Despite the substantial financial surpluses Saudi Arabia has accumulated over the past few decades, it is the only major oil producing country without a proper sovereign wealth fund (SWF). There are of course several institutions managing those surpluses, but not in the usual SWF format.
Most countries with financial windfalls, whether from oil and gas or other sources, have established SWFs to invest those surpluses over the long run to help weather financial crises and preserve wealth for future generations. The SWF Institute estimates the values of those funds at about $7.3 trillion globally, $4.2 of which belong to oil and gas producers, primarily GCC countries.
Published information about SWF in Saudi Arabia is not always accurate, because of data limitations and also due to the usage of different definition for SWFs. For example, the SWF Institute includes reserves held by Saudi Arabian Monetary Agency (SAMA) as if they were a proper SWF, but the Saudi General Investment Fund (GIF) is really closer to what might be considered as such.
Regardless of definitions, however, Saudi Arabia has accumulated surpluses in excess of SR3 trillion ($800 billion) managed by several different institutions.
The need to establish a proper SWF has become more urgent now than ever, with oil prices plummeting over 60 percent since last summer, a situation that may last for some time. A well-defined SWF would manage national wealth so as to augment government resources and spur economic growth. The fund should be able to channel funds into the national economy when and where needed, timed against the ups and downs of business cycles, as well as global crises and future needs.
I will focus today on SAMA’s reserves and GIF’s portfolio, which together exceed $800 billion and by far are the most important public investment channels currently. There are other funds and portfolios, but they are either too small or operate under specific restrictions.
GIF was established in 1971 to fund strategic and commercial projects that could not be undertaken by private companies. It has funded oil refineries, pipelines and storage tanks, aircraft purchases, maritime shipping, railroads, basic and manufacturing petrochemicals, as well as energy, desalination, and mining projects. The fund has also contributed to the capitalization of many companies, locally and abroad.
Funding is carried out through loans, exceeding $30 billion, or partial or total ownership, exceeding $40 billion.
In a significant development, on March 23, 2015 the Council of Ministers changed GIF’s affiliation from the Ministry of Finance to the newly-created Council for Economic and Development Affairs, whose chair became chairman of GIF board of directors, which is appointed by the prime minister, indicating the new importance now attached to GIF and public investment in general and raising hopes that the new changes would lead to improvements in the way the fund is run.
SAMA’s reserves represent the bulk of Saudi financial wealth. As such, it is important that those reserves are run as a normal SWF, instead of as a currency reserve fund, by turning over those funds to GIF, or creating a new SWF to manage them.
SAMA’s reserves accumulated rapidly during the past several years, exceeding $700 billion earlier this year. Although China and Japan keep higher reserves, Saudi reserves are the highest when measured against GDP, exceeding 90 percent.
Normally, central banks keep reserves to support monetary policy, i.e. to support the exchange rate and provide liquidity when needed. As such, reserves need to be kept in hard currencies and gold or invested in short-term, stable and secure vehicles, such as treasury bills and high-grade debt instruments, which can be easily and quickly liquidated when the need arises.
Almost all of those instruments have little or no return, but are kept as a reserve to support and protect the currency. But SAMA’s reserves have for some time exceeded currency reserve needs, which are typically set to cover 3-4 months of imports. In the case of Saudi Arabia, that amounts to about $38 billion. In other words, the reserves kept by SAMA are about 20 times the required levels, covering about 60 months of imports.
Therefore, about 80 percent or more of SAMA’s reserves could easily be turned over to GIF, or to a newly-established SWF, to manage them according to a long-term investment strategy, without any negative impact on currency reserve requirements. The fund could then be run according to state-of-the-art investment standards, balancing benefits versus risks, domestic versus international investment vehicles, and present versus future needs of future post-oil generations.
