Arab sovereign wealth funds: Angels for good?

Arab sovereign wealth funds: Angels for good?
By Yadullah Ijtehadi, Special to Gulf News
Published: February 23, 2008, 01:05


Given the noise surrounding the alleged "evils" of sovereign wealth funds (SWF), it may be almost scandalous to suggest that Arab SWF investments can strive to be a "force for good" in the world.

But there appears to be a unique opportunity, especially for Gulf SWFs, to spread a more positive image of the region. While it is naiveve to say that Gulf investors should invest in western companies purely for altruistic reasons, or not be opportunistic when a good prospect arises, they must strive to generate goodwill, not just good returns.

However, the region's past behaviour hardly inspires confidence. Arab-led Opec cannot claim to be the beacon of hope for the global economy and has often looked to safeguard its own interest at the expense of global economic growth. So why should Arab investments be any different?


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Simple - if SWFs don't play nice, western governments will raise the barrier to their entry. Arif Naqvi, chief executive officer of Abraaj Capital, the Middle East's largest private equity player, agrees: "The increasing quantum of money being invested into western assets could not realise their full potential if political and economic relations between the West and the Arab world are not managed in an optimal way. Possible negative repercussions of the current trend could be increased protectionism making foreign investments more difficult."

From his vantage point, Naqvi can see the avalanche of petrodollars flowing into the global economy. According to a McKinsey research, capital outflow of oil-centric econ-omies will reach $1.5 trillion by 2012, if oil hovers around $50 a barrel till that time - that's a daily capital injection of $1 billion into global financial markets for the next four years.

"At $70 a barrel, petrodollar flows into global markets would grow even larger, reaching $628 billion annually by 2012, implying new petro-dollar investments of nearly $2 billion a day," says the McKinsey study. "By 2012 the total stock of petrodollar foreign assets would grow to $6.9 trillion."

Even if oil prices declined to $30 a barrel, petrodollar foreign assets would grow at a robust average rate of six per cent annually, to reach about $4.8 trillion in 2012, when the oil-producing countries would add $147 billion to the global financial system. That figure is larger than petrodollar surpluses throughout the 1990s.

As these monies cascade through the global economy, western governments and companies fear that Arab SWFs will start knocking on their doors more aggressively. The presence of large, opaque shadows hovering over financial markets strike at the very heart of the transparency that these economies pride themselves on.

SWFs also often forego a board seat despite substantial investment (such as Abu Dhabi's Citibank deal), but that may also mean that a large stakeholder is not being accounted for. "The 900-pound gorilla can't be missing in the boardroom!" quips one analyst.

Michael Warren, Investment Director at Thames River Capital, says it is "two-faced" for western institutions to seek SWF investment in some sector and to protect others.

"There is no evidence to support the conjecture that the SWFs' behaviour won't be what you want it to be and that they will not be long-term investors, given the opportunity," says Warren, who is soliciting funds from regional SWFs for the boutique investment house.

Still, not everybody is rolling out the red carpet for SWFs, with two cases sparking an ugly reaction. Qatar acted like a bull in the Sainsbury china shop, while Dubai also learnt a few poignant lessons during its P&O saga. This is where SWFs have to act with more dignity and act like elder statesmen rather than corporate raiders, say analysts.

Best strategy

"I have a lot of respect for the way Dubai conducted itself in the wake of the P&O issue in the US by withdrawing quietly and not being 'Arab/Muslim-conspiracy theorists' about it," says Sultan Al Qasimi, chief executive officer of Al Saud Company. "The day that the SWF/private equity investments are used for political reasons is the day that they will no longer be welcome in any country. The fear is that one day one of the new SWFs will try to do something along these lines and all the SWFs will be tarred with the same brush."

Going forward, generating goodwill will be just as important as generating revenue for Arab investors. Earlier this year, DP World's sister company Jafza invested $600 million in one of the poorest counties in the US - nicknamed the "corridor of shame" on account of its destitute condition. The company aims to set up a manufacturing and logistics hub for North America, no doubt creating jobs and spreading economic prosperity in the area. This may be the classic example of a shrewd business move with a socially beneficial twist.

Shawkat Hammoudeh, a senior professor of Economics at Drexel University, says that sectors like education could be another target area for Arab investors. "They can support named professor positions in universities and can choose the field of the named professor," says Hammoudeh, who follows the ME markets closely.

Can Arab SWFs rise to the dual challenge of positive returns and positive image? Naqvi feels it could have some impact on investing countries, although it is unlikely to stretch to the entire Arab/Muslim community. "If those investments are managed wisely... the SWFs will be actively lauded for their sagacity and wisdom, and the important role they played in propping up jobs and opportunities and the goodwill will act as a tonic for the entire investment climate and bilateral relations. Let's just say, it will have a benign impact and will certainly in the long run create a positive image about the investing countries."

Sounds like a strategy worth pursuing.

- The writer is managing editor of Zawya.com.