An Update on Gulf Sovereign Wealth Funds

On October 14, I was pleased to join the Arab Gulf States Institute in Washington and Abana for a panel on Gulf Sovereign Funds. While sovereign funds have been key actors in the region for decades, their role takes on even more importance as Gulf countries navigate towards economic and energy transition and seek to build resilience after the interlinked crises associated with Covid19. Overall, these structural factors have increased the importance of interlinkage and alignment between sovereign funds and their sponsor governments. There’s still plenty to do for sovereign funds to be a key part of National Development Commitments for climate change and other long-term planning, an area to watch closely.

Watch the video below for our conversation. We touch on the divergent mandates of funds, their role in the national balance sheets, the work to be done on repricing climate and other long-term risks, their investments in innovation and much more. I’ve copied below some of my opening remarks.

The panel took place the same week as the controversial purchase of Newcastle United by Saudi Arabia’s Public Investment Fund (PIF), which triggered a lot of discussions about the role of funds, their links with the state and their mandates. I’ve been fielding a lot of these questions for the 15 years I’ve been tracking petrodollars and sovereign funds.

Any discussion of sovereign funds begins with a reminder to consider their diversity, which stems from economic choices of sponsor governments, institutional structure and especially oil and oil wealth per capita, my favorite metric for looking at regional balance sheets. The Fund’s ability and interests, depends on their mandates and economic structures of their sponsor governments. Ideally, sovereign investors should be viewed within national fiscal plans, economic goals and especially national balance sheets. We see this being more explicit in some countries – Saudi Arabia notably, where the PIF is explicitly mentioned as a source of funding for infrastucture spending, mega projects and non-oil revenue, but also sovereign investment pools are called on in more one-off ways. 

Similarly, Sovereign wealth has also influenced debt management choices at the national level. More recently, Sovereigns have chosen to borrowed when rates are low to avoid having to sell liquid or illiquid assets at a potential loss. Meanwhile, some new funds, are explicitly capitalized via domestic or international borrowing. Thus, sovereign assets and sovereign liabilities in the short or long-term need to be considered.

There remains a tension about the funds as political actors. While as sovereign actors, investing for the long-term interest of the populations, they shouldn’t just act like private actors, but short-term political pressures would pose challenges including the regular pressure to take on challenging projects. These tension will persist for some time. Global market actors and recipients are calling on sovereign funds to be business oriented (avoid political influence) but yet to meet their goals and mandates, there needs to be good alignment with broader national balance sheets. The way to address that tension is to provide more transparency about goals, the link to fiscal policies and to create time and vehicles for coordination with government goals. In many cases, sovereign funds could be a vehicle for testing policies like ESG plans or invest in other long-term goals. 

Portfolio funds like ADIA and Central banks ashewed local investment  (at home or in the region) as the goal was diversification. , there has long been other vehicles that have prioritized strategic investments including  investing abroad in sectors key to local development. QIA, various Abu Dhabi funds and most recently PIF. 

There have been several structural changes relevant to Gulf sovereign wealth  in the last five or six years which have increased the domestic focus of sovereign wealth (even if not all funds are investing more at home

  • reduced, tho volatile income from energy revenues, 
  • greater short and long-term spending needs at home.

Collectively this means less savings that need to be deployed, and less need to keep money offshore to avoid dutch disease, and more pressure to invest at home. In some jurisdictions like Abu Dhabi, domestically-focused foreign investment vehicles like Mubadala have long received most of the new capital and the focus has shifted more to strategic investments.

This balancing act has been particularly challenging in some of the countries that have larger populations per revenue sources and already had smaller savings pools – Bahrain and Oman vs Abu Dhabi, Qatar and Kuwait, with Saudi Arabia somewhat in the middle. All have some degree of strategic fund.

At the same time the combination of political pressures, the energy and other economic transitions have increased the urgency of economic development and pump priming. Thus sovereign funds are playing an increasing role in long-term revenue expectations.

Despite the long-term focus we have seen gulf sovereign funds be opportunistic, taking advantage of their cash to make short-term as well as long-term bets. Most notable and visible in this effort has been the PIF, reflecting in part the coincidence of the covid crisis with the shift in how Saudi Arabia chose to manage its foreign assets. Many of its global investments have been in sectors prioritized for local development including sports, entertainment, energy and tourism. This domestically focused foreign investment is a long-standing trend.

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