Dubai. Sovereign wealth funds are cushioning oil-dependent Gulf economies against the financial crisis, but observers warn that some governments have raided them for current spending and many investments have shrunk in value.
The four main funds are Abu Dhabi Investment Authority (ADIA), Kuwait Investment Authority (KIA), Qatar Investment Authority (QIA) and the Saudi foreign assets managed by the Saudi Arabian Monetary Agency (SAMA).
“They put the Gulf countries in a comfortable position to deal with the global economic crisis,” said economist Eckart Woertz, from the Dubai-based Gulf Research Center.
According to UN figures released last month, the aggregate value of the four funds fell only slightly during last year’s financial meltdown, as new cash injections offset most of the fall in the capital value of investments.
The UN’s World Investment Report 2009 said the estimated combined value of the funds eased slightly to $1.115 trillion at the end of last year from $1.165 trillion a year earlier.
Capital losses last year reached $350 billion, or more than 35 percent of total value, according to UN calculations, but the report said government injections of $300 billion offset the fall.
In any case, the impact of the capital losses was minimal. “These are long-term funds that stay offshore on international markets,” said Woertz. “They do not have an immediate asset liability in the short term and are rather meant to be spent many years from now when oil revenues will decline.”
The Gulf sovereign wealth funds have never officially disclosed the size of their assets nor losses and the exact value of the funds remains unclear, especially that of ADIA, which some reports put at near $800 billion before the crisis.
“The size of ADIA was overstated, sometimes by as much as 100 percent,” said a paper published by the US-based Council on Foreign Relations in January, valuing ADIA at $453 billion as of December 2007. ADIA’s value is believed to have shrunk to $328 billion by December 2008, according to the UN report.
Kuwait’s fund, meanwhile, is estimated to have dropped from $262 billion to $228 billion in 2008, while Qatar’s fell from $65 billion to $58 billion.
These big losses were largely offset by substantial inflows, however. Analysts said the funds’ exposure to the fall in global equities was the main factor in the losses.
SAMA stood out as it reaped the benefits of its conservative investment policy, which led to it put its foreign assets in fixed-income instruments such as US bonds. SAMA’s foreign assets are estimated to have increased from $385 billion at the end of 2007 to $501 billion in December 2008.
Saudi Finance Ministry figures, meanwhile, show the kingdom’s net foreign assets peaking at $443.2 billion in November 2008.
“The three main funds apart from SAMA, which have inflated their coffers during the oil boom, have taken huge risks. The share of equities in these funds became higher than bonds,” said Kuwaiti economist Jassem al-Saadoon.
He scolded some of these funds for “politically motivated” moves to invest in struggling Western financial institutions in the midst of the crisis.
“The countries owning these funds made a mistake in wanting to prove to the world that they were responsible states. But they have not taken the right decisions,” he said.
Woertz highlighted another negative factor for the funds. “The financial crisis and lower oil prices have necessitated withdrawals for funding government investment in infrastructure,” the economist said.
Saudi Arabia in particular appears to be tapping into its foreign assets to cover its budget deficit, according to a report by Saudi financial company Jadwa Investment.
Saadoon criticized how governments had used Gulf sovereign wealth funds for current expenditure instead of treating them as savings for the future.
“These are, metaphorically speaking, retirement funds for the nations,” he said. He lamented what he called a lack of a “strong commitment to keep them as funds for the future.”
However, whether or not their investments recover in line with global stock markets, the recovery in oil prices should reduce the need for governments to dip into the funds to finance spending.
“Oil above $50 a barrel, most of the Gulf Cooperation Council budgets will be balanced in 2009,” Woertz said.