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How Have Arab SWFs Been Affected by the Financial Crisis?

Jamus Lim's picture

Of course, the right answer is, nobody---except the folks who run the SWFs themselves---can really know for certain. Such funds, after all, are notoriously secretive, and given the possibility that their transactions may move markets (possibly against them), such secrecy is perhaps not entirely unwarranted. However, there is possibly some indirect evidence that we can point to that may hint at their performance over the financial crisis (especially since Brad Setser's excellent investigations in the Follow the Money blog have been put on hold after his decision to decision to join the Obama administration).

One approach is to consider SWF transactions, at least those that have been directly executed by the SWF and hence recorded in the public record. Of course, estimates in this case do not reflect trade performed by, say, London-based broker-dealers, which may comprise a substantial share of all transactions. Nonetheless, appealing to the view that incomplete data is better than no data (with a clear caveat emptor), and that we are in any case interested more in the trend rather than absolute numbers, it is possible to cobble together rough estimates of Arab SWF assets pre- and post-crisis, to give a sense of how their respective holdings have been affected by the events of the past few years.

The data suggest that, while it appears that Arab SWFs grew through the end of 2007, the financial crisis is likely to have significantly dented the value of their assets under management in 2008 (including some well-publicized cases of investment losses from financial sector bets). In most cases, however, the subsequent market recovery has meant that SWFs are likely to have regained much of the losses they incurred in 2008. Along with new injections by their parent sovereigns, Arab SWFs are estimated to hold a total of as much as $1.62 trillion in assets in 2009---increasing marginally to $1.64 trillion as of March 2010---compared to holdings of between $0.9 and $1.5 trillion in 2007 (see table). Assuming that the SWFs did not unload their holdings in early 2008, then, the picture here is somewhat more sanguine than others who have taken a more critical (PDF) view of the losses incurred by SWF investments, along with their intrinsic motivations.

Country Funds Assets (2007) Assets (2009) Assets (current)
Algeria Fond de Régulation des Recettes $43b $60b $47b
Bahrain Mumtalakat Holding Company   $14b $14b
Kuwait Kuwait Investment Authority $213b $169-202.8b $202.8b
Libya Libyan Investment Authority $50b $65b $70b
Oman State General Reserve Fund, Oman Investment Fund $2b $8.2b $8.2b
West Bank/Gaza Palestine Investment Fund $0.9b $0.7b $4b
Qatar Qatar Investment Authority $30-50b $58-62b $65b
Saudi Arabia Public Investment Fund, SAMA Foreign Holdings $289b $436.3b $437.3b
Sudan Oil Revenue Stabilization Account $24.6m $122.4m $122.4m
United Arab Emirates ADIA, ADIC, IPIC, ICD, Dubai World, Mubadala, RAKIA, EIA $250-875b $408.2-767.9b $795.1b
Total   $878-1,523b $1,215-1,617b $1644b

Sources: IMF (PDF), Monitor-FEEM SWF Transaction Database, SWF Institute, PIFC (various years), Sudan Ministry of Finance (various years).

Notes: All reported data at country level are estimates, and may not include all indicated component entities. Ranges indicate low and high-end estimates in the data. 2009 values are estimated for April 2009, with the exception of Algeria and Palestine (December 2008), Sudan (June 2009), and Saudi Arabia (October 2009). Current data are for March 2010, with the exception of Palestine, which reports projected investment value that includes domestic and foreign sources.

How do we know that SWFs may have received injections in 2008? Pinning this down requires that we use another (indirect) approach, which is to look at current account surpluses; such surpluses often form the revenue backbone for most funds. Of course, surpluses need not all be channeled to the SWF. Still, it is not unreasonable to presume that, on average, governments send a more-or-less stable proportion of surpluses to the SWFs to manage. It is therefore also useful to compare these surpluses to changes in reserve holdings (see figure).

Source: IMF IFS

In this regard, oil exporters appear to have added to their reserve stock through 2008, and only in 2009, with a much softer current account surplus, have they drawn down on reserves. Still, the decline appears to be small relative to the accumulation between 2006 and 2008 (when oil prices were at record levels), and with oil prices once again creeping up (see figure), it is likely that both surpluses---as well as funds directed to SWFs---will see increases in the year ahead.

What does all this mean for developing countries? Since Arab SWFs tend to cycle their investments within the MNA (see figure)---the region accounts for the largest number of deal volume, and deal values are larger than all other regions except to the developed world---developing countries in MNA are likely to benefit from this recovery in the fortunes of SWFs. Furthermore, to the extent that the recovery in the developed world is expected to be more anemic, fast-growing developing economies, especially in LAC and EAP, but benefit from increased SWF investments in their countries. With recent research allaying some of the concerns of that SWFs may pursue politically-influenced investment strategies, SWFs may be leading the way in investments in emerging economies. Indeed, a handful of SWFs recently committed to an IFC fund, and Bank president Bob Zoellick recently called on SWFs to take the lead in investments in Africa.

Source: Monitor-FEEM SWF database.

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