COMMENT West's loss of Gulf funds East's gain
By Meena Janardhan
DUBAI - As politically motivated restrictions on investments by oil-rich
countries intensify in the West, the sovereign wealth funds (SWFs) of the Gulf
countries could opt to invest in Asia and other emerging markets despite
attractive valuations in the slowing US and European markets.
The United Arab Emirates and a few other countries sought at this year's World
Economic Forum in Davos in January to allay Western fears by stressing that the
funds were strictly commercial and not political threats.
Sultan Ahmad bin Sulayem, chairman of the Dubai World holding
company, warned that Gulf funds could stop investing in developed markets if
their motives were continuously questioned. "There is the policy of these
government fund managers to go where they are welcome. If [rich nations] say
'we don't want your money', fine. We will invest in China and India. They all
want investment."
Dubai International Financial Center (DIFC) governor Omar bin Sulaiman voiced a
similar opinion in November. "If you need foreign direct investment, you need
to be welcoming, not scaring investors off. Talk about the SWFs is creating a
lot of sensitivity, even for private investors. They are already looking
elsewhere to hedge their positions."
Sulaiman added that Borse Dubai, a government unit partly owned by the DIFC,
was likely to invest in an Asian exchange. "It's only logical. It's a matter of
when rather than whether we will."
Reflecting this sentiment, which also indicates the economic, not political,
leanings of Gulf SWFs, Dubai International Capital (DIC) purchased a
"substantial" stake in Sony in November, which reports estimate to be worth
between US$500 million and $1 billion.
In fact, when DIC was launched in 2004, its strategy was to channel a third of
its overseas investments to Asia. So far, the DIC is estimated to have invested
about $2 billion in Asia.
Explaining Western governments' concerns that major shifts in international
finance could involve power politics, Eckart Woertz of the Gulf Research Center
in Dubai told Inter Press Service: "They are particularly worried about the
possibility of the SWFs buying up Western assets, putting them at the disposal
of potentially 'unfriendly' regimes."
The SWFs, some of which have existed for a long time, have attracted attention
recently because they have grown bigger than the world of hedge funds and other
private institutional investors. They are owned by governments of countries
that have substantial current account surpluses - mainly industrializing
countries in Asia and oil exporters - and are used to acquire assets abroad
that have potential for better returns than shares and bonds.
Currently, more than 20 countries have these funds. Funds from the Gulf
countries are estimated at $1.6 trillion, with the leader, the Abu Dhabi
Investment Authority, having about $900 billion. Singapore's Temasek and the
official reserves of China and Russia, which are being moved from central banks
to the SWFs, are other big players.
The US, in particular, feels that large amounts of its securities in the hands
of those who are not necessarily allies is "financially imprudent", as a
sell-off by such nations could lead to falling bond prices and rising interest
rates, thus hurting its economy.
Such attitudes have encouraged South-South economic cooperation through
mechanisms aimed at diversifying trade and investment. According to a report by
the United Nations Conference on Trade and Development, trade volume fueled by
cooperation among developing countries tripled to reach $2 trillion between
1996 and 2006.
Further, partly as a result of the fallout of the September 11 attacks in the
US in 2001 and partly due to the surge in Asian economies, the East is now the
Gulf's market of choice.
The Gulf countries export about two-thirds of their oil to Asia, which could
double during the next two decades. Half of Gulf exports go to Asia and a third
of Gulf imports are from Asia. Gulf-Asia trade currently exceeds $300 billion,
tripled since 2000.
Amid mounting US Congressional scrutiny of foreign government funds, the US
Treasury in March signed a series of agreements with the Abu Dhabi and
Singapore SWFs covering investments in US markets.
These state that SWFs investment decisions should be based on commercial
grounds rather than geopolitical strategies of a controlling government;
second, funds should be more open about their finances and investment aims,
should run strong risk management programmes and respect other governments'
laws; and finally, countries receiving investment flows should not erect
protectionist barriers against foreign investment and should not discriminate.
Yet, a Congressional hearing in May debated how investments by the funds of
Middle Eastern countries "have raised questions about the power they may have
over US national security interests", especially since some of these funds are
controlled by governments that are "sometimes unfriendly, sometimes
untrustworthy".
Elsewhere, Germany is discussing a special law to ward off unwanted foreign
buyers of strategic national companies. In 2006, German Finance Minister Peer
Steinbrueck asked, "What would happen if they [SWFs] invest 10-20% of their
foreign reserves instead of just 0.3%?"
Even Libya's $100 billion fund is considering buying stocks, bonds, real estate
and banks in Asia and South America. "The only market which is unfortunately
not a pleasant market is the United States. It's a very active market, but it
is full of politics and unpleasant actions," Shokri Ghanem, chairman of Libya's
National Oil Corporation said in February, according to media reports.
Reacting to Western concerns, economist Woertz said, "The politically weak and
less ambitious Gulf countries have no political axe to grind. Yet, they are
part of an instable region and its power politics and major foreign holdings in
strategic companies raise concern."
One controversial unrealized deal involved Dubai Ports World - which took over
British-based Peninsular & Oriental Steam Navigation Co in 2006 but was
blocked from the American segment of the deal after US politicians opposed it
on security grounds.
Part of the Western worries stem from the future enormity of the funds. The
SWFs, which held about $500 billion worth of assets in 1990, and manage about
$2.5 trillion currently, are likely to grow annually by $1.2 trillion over the
next five years, and are expected to reach about $27 trillion by 2022.
Given that increasing oil prices will help Gulf SWFs make more acquisitions
abroad in the future, Woertz advises that they "should remind Western
governments that access to markets is not a one-way street". If the West fails
to heed such advice, the East has more gains to look forward to.
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