Arab Sovereign Wealth Funds: Growth, Relevance, and Prospects

IMGXYZ1392IMGZYXThe Carnegie Middle East Center, the Issam Fares Institute for Public Policy and International Affairs and the Arab Reform Initiative hosted a panel to discuss the “Arab Sovereign Wealth Funds: Growth, Relevance and Prospects.”  Panelists included Sven Behrendt, Associate Scholar, Carnegie Middle East Center; Rami Khouri, Director, Issam Fares Institute for Public Policy and International Affairs; Danyel Reiche, Assistant Professor for Comparative Politics, AUB; and Ibrahim A. Warde, Adjunct Professor of International Relations, The Fletcher School, Tufts University.

 “The emergence of Arab Sovereign Wealth Funds represents the phenomenal movement of once peripheral players into the center of the political and economic system,” declares Sven Behrendt. “This is a shifting of the balance of power in the global system of the young 21st century.” Arab Sovereign Wealth Funds (SWF) – which are government-controlled pools of assets designed to engage primarily in foreign investment – have existed for quite some time, the first started in Kuwait in the 1950s. However, they only truly reached global prominence recently as they burst onto the international economy at the beginning of this decade. Fueled by tremendous income from the oil price surge, the rise of SWFs, particularly from the Arab world, has made them into a globally relevant investor class.

Until recently SWFs were speculated to control around 3 trillion US dollars, of which 1.5 trillion were in Arab SWFs. The largest, Abu Dhabi Investment Authority, was speculated to manage assets in the size of hundreds of billions of dollars. The opaqueness of Arab SWFs has led to huge amount of speculation over their size and raised a lot of eyebrows in the West. Additionally, the political reaction to Arab SWF investment in the US and the European Union has generally been one of concern, as the Arab funds are seen as potentially harming the national security or economic competitiveness of recipient economies. SWFs themselves have reacted to this backlash by creating a voluntary initiative called the SantiagoPrinciples, but Behrendt argues that, “It’s one thing to call for principles, yet another to implement them.”

The huge numbers being thrown around during the discourse on Arab SWFs are problematic says Ibrahim A. Warde, who points out that many of the financial assets are inflated or even simply invented. Warde explains that when SWFs first emerged upon the international scene, big financial institutions were going through difficult times. For a period in 2007, “just about every week or so a SWF was acquiring shares in this or that large financial institution.” This led many to conclude that Arab SWFs were a new and immensely powerful investor class, drawing comparisons to the panic of the 1970’s oil boom when people said Arab financial powers would take over the world. 

The political demands of SWFs are also important, according to Warde. Domestically the big question is how to invest surpluses to ensure future generations are financially stable. What happens when that money is invested poorly, as seems to be the case now? Warde says that when talking to insiders, a lot of dissatisfaction is heard and recent upheavals in Kuwait may have to do with money issues. In addition to domestic demand, regional political issues such as the “Iranian Threat” and the Israel/Palestine conflict all effect the way money is invested.

The way that money is invested is a significant topic, according to Rami Khouri. “SWFs represent an extraordinary store of money and cash wealth in the hands of Arab governments,” says Khouri, but so far, “Arab economic management has been unable to take that wealth and translate into a more viable regional economy that is able to withstand short term pressures.” Khouri points out that small numbers of people control decisions dealing with hundreds of billions of dollars, and there is little in the way of oversight or ethical guidelines. “How will future generations be safeguarded?” asks Khouri, “when the exercise of economic power by the ruling elite of the Arab world has been erratic at best.”

According to Khouri, the current economic crisis will raise such accountability issues more forcefully. As every major source of income in the Arab world is hit hard, as seen in the drop in oil prices, exports, imports, investment, tourism, and aid; reality will ripple through many Arab economies, forcing them to reevaluate their economic policies. Khouri added that good corporate governance policies have been shown to lead towards better profitability for companies, consumers and shareholders. If these principles could be applied to Arab SWFs, perhaps similar effects would follow.

Danyel Reiche followed up on Khouri’s talk on the need for better policies with an example of good investment governance that Arab countries could follow. Reiche explains how Norway, a country with significant oil and natural gas reserves, has built up its renewable energy sector to 99 percent of its energy needs. Like the SWFs of the Arab world, the Norwegian government decided to start a pension to contribute to future prosperity of its citizens. However, by the end of the 1990s the Norwegian public was dissatisfied with investments being made, some of which were in companies that were heavily polluting the environment, using child labor, and selling inhuman weapons. After much public debate, the Norwegian parliament decided to introduce strict ethical guidelines for investing. The guidelines have remained in place despite several changes of government, and now unethical companies are no longer invested in by the Norwegian government.