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GLOBALISATION: West’s Loss of Gulf Funds East’s Gain

Analysis by Meena Janardhan

DUBAI, Jul 2 2008 (IPS) - 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 U.S and European markets.

At this year’s World Economic Forum in Davos, the United Arab Emirates and a few other countries sought 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 Centre (DIFC) Governor Omar bin Sulaiman also voiced a similar opinion in November. "If you need foreign direct investment [FDI], 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 was quoted as saying by Economist Intelligence Unit and the Financial Times (FT) in the news channel ViewsWire.com.

Sulaiman also told the London-based FT in the November interview 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 500 million and one billion US dollars.

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 two billion US dollars in Asia.

Explaining Western governments’ concerns that major shifts in international finance could involve power politics, Eckart Woertz of the Gulf Research Centre in Dubai told IPS, "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 have existed for a long time, but 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 industrialising 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. While funds from the Gulf countries are estimated at 1.6 trillion US dollars, the leader is the Abu Dhabi Investment Authority (ADIA) with about 900 billion US dollars. Singapore’s Temasek and the official reserves of China and Russia, which are being moved from central banks to the SWFs, are big players too.

The U.S., 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 (UNCTAD), trade volume fuelled by cooperation among developing countries tripled to reach 2 trillion US dollars between 1996 and 2006.

Further, partly as a result of the fallout of the Sep. 11 attacks in the U.S. 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 US dollars, this has tripled since 2000.

Amid mounting U.S. Congressional scrutiny of foreign government funds, the U.S. Treasury signed in March a series of agreements with the Abu Dhabi and Singapore SWFs covering investments in U.S. markets.

The agreement states 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 U.S. 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 percent of their foreign reserves instead of just 0.3 percent?"

Even Libya’s 100 billion US dollar 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 unrealised deal involved Dubai Ports World – which took over British-based Peninsular and Oriental Steam Navigation Company in 2006 – but was blocked from the American segment of the deal after U.S. 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 US dollars worth of assets in 1990, and manage about 2.5 trillion US dollars currently – are likely to grow annually by 1.2 trillion US dollars over the next five years, and are expected to reach about 27 trillion US dollars 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 in the future.