Gulf funds may rescue the West

Necessity in tough times is likely to overcome any suspicions attached to sovereign wealth

With the spending capacity of western governments constrained, SWFs are likely to become an attractive source of funding. Damien Meyer / AFP
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The deep pockets of Gulf sovereign wealth funds (SWFs) could be an increasingly important source of funding for western economies facing spending cuts in the new era of austerity. Projects in Europe may become more financially attractive for the region's government investment vehicles as austerity measures by EU governments depress market valuations, said Dr Alexander Mirtchev, the founder and chairman of the US economic consultancy Krull.
"These SWFs are starting to look increasingly as the premier source of available financing for a cash-starved international financial system," said Dr Mirtchev, who is also an independent director of the Kazakhstan SWF Samruk-Kazyna. "The Gulf SWFs can underwrite the autonomy of states by acting as an insurer of last resort - in other words, a buffer against global crises and cyclical development."
SWFs could become increasingly accepted as investors in the US and Europe, as the spending capacity of western governments remains constrained by the need to cut bulging budget deficits, he said. Policymakers in the UK, Japan, Greece and Ireland are already cutting their spending to reduce public debt. Globally, the wealth of SWFs is expected to grow to more than US$6 trillion (Dh22.03tn) next year from nearly $4tn now, with signs of increased activity already emerging after the global financial downturn.
The Abu Dhabi company Aabar Investments's purchase of a 4.9 per cent stake in UniCredit, Italy's largest bank, and Qatar Holding's £1.5 billion (Dh8.3bn) purchase of the luxury London department store Harrods are recent examples of investment funds from the region buying European assets. But barriers to the investment vehicles having their pick of projects in the US and EU remain. A tendency towards protectionism and concerns about foreign ownership of domestic assets are likely to be among the hurdles SWFs face, Dr Mirtchev said. More significant, perhaps, were lingering suspicions about the role and intentions of the investment vehicles, he said.
Suspicions arose in 2006 when plans by then-US president George W Bush to allow Dubai's DP World to operate some US ports was met with opposition from many US politicians. "Gulf and other SWFs continue to be subject to uncertainty and even outright suspicion, and considered as policy tools for their own governments," Dr Mirtchev said. "The new, mature Gulf SWFs are better positioned to counter such arguments."
The region's SWFs have made significant strides to improve their transparency and accountability practices in recent years. In addition to subscribing to the Santiago Principles - a voluntary code of practices agreed to in 2008 by global SWFs including those from Abu Dhabi and Kuwait - the Abu Dhabi Investment Authority and Mubadala Development have won plaudits for their efforts to increase transparency and disclosure.
There was also a need for Gulf investment vehicles to improve their awareness of the political risks sometimes inherent in investments. A global investment survey by the World Bank's Multilateral Investment Guarantee Agency (MIGA) last year found an inadequate anticipation of political risk among investors from the Arab world, with a common problem being the absence of insurance schemes to manage this category of risk.
Regulatory restrictions, breaches of contract, terrorism, war and civil disturbances are deemed political risks by the World Bank. "This points to the fact that work still needs to be done to address the knowledge gap that exists on the investor side when it comes to risk mitigation insurance," said Stephan Dreyhaupt, the head of the research and knowledge group at MIGA. The pitfalls Gulf investors could face abroad were illustrated last week when a judge in the UK ruled in favour of the UK developer CPC Group in its court action against Qatari Diar Real Estate Investment. CPC sued the property investment arm of Qatar's sovereign wealth fund over an aborted agreement to build luxury apartments in London.