The discussion regarding a Saudi sovereign wealth fund (SWF) must look into its positive and negative aspects, without jumping into a definitive technical opinion on the feasibility of its establishment. The rationale is that if we come to an agreement on the limits of the pros and cons, it will be easier to express an opinion on whether it is feasible to establish a Saudi SWF.
Many countries were ahead of Saudi Arabia in this field. They include the Abu Dhabi [Investment] Authority with its $875 billion Fund, Singapore with $330 billion, China with $200 billion [China has committed $300 billion to its SWF], Kuwait with $250 billion and the additional Kuwaiti Future Generation Fund created 54 years ago. Saudi Arabia is considering the establishment of an SWF with $6 billion [22.5 billion riyals].
Among the positive [aspects] of these funds is that they operate by diversifying the government's investment assets in different instruments, countries and currencies, thereby reducing risk and increasing profitability.
The SWF provides a safety net for a country such as Saudi Arabia in the light of the difficulty in predicting future changes in oil prices, the requirements for economic development in addition to rising Saudi population growth rates. Moreover, it has the ability to offer as well as attract talents and technical expertise in the investment fields.
At the international level, these funds provide a source of liquidity and assurance of stability in the global financial markets. The sovereign wealth funds could also be an integral part of the global market, and work towards improving the liquidity in the market, especially in that they do not operate like the other forms of short-term financings. The industrialized countries are concerned that these funds would turn into pressure groups in their financial markets and undermine the balance in the global stock markets.
It is also feared that the sovereign wealth funds would not only target bonds, but would also include capital investments. According to Michael Woolfolk, the senior currency strategist for Exchange Markets at the Mellon Bank in New York, this is the outcome when a country has a huge accumulation of foreign exchange reserves, which require high transparency that may not fit the governance of these funds. On the other hand, some think that the SWFs will invest their capital in foreign investment instruments so that they can work towards increasing the pumping of funds in Western and Asian companies, including financial institutions, which suffered losses as a result of the US mortgage crisis.
The industrialized world is mostly concerned that the governments which own the SWFs might use them as foreign arms extended into economic bodies that are stable on their own. These owners can buy shares of huge global companies [conglomerates] that are blended in the industrialized states and exert pressure in the selection of their management as well as their boards of directors. This is in addition to the fear of technology transfer of the industrialized countries, which affects their national security and sovereignty. Therefore the industrialized nations emphasize the importance of defining the areas of investment by these funds and the necessity to provide transparency regarding the objectives, directions and mechanisms of their investments. The industrialized world also fears of the use of the hedge funds [to the extent they are controlled by the SWFs] by the oil [producing] countries to manipulate the price of oil on the international markets.
The Sovereign Wealth Fund as Capital
In an article in the Financial Times, titled “For the Sovereign Funds... Silence May Not Always be of Gold”, Henry Sonder wrote that he considered the sovereign funds the first and last resort for providing capital to insolvent financial institutions in the US, not only because they possess enormous cash, but because they are huge, passive and patient. Critics believe that these funds are only suitable to the economies of the small countries prone to shocks. This does not apply to the Saudi economy, which possess $258 billion (967.5 billion riyals) worth of foreign investments run by the Saudi Arabian Monetary Agency [the central bank], which substitutes in one way or another for the sovereign fund.
It is difficult to make a definite judgment, although the thinking of establishing a sovereign fund (albeit late), sends a reassuring message in the future of Saudi Arabia’s economy and that of the coming generations.
*Saudi Financial Analyst
al-Sharq al-Awsat, London,February 4, 2008. The article originally appeared in Arabic and excerpts from the article were translated by the staff of www.memrieconomicblog.org