loans, convertible after a certain period into shares, from SWFs; the Abu Dhabi Investment Authority (ADIA) and Singapore's Tema-sek respectively.
In January, both banks announced that Kuwait Investment Authority (KIA) would be involved in the financing operations. KIA extended $3 billion to Citibank and $2 billion to Merrill Lynch, which will be convertible into shares in three years.
Amidst the debate about what the deals mean for the US, it is worth considering the useful role the SWFs in the Gulf play for their own countries.
First, they very simply offer an excellent investment for the funds in financial terms. The likes of Citigroup and Merrill Lynch are in a tight spot, but are very unlikely to fold. A recovery as the global economy picks up - even if that takes some years - is probable. Therefore funds can buy into them at very reasonable rates with the expectation of a good return - i.e. the banks are a sound recovery stock.
Second, as a long-term investment, the banks offer Gulf funds the opportunity of diversifying their investments away from the domestic oil sector (which depends on a finite resource) and also out of dollar-denominated assets (e.g. oil and their own currencies).
Third, the investments may be part of the strategies of Gulf countries to establish themselves as global banking centres, as part of their diversification programmes. Influence and experience in major global banks - and possible further increases in stakes - could help bolster the reputation of Gulf countries as places of some importance in the global financial system. The public relations values of bail-outs for American banks by what a few years ago were seen as "emerging economies" should also not be discounted.
Finally, the economies of the Gulf have experienced rising inflation over the past few years, due to a glut of liquidity, the weak dollar bringing up the costs of imports and the rising cost of food, construction materials and wages. SWFs have absorbed a proportion of the oil revenues accrued in recent years, and can now help pour some of the excess money out of their overheating economies.
Scepticism
Unfortunately, SWFs are still treated with some scepticism elsewhere. As the investment wings - albeit fairly autonomous ones - of governments, they are seen as vulnerable to "political interest". The debacle over the acquisition of US ports by Dubai Ports World, a subsidiary of Dubai Holding, which was blocked by the US Congress, is a case in point: there is still a suspicion of government funds from Muslim countries. Parliamentarians in Europe have raised questions about the possibility of protecting their own companies from SWFs in "the national interest". This may explain why KIA appears to have bundled its investments with other funds and firms.
For the time being, however, SWFs will surge onwards, providing the services that their countries, and others, require.
- The writer is the regional editor of Oxford Business Group.
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