It was noticeable that this time around, there were few Sovereign Wealth Funds (SWF’s) stepping forward to help out distressed Western financial institutions, compared with earlier bailouts. The reason is not too difficult to unravel: The financial crises enveloping the world banking sector has left SWF’s with multibillion dollar losses from their earlier bailouts. They have watched with horror as the financial meltdown reduced the value of their holdings in such global financial institutions as Citigroup, Morgan Stanley and UBS. The dramatic fire-sale of the fifth largest US investment bank Bear Stearns, and runs on HBOS, depressed banking stocks and have caused SWF’s to sit back and reflect on events, in which they seem to be mere spectators rather than main actors.
The SWF’s contribution to propping up ailing financial institutions is nothing to sneeze at — Singapore’s GIC spent more than $11 billion on a 9 percent stake in UBS in 2007, and GIC must not be very amused to see UBS shares down by around 45 percent so far this year. The Swiss financial giant has now reported that its credit write-down, as a result of the subprime crises, have more than doubled to about $37 billion — the largest write-down by any bank since the credit crunch began.
Both GIC and Abu Dhabi Investment Authority (ADIA) spent around $14.5 billion between them to help the embattled Citigroup, only to see Citigroup shares plummet by 40 percent since they made their investment. The pain is not easing for such investments, as analysts are predicting even more mind-blowing credit write-offs from assorted financial institutions, which will continue to drag banking stocks further. It is not only Singapore or ADIA SFW’s that are suffering, but the Chinese have also found out that their own banking investment has gone a bit sour. China Investment Corporation’s investment in Morgan Stanley made in late 2007, is also facing significant loss. The investment it made for $5 billion at a stock conversion price of between $48 to $57 a share in two years time is presently trading at around $42 a share. With all these losses, will SWF’s hold back from investing abroad or will they look for safer investments at home or in different countries that have not yet seen significant SWF investments? The losses sustained by SWF’s to date are insignificant when compared to the estimated $3.2 trillion these SWF’s are believed to have under their control. Some analysts believe that the disposable investment amount will keep rising, given high oil prices, and that the amount available for SWF investment could even rise to $12 trillion by 2015.
These are staggering figures and will cause SWF’s to consider very carefully from now, on how to invest abroad and to try and minimize more mega losses in the future so as to avoid any resultant political and social recriminations and blame by their nations.
Recent losses may dampen SWF appetite for further involvement in sickly Western financial institutions, and already there were signs of a rethink by some SWF’s for this line of investment. This reluctance is also aided by the increasing concern expressed by some Western politicians about the so-called power of sovereign wealth funds in their markets. At the same time, the fall in the value of the dollar is making some SWF’s consider diversification investment toward Asia and even Africa, especially in commodity producing nations. A precipitous move away from the dollar is also not on the card, given that such a move could further erode the heavy dollar weighted investments of SWF’s.
For Saudi Arabia and some other countries in the Gulf Cooperation Council, the global financial turmoil and credit crunch is making investment at home a more attractive proposition, especially for those countries embarking on mega-infrastructure projects in the hydrocarbon sector and diversified economic cities. The planned SR20 billion Saudi SWF is miniscule in comparison with existing sovereign funds, and the recent chaos in the international financial markets might yet cause a pause in making any significant Saudi sovereign fund investment abroad.
According to Finance Minister Dr. Ibrahim Al-Assaf, the Saudi SWF will be structured as a Saudi investment vehicle under the auspices of the Public Investment Fund, and will concentrate on investments in the technology sectors, especially in those areas that can add value for inward technology transfer and skills to the Kingdom. This is a more realistic SWF strategy and strategic focus to meet domestic needs, adds synergies with domestic projects, since the opportunities at home seem much more secure by comparison with international investments. Adopting such a limited SWF strategy will also assist the Kingdom in testing the international markets to gain valuable asset management experience and adopt appropriate governance and code of conduct standards.
(Dr. Mohamed A. Ramady is visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.)